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Research

Published Papers

Distinguishing the Effect of Overconfidence from Rational Best-Response on Information Aggregation

Review of Financial Studies, 2009

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In this paper I study -- theoretically and in a laboratory setting -- a new bilateral game in which subjects estimate the value of an asset and have incentives to learn from each other. By inducing subjects to overconfidence is some treatments, I find that overconfidence has a causal effect on the dispersion and convergence of these estimates. Interestingly, I show that even when subjects are not overconfident, qualitatively results may be observed due to subjects’ strategic response to each other’s errors. 

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Predicting Risk from Financial Reports with Regression

Proceedings of the North American Association for Computational Linguistics Human Language Technologies Conference, Boulder, CO, May/June 2009

with Dimitry Levin, Bryan Routledge, Jacob Sagi, and Noah Smith

In this paper, we take a novel approach to predicting long-horizon firm volatility. Instead of relying on statistical properties of returns, we extract the information relevant for firm volatility from the Management Discussion and Analysis (“MD&A”) section in annual reports by applying machine learning to the text. We find that a model that uses both past volatility and text data significantly outermost out-of-sample standard benchmarks.  

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Securities Auctions under Moral Hazard: An Experimental Study

Review of Finance, 2009

with John Morgan

We study, both theoretically and in the lab, the performance of debt and equity auctions in the presence of both private information and hidden effort. We show that the revenues to sellers in debt and equity auctions differ systematically depending on the returns to entrepreneurial effort. Using a controlled laboratory experiments we test the model’s predictions and find strong support for the theory. 

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Coordination in the Presence of Asset Markets

American Economic Review, 2011

with Anthony Kwasnica and Roberto Weber

In this paper, we explore experimentally the influence of two-sided futures asset markets on behavior and outcomes in an economic activity characterized by multiplicity of equilibria (a coordination game with Pareto-ranked equilibria). Across several experiments, we find that the presence of an asset market has a negative effect on output (efficiency) and that this cannot be explained entirely by the distorted payoffs of a portfolio incentive effect. 

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Investor Inattention and the Market Impact of Summary Statistics

Management Science, Special Issue on Behavioral Economics and Finance, 2012

with Thomas Gilbert, Lars Lochstoer, and Ataman Ozyildirim

We show that U.S. stock and Treasury futures prices respond sharply to recurring stale information releases. In particular, we identify a unique macroeconomic series — the U.S. Leading Economic Index (LEI) — which is released monthly and constructed as a summary statistic of previously released inputs. We show that a front-running strategy that trades S&P 500 futures in the direction of the announcement a day before its release and then trades in the opposite direction of the announcement following its release generates an average annual return of close to 8%. 

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Trading Complex Assets

Journal of Finance, 2013

with Bruce Ian Carlin and Richard Lowery

We perform an experimental study to assess the effect of complexity on asset trading. We find that higher complexity leads to increased price volatility, lower liquidity, and decreased trade efficiency especially when repeated bargaining takes place. This is caused by complexity altering the bidding strategies used by traders, making them less inclined to trade, even when we control for estimation error across treatments. As such, it appears that adverse selection plays an important role in explaining the trading abnormalities caused by complexity. 

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Business Microloans for U.S. Subprime Borrowers

Journal of Financial and Quantitative Analysis, 2016

with Cesare Fracassi, Mark J. Garmaise, and Gabriel Natividad

We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data on startup loan applicants from a lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues, and create more jobs

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Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry

Behavioral Finance: Where do Investors Biases Come From?, Itzhak Venezia [ed.], World Scientific Publishing Co., 2016

with Vincent Glode, Burton Hollifield, and Marcin Kacperczyk

We provide novel evidence that mutual fund returns are predictable after periods of high market returns but not after periods of low market returns. Performance predictability is more pronounced for funds catering to retail investors than for funds catering to institutional investors, suggesting that unsophisticated investors make systematic mistakes in their capital allocation decisions. 

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Information, Trading, and Volatility: Evidence from Firm-Specific News

Review of Financial Studies, Volume 32, Issue 3, 1 March 2019

with Jacob Boudoukh, Ronen Feldman, and Matthew Richardson

What moves stock prices? Prior literature concludes that the revelation of private information through trading, and not public news, is the primary driver. We revisit the question by using textual analysis to identify fundamental information in news. We find that this information accounts for 49.6% of overnight idiosyncratic volatility (vs. 12.4% during trading hours), with a considerable fraction due to days with multiple news types. As applications, we use our measure of public information arrival to reinvestigate two important contributions in the literature related to individual R2s of stock returns on aggregate factors, namely Roll (1988) and Morck, Yeung and Yu (2000).

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Social Media and Financial News Manipulation

Review of Finance, Volume 27, Issue 4, July 2023

with Toby Moskowitz and Marina Niessner

We examine an undercover Securities and Exchange Commission (SEC) investigation into the manipulation of financial news on social media. While fraudulent news had a direct positive impact on retail trading and prices, revelation of the fraud by the SEC announcement resulted in significantly lower retail trading volume on all news, including legitimate news, on these platforms. For small firms, volume declined by 23.5% and price volatility dropped by 1.3%. We find evidence consistent with concerns of fraud causing the decline in trading activity and price volatility, which we interpret through the lens of social capital, and attempt to rule out alternative explanations. The results highlight the indirect consequences of fraud and its spillover effects that reduce the social network’s impact on information dissemination, especially for small, opaque firms.

Working Papers

[*NEW*] Are Cryptos Different? Evidence from Retail Trading

with Igor Makarov, Marina Niessner, and Antoinette Schoar

Trading in cryptocurrencies has grown rapidly over the last decade, primarily dominated by retail investors. Using a dataset of 200,000 retail traders from eToro, we show that they have a different model of the underlying price dynamics in cryptocurrencies relative to other assets. Retail traders in our sample are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. Individual characteristics do not explain the differences in how people trade cryptocurrencies versus stocks, suggesting that our results are orthogonal to differences in investor composition or clientele effects. Furthermore, our findings are not explained by inattention, differences in fees, or preference for lotterylike stocks. We conjecture that retail investors hold a model of cryptocurrency prices, where price changes imply a change in the likelihood of future widespread adoption, which in turn pushes asset prices further in the same direction.

[*NEW*] Pure Momentum in Cryptocurrency Markets

with Cesare Fracassi

Momentum is one of the most widespread, persistent, and puzzling phenomenon in asset pricing. The prevailing explanation for momentum is that investors under-react to new information, and thus asset prices tend to drift over time. We use a unique feature of cryptocurrency markets: the fact that they are open 24/7, and report returns over the last 24 hours. Thus, the one-day return is subject to predictable fluctuations based on the removal of lagged information. We show that investors respond positively to changes in reported returns that are unrelated to any new release of information, or change in the asset fundamentals. We call this behavioral anomaly "Pure Momentum".

[*NEW*] Fee the People: Retail Investor Behavior and Trading Commission Fees

with Omri Even-Tov, Kimberlyn George, and Eric So

We show retail investors are highly responsive to changes in trading commission fees. Using a triple-difference research design around the removal of fees for retail investors on the international retail broker platform, eToro, we show investors responded by trading approximately 30% more frequently, in smaller order sizes, and increasing portfolio turnover. Removing fees also spurred retail investors to reallocate their portfolios and diversify. Retail investors’ gross return performance did not significantly change around the fee removal despite trading more often, but retail investors earned significantly higher returns on a net basis after accounting for fees incurred in the pre-period. Finally, using demographic information, we show removing fees disproportionately affected inexperienced investors with lower deposit amounts and lesser technological sophistication both by expanding the extensive margin of investors and changing trading activity for the intensive margin of investors. Together, our results suggest commission fees play an influential role as a speed bump for retail investor participation, trading activity, and diversification.

[*NEW*] Avoiding Idiosyncratic Volatility: Flow Sensitivity to Individual Stock Returns

with Marco Di Maggio, Francesco A. Franzoni, and Ran Xing

Despite positive and significant earnings announcement premia, we find that institutional investors reduce their exposure to stocks before earnings announcements. A novel result on the sensitivity of flows to individual stock returns provides a potential explanation. We show that extreme announcement returns for an individual holding lead to substantial outflows, controlling for overall performance, and they increase the probability of managers leaving the fund. Reducing the exposure to these stocks before the announcement mitigates the outflows. We build a model to describe and quantify this tradeoff. Overall, the paper identifies a new dimension of limits to arbitrage for institutions.

The Asymmetry in Responsible Investing Preferences

with Jacquelyn Humphrey, Jacob Sagi, and Laura Starks

Responsible, or ESG-based, investment often exhibits strong biases against "sin" stocks rather than favoring "angel" stocks. We design an experiment to study whether these biases can be micro-founded via individual preferences. By controlling for the magnitude of negative and positive social externalities, we find that negative externalities have thrice the impact on investment choices. The asymmetry is pervasive and heterogeneous. Beyond rationalizing important stylized empirical facts, our findings help direct the growing theoretical literature seeking to model the implications of non-pecuniary investor behavior.

Corporate Disclosure: Facts or Opinions?

with Vitaly Meursault and Toby Moskowitz

A large body of literature documents the link between textual communication (e.g., news articles, earnings calls) and firm fundamentals, either through pre-defined “sentiment” dictionaries or through machine learning approaches. Surprisingly, little is known about why textual communication matters. In this paper, we take a step in that direction by developing a new methodology to automatically classify statements into objective (“facts”) and subjective (“opinions”) and apply it to transcripts of earnings calls. The large scale estimation suggests several novel results: (1) Facts and opinions are both prominent parts of corporate disclosure, taking up roughly equal parts, (2) higher prevalence of opinions is associated with investor disagreement, (3) anomaly returns are realized around the disclosure of opinions rather than facts, and (4) facts have a much stronger correlation with contemporaneous financial performance but facts and opinions have an equally strong association with financial results for the next quarter.

Aggregate Sentiment and Investment: An Experimental Study

with Donja Darai, Anthony Kwasnica, and Roberto Weber

Sentiment indices, such as measures of consumer confidence, are often discussed as potential indicators of future investment, consumption and growth. However, documenting a causal relationship between consumer confidence and output using field data has been challenging. We rely on the high degree of control afforded by laboratory environments to experimentally test a simple model of investment with complementarities and time-varying fundamentals. Our experiment manipulates the presence of aggregate confidence measures to test both how they reflect available information and how they influence future output. We find that an aggregate sentiment measure can be as effective as a highly precise exogenous public signal in coordinating behavior on more efficient equilibria. Furthermore, our analysis indicates that the confidence measure also impacts expectations by influencing beliefs about aggregate investment.

Information Environment and the Geography of Firms and Investors

with Gennaro Bernile and Johan Sulaeman

We develop a model linking stock ownership and returns to the distribution of private information and quality of public information. Supporting the model, we find that the firm’s information environment affects investors’ propensity to hold and trade its stocks, but its effects hinge on investors’ access to private information. Nearby investors with potential access decrease their holdings when private information becomes more dispersed and public information quality improves, whereas distant investors display opposite patterns. 

Uncertainty Shocks and Personal Investment: Evidence From a Global Brokerage

with Rawley Heimer and Nancy Xu

We use novel data from a global retail brokerage to study how shocks to uncer- tainty affect personal investment around the world. We consider three empirical uncertainty shocks that have been proposed by the literature — terrorism, natu- ral disasters, and large stock price jumps. We then consider how within-country uncertainty shocks affect investment and delegation in global assets on the broker- age. Importantly, the within-country uncertainty shocks (e.g., a natural disaster in Spain) are unlikely to affect world asset fundamentals (e.g., the SPX500). This allows us to isolate the effects of uncertainty shocks on personal risk aversion from their effects on asset fundamentals. We find that uncertainty shocks have scant effects on personal investing. They primarily affect delegation to asset managers on the brokerage, but that the direction of the effects depends on the type of uncertainty shock. Investors increase their delegation by 5% following terrorist activity and reduce delegation by 8% following positive and negative stock market jumps. These findings suggest that the exogenous uncertainty shocks proposed by the literature have heterogeneous effects on individual investment.

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