Presentations: Acadian, CEIBS Finance and Accounting Symposium, CICF, CUHK, EFA, ESADE Spring Workshop, HKU, HKUST, Maryland Smith, MFA, MIT Sloan, MFS Workshop (PhD session), NFA, Northwestern Kellogg, Toronto Rotman, UBC Sauder, UNSW Asset Pricing Workshop, UW Foster, Wharton, WUSTL Olin, and Yale Behavioral Reading Group
Abstract: The U.S. stock market’s return during the first month of a quarter correlates strongly with returns in future months, but the correlation is negative if the future month is the first month of a quarter, and positive if it is not. These correlations offset, consistent with the well-known near-zero unconditional autocorrelation, yet they are pervasive, present across industries and international markets. The pattern accords with a model in which investors extrapolate announced earnings to predict future earnings, not recognizing that earnings in the first month of a quarter are inherently less predictable than in previous months. Survey data support the model.
Feedback and Contagion through Distressed Competition, joint with Hui Chen, Winston Dou, and Yan Ji. Forthcoming, Journal of Finance
Presentations: AFA, CFRC, Conference on Systemic Risk and Financial Stability, CUHK-Shenzhen, CUNY, EFA, FMCG, FOM Research Group Conference, HKUST-Jinan Macro Workshop, HKUST, MFS Workshop, McGill-HEC Winter Conference, MFA, NBER SI (CM), NFA, NYU Five Star Conference, PKU, PHBS Workshop on Macroeconomics and Finance, Richmond Fed, SFS Cavalcade, Stanford SITE, SIF conference, SFI/EPFL, Tsinghua SEM alumni conference, UConn, UMich, UT Dallas, Toronto, Utah Winter Finance Conference, Wharton
Abstract: Firms tend to compete more aggressively in financial distress; the intensified competition in turn reduces profit margins for everyone, pushing some further into distress. To study such feedback and contagion effects, we incorporate dynamic strategic competition into an industry equilibrium with long-term defaultable debt, which generates various peer interactions: predation, self-defense, and collaboration. Such interactions make cash flows, stock returns, and credit spreads interdependent across firms. Moreover, industries with higher idiosyncratic-jump risks are more distressed, yet also endogenously less exposed to aggregate shocks. Finally, we exploit exogenous variations in market structure -- large tariff cuts -- to test the core competition mechanism.
“Superstitious” Investors, joint with Jessica Wachter. Review of Asset Pricing Studies, 2025 (Lead article, Editor's choice)
Presentations: AFA, Boston University, Duke, EPFL/University of Lausanne, LBS, MIT Sloan, SFS Cavalcade, Wharton
Abstract: We reconsider the Shiller (1981) volatility puzzle through the lens of a model in which agents believe they can predict dividend growth when in fact they cannot. Besides excess volatility in the time series, the model explains the value premium, and the explanatory power of the value factor. In support of the model, we show that analysts' earnings forecasts align with market valuation and that analysts are far more optimistic about growth stocks than value stocks. Using both survey and price data, we show that the same mechanism can explain the excess returns earned by investing in high-interest rate currencies.
Identifying Preference for Early Resolution from Asset Prices, joint with Hengjie Ai, Ravi Bansal, and Amir Yaron. R&R American Economic Review
Presentations: AFA, Berkeley, Duke, EFA, FIRS, Macro-finance conference at Bank of England, MFA, Norwegian School of Economics, PHBS Workshop in Macroeconomics and Finance, SFS Cavalcade, SAIF, TAU Finance Conference, WUSTL, Wharton, University of Chicago, University of Iowa
Abstract: This paper develops an asset market based test for preference for the timing of resolution of uncertainty. Our main theorem provides a characterization of preference for early resolution of uncertainty in terms of the risk premium of assets realized during the period when the informativeness of macroeconomic announcements is resolved. Empirically, we find support for preference for early resolution of uncertainty based on evidence on the dynamics of the implied volatility of S&P 500 index options before FOMC announcements.
Macroeconomic Announcement Premium, joint with Hengjie Ai and Ravi Bansal, Oxford Research Encyclopedia of Economics and Finance, 2024
An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty, joint with Hengjie Ai, Ravi Bansal, and Amir Yaron. Working Paper
Presentations: UBC Winter, Financial Theory Group Meeting, SFS Cavalcade, HKUST, Stanford SITE
Abstract: This paper develops a theory of the elasticity of preference for early resolution of uncertainty (PER) that parallels the Arrow-Pratt measure of risk aversion in expected utility theory. We demonstrate that the local welfare gain of early resolution of uncertainty is equal to the product of the elasticity of PER and the conditional variance of continuation utility. We illustrate how asset market data can be used to estimate the elasticity of PER and how this measure can be used to compute the welfare gain for various experiments of early resolution of uncertainty.
Correlation Neglect in Asset Prices, joint with Jessica Wachter. Working Paper
2025 Jack Treynor Prize
Presentations: USC Brownbag, Bristol
Abstract: The U.S. stock market return during the first month of a quarter positively predicts the second month's return, which then negatively predicts the first month's return of the next quarter. The pattern arises because investors do not fully recognize that earnings announced in the second month of a quarter are inherently similar to those announced in the first month, and thereby overreacting to such predictably repetitive earnings. The same pattern exists in the cross-section of industry returns. Evidence from survey data lends support to the mechanism of correlation neglect.
Forecast-Agnostic Portfolios, joint with Jessica Wachter. Working Paper
Abstract: We introduce forecast-agnostic (FA) portfolios that exhibit out-of-sample market-timing ability without relying on estimated predictive coefficients. These portfolios go long or short the market based on the level of a predictor variable, thereby avoiding the instability and estimation error that undermine traditional market-timing strategies. Despite using predictor variables that typically deliver negative out-of-sample R2 values (Goyal, Welch, and Zafirov 2024), FA portfolios deliver significantly positive alphas on average. We explain these seemingly contradictory phenomena by interpreting regression coefficients as portfolio returns: genuine predictability is necessary for high portfolio returns, whereas achieving a positive out-of-sample R2 additionally requires the ability to forecast the returns on the forecast-agnostic portfolios themselves. Simulations show that the statistic we propose has power to detect predictability that extends beyond in-sample diagnostics and the out-of-sample R2.
Industry Distress Anomaly, joint with Hui Chen, Winston Dou, and Yan Ji. Working Paper
Abstract: This paper documents a robust and significant industry component of the financial distress anomaly. The industry distress anomaly remains significant after controlling for the within-industry firm distress anomaly, yet becomes insignificant in hypothetical industries constructed by reshuffling firms across real industries. To rationalize the industry distress anomaly, we propose an industry equilibrium model with endogenous strategic competition. Central to the model is the competition-distress feedback within industries, which amplifies the exposure of industries’ profit margins and equity returns to aggregate discount-rate shocks. Industries with higher idiosyncratic left-tail risks are more distressed, yet are endogenously less exposed to aggregate shocks due to the weaker competition-distress feedback, implying lower expected equity returns.