(Job Market Paper)
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 effects offset, leaving the market return with its weak unconditional predictive ability known to the literature. 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 other months. Survey data support this model, as does out-of-sample return predictability across industries and international markets. These results challenge the Efficient Market Hypothesis and advance a novel mechanism of expectation formation.
Presented at: AFA, EFA, Macro Finance Society Workshop, MFA, NBER Summer Institute (CM), Organizations and Markets (FOM) Research Group Conference, SFS Cavalcade, Stanford SITE, WFA
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.
Presented at: AFA, SFS Cavalcade
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.
Abstract: This paper develops a revealed preference theory for preference for the timing of resolution of uncertainty based on asset pricing data and present corresponding empirical evidence. Our main theorem provides a characterization of the representative agent's preference for early resolution of uncertainty in terms of the risk premium of assets realized during the period of resolution of informativeness of macroeconomic announcements. Empirically, we show how data on the dynamics of the S&P 500 index options prices around FOMC announcements can be used to identify investors' preference for the timing of resolution of uncertainty.
The Common Component of Contemporaneous Earnings Announcement Excess Returns, joint with Jessica Wachter. Work in progress
Expectation Formation in the Foreign Exchange Market: Evidence from Survey Data. Work in progress