Papers In Preparation
Passive Ownership and the Stock Market (Updated 11/2018)
Abstract: I document new stylized facts on a decrease in pre-earnings announcement price informativeness. Between 1990 and 2017, pre-earnings cumulative abnormal trading volume declined 10% and the pre-earnings drift declined 22%. Further, earnings days now account for 17% of total annual volatility, up from 3% in 1990. At the firm-level, increases in passive ownership can explain up to 76% of the decline in pre-earnings volume, 20% of the decline in the pre-earnings drift, and 14% of the increase in volatility on earnings days. These results are robust to using only quasi-exogenous variation in passive ownership that arises from S&P 500 index addition, and Russell 1000/2000 index reconstitution. One explanation for decreased efficiency is that passive managers lack strong incentives to gather and consume firm-specific information. Consistent with this mechanism, increases in passive ownership are correlated with fewer analysts covering a stock, decreased analyst accuracy, and fewer downloads of SEC filings.
What Triggers National Stock Market Jumps? (New Slides 8/2018)
Joint with Scott Baker, Nicholas Bloom and Steven Davis
Main Findings: 1) 36% US jumps attributed to policy categories (and 41% internationally). Policy includes government spending, monetary policy and regulation. Non-policy includes macroeconomic news, corporate earnings & outlook and commodities. 2) Realized volatility is lower following policy-driven jumps, relative to non-policy jumps of the same magnitude and sign. We measure realized volatility as the sum of squared daily returns in the 22 trading days following the jump. 3) Outside the US, newspapers attribute 34% of jumps to US developments – above the US’s 11% share of global GDP. The share of jumps attributed to the US has been rising over time. 4) Volatility and trading volume are lower after jumps with high clarity. We define clarity as the first principal component of (1) agreement across newspapers describing the same jump (2) how confidently the journalist advanced their explanation (3) how easy it was to categorize the article (4) one minus the share of newspapers that did not give an explanation for the jump.
Trade policy uncertainty and stock market performance (New 7/2018)
Joint with Marcelo Bianconi and Federico Esposito
Abstract: We study the impact of trade policy uncertainty on stock market performance. In 2000, the U.S. government granted China Permanent Normal Trade Relations (PNTR), which eliminated potential tariff spikes on Chinese imports. US industries more exposed to this policy shock experienced significantly lower stock returns. This result is robust to other potential explanations for the low realized returns, including industry-time varying fundamentals, as well as other US-China policy changes, such as the expiration of the Multi-Fiber Arrangement and the reduction in Chinese import tariffs associated with the China accession to WTO. We develop a simple asset pricing model that features input-output linkages on the production side to explain the empirical results. Consistent with the model, the intensity of intermediate input linkages between US and Chinese industries matters for the response of stock returns to the policy shock.
Pricing Dollar Strength Risk (Last Version 9/2017, Revision in Progress)
Joint with Marcelo Bianconi
Abstract: The relative strength of the U.S. dollar does not explain the cross-section of expected returns. We find, however, that signed sensitivity of individual firms’ returns to moves in dollar strength matters for asset pricing. A portfolio that goes long high-dollar-sensitivity stocks and short low-dollar-sensitivity stocks earns a multi-factor alpha of 3%-7% per year. Sorting on dollar sensitivity captures firm fundamentals - in particular fraction of revenue from abroad. Dollar sensitivity has implications for profitability and fundamental momentum, as well as the relationship between momentum strategies across countries.
Environmental, Social, and Governance Criteria: Why Investors Are Paying Attention (Journal of Investment Management, January 2018)
Joint with Ravi Jagannathan and Ashwin Ravikumar
Abstract: We find that money managers could reduce portfolio risk by incorporating Environmental, Social, and Governance (ESG) criteria into their investment process. ESG-related issues can cause sudden regulatory changes and shifts in consumer tastes, resulting in large asset price swings which leave investors limited time to react. By incorporating ESG criteria in their investment strategy, money managers can tilt their holdings towards firms which are well prepared to deal with these changes, thereby managing exposure to these rare but potentially large risks.
Implied Volatility and the Risk-Free Rate of Return in Options Markets (Published 1/2015)
Based on my Senior Honors Thesis at Tufts University.
Abstract: We numerically solve systems of Black-Scholes formulas for implied volatility and implied risk-free rate of return. After using a seemingly unrelated regressions (SUR) model to obtain point estimates for implied volatility and implied risk-free rate, the options are re-priced using these parameters.
After repricing, the difference between the market price and model price is increasing in time to expiration, while the effect of moneyness and the bid-ask spread are ambiguous.
Our varying risk-free rate model yields Black- Scholes prices closer to market prices than the fixed risk-free rate model. In addition, our model is better for predicting future evolutions in model-free implied volatility as measured by the VIX.