Research

Publications

1. Time Variation in the News-Returns Relationship (with Paul Glasserman and Harry Mamaysky)
   Journal of Financial and Quantitative Analysis, forthcoming
   [Internet Appendix]
   Abstract

   The speed of stock price reaction to news exhibits substantial time variation. Higher risk-bearing capacity of financial intermediaries, lower passive ownership of stocks, and more informative news increase price responses to contemporaneous news; surprisingly, these interaction variables also increase price responses to lagged news (underreaction). A simple model with limited attention and three investor types – institutional, non-institutional, passive – predicts the observed variation in news responses. A long-short trading strategy based on news sentiment earns high returns, which increase when conditioning on the interaction variables. The interactions we document are robust to the choice of news source.

Working Papers

1. Retail Trading and Asset Prices: The Role of Changing Social Dynamics
   This version: November 2022
   [Paper] [Internet Appendix]
   Abstract

   Social-media-fueled retail trading poses new risk to institutional investors. This paper examines the origin and pricing of this new risk. I first present stylized facts on prices, quantities, and retail investors’ beliefs for a set of meme stocks. I establish that aggregate fluctuations in retail sentiment originated from a growing and concentrated social network. The retail sentiment fluctuations induced changes in investor composition. As sentiment increased throughout 2020 and 2021, retail investors built up long positions, while price-sensitive long-only institutions have gradually exited the market since early 2020. Short interest stayed high in 2020, then dropped sharply following the price surge in January 2021, and remained low throughout 2021. Motivated by these facts, I develop a model of the interaction between three groups of investors – retail investors, long-only institutions, and short sellers. I calibrate the model to match the price, quantity, and retail sentiment dynamics during this period. Then I use the calibrated model to demonstrate that social network dynamics shape the distribution of retail sentiment and have an economically large impact on asset prices. In the model, retail investors participate in a social network with concentrated linkages. This implies that their idiosyncratic sentiment shocks can lead to aggregate fluctuations in retail sentiment. Aggregate retail sentiment shocks shift investor composition, which in turn determines the price of retail sentiment risk. Following an increase in the aggregate retail sentiment, price-elastic long-only institutions first hit their short-sale constraints, leading to a decrease in the aggregate demand elasticity in the market for an individual stock. Then a “small” positive retail sentiment shock can have a “large” price impact and even squeeze short sellers.
2. Neoclassical Growth Transition Dynamics with One-Sided Commitment (with Dirk Krueger and Harald Uhlig)
   This version: November 2022
   [Paper] [Slides]
   Abstract

   This paper characterizes the transition dynamics of a continuous-time neoclassical production economy with capital accumulation in which households face idiosyncratic income risk. Insurance companies operating in perfectly competitive markets offer long-term insurance contracts and can commit to future contractual obligations, whereas households cannot. Therefore the equilibrium features imperfect insurance and a non-degenerate cross-sectional consumption distribution. When household labor productivity takes two values, one of which is zero, and the utility function is logarithmic, we show that the transition dynamics induced by unexpected positive or negative technology shocks, including the evolution of the consumption distribution, can be calculated in closed form, as long as the initial deviation from the steady state is not too large. This is in contrast to both the standard representative agent neoclassical growth model as well as Bewley (1986) style models with uninsurable idiosyncratic income risk. Thus the paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in the macroeconomic literature on limited commitment.