“In God we trust; all others must bring data.”   W. Edwards Deming.

For codes to replicate the published papers, please visit the publications page or the original online paper.

Working Papers:

Jan Ericsson, Evan Jo, Babak Lotfaliei, 2018, "Variance Risk Premium and Investment Uncertainty", resubmit requested for Journal of Financial and Quantitative Analysis (JFQA), July (First version: July 2014) 

This article documents that the variance risk premium in asset returns decreases firms' investment. In our model, the premium increases the value of the real option to postpone an irreversible investment. In our data, we find support for a negative relationship between variance risk premia and firms' rate of investment. The relation is more important for investment-grade firms, which tend to have low historical variance but relatively high variance risk premia. Controlling for this premium allows us to reconcile an otherwise surprising pattern across credit ratings: investment rates are higher for speculative grade than investment grade firms.

 Files for replicating the paper (using MATLAB and Stata), Files size: 19 MB

 SSRN version, Online appendices

Western Finance Association 2018, SDSU Finance Seminar, California Corporate Finance Conference 2017, Northern finance Association 2017, Global Finance Conference 2016, Financial Management Association (FMA) 2016 meeting, Finance Forum (Barcelona) 2017

Fatemi, Hajar, Iksu Jurn, Babak Lotfaliei, Timothy Trombley, "To Wait or To Vaccinate"  

American Economic Association meeting, 2023 (paper, presentation, 20 min brief presentation

This paper models individual decisions under irreversibility of the vaccine using real options. Vaccine irreversibility increases the value in waiting to vaccinate and postpone vaccination, even if vaccination has positive net gain. The waiting value magnifies the vaccination cost ex ante in a rational framework. In this framework, we analyze the difference between the reward at vaccination, or equivalent tax on non-vaccinated for increasing the likelihood to vaccinate. For individuals, any subsidy at vaccination to reduce the vaccine cost is more effective on the likelihood to vaccinate relative to any equivalent taxes imposed to increase the cost of no vaccination. The factors that add to the value in waiting and postpone vaccination are increase in the uncertainty about the disease, and likelihood for the expected cost of the infection to go down.  


Babak Lotfaliei, and Mahmood Mohebshahedin, 2024, "Leashed Capital Structure of Closed-End Funds", August (First version: Dec 2018) 

This paper examines the capital structure of the closed-end funds, under the regulatory leverage constraint (Investment Company Act of 1940). The act constrains leverage to 33% for the closed-end funds. We theoretically model the funds’ optimal leverage under the constraint, which produces leverage close empirical observations. Based on model calibrations, we empirically find that closed-end funds lose, on average, 1.73%  of their value due to the constraint in our sample (more than $3 billion as of 2017) from potential net leverage benefits (tax shield minus debt costs). The loss penalizes funds with low-risk investments almost four times more than otherwise risky funds; risky funds endogenously borrow with caution regardless of the constraint..

Preliminary version

Midwest Finance Association 2020, Seminars at Federal Reserve Bank of Philadelphia, Central Washington University, Dickinson College, University of Southern Indiana, Ontario Tech University, Christopher Newport University, University of Northern British Columbia, University of Texas-Permian Basin, San Diego State University, Financial Management Association meeting 2020


Babak Lotfaliei, and Clark Lundberg, 2019, "Reevaluating the Trade-off Theory of Capital Structure: Evidence from Zero-leverage Firms", October (First version: Dec 2016) 

We empirically evaluate extensions to the trade-off theory of capital structure featuring a real option on debt issuance in a zero-leverage environment. Controlling for alternative explanations of zero-leverage behavior, we find considerable evidence in support of the extended trade-off theory and no evidence against it. We validate our empirical approach via simulations under the real option mechanism and under an alternative financially constrained mechanism. The simulations show that our empirical findings are not consistent with zero-leverage behavior driven exclusively by financial constraints, but they are consistent with the real-option mechanism.


Michael Ferguson, Babak Lotfaliei, and Timothy Trombley, 2019, "Non-Market Factors and the CAPM: The Market Index Effect", August (First version: Aug 2017) 

We show that the Fama-French factors (SMB and HML) are economically and statistically significant in asset-pricing tests, even within a single-factor CAPM economy. In this CAPM economy, we simulate firms that dynamically pursue optimal capital structure using merely classic tradeoff theory. The Fama-French factors are significant only when equity-based indexes represent the market portfolio. When we replace the equity-based market index with the true market index measuring systematic shocks to the economy’s firms, the factors are not significant. Hence, financing frictions exacerbate risk-measurement errors associated with both leverage and using a levered market index, which suffice to produce Fama-French factors.

 Preliminary version

Best Paper Award semi-finalist at Financial Management Association (FMA) 2020 , Eastern Finance Association 2019, SDSU Finance Seminar, 


Amir Akbari, Babak Lotfaliei, 2015, "International Correlation Premium in the Stock Markets", Working paper, December, San Diego State University 

Historically, correlations among international markets have doubled in the past 30 years from 40% to 80%. An increasing correlation implies that the diversification benefits from investing in different countries decrease. This phenomenon is analogical to observed correlation among stocks in the US stock market, but in a larger scale. There is evidence on priced correlation risk among the stocks in the US market. This project extends the correlation-risk idea to the international markets: Did markets consider the increasing trend of the correlation and allocate a premium to that? How big is the correlation risk premium among the international markets? If correlation has priced risk, risk-adjusted (RA) correlation is expected to be larger than historical correlation; market has predicted that correlation is risky and already has taken that into account. Otherwise, RA correlation is equal to historical correlation if correlation is not risky. In addition to portfolio management implications, the outcome of this project has implications for pricing index and stock options worldwide.

For more information please see my CV.