Working Papers
Working Papers
The Intersection of Expected Returns [SSRN]
Abstract:
A relatively small number of stocks plays a disproportionately large role in explaining the premia of 163 cross-sectional asset pricing anomalies. For instance, excluding the top 10% of stocks that are shared across the most anomaly portfolios for a given month reduces the average anomaly's return and alpha by approximately 40%. These stocks can be identified ex ante and used to form long-short portfolios that generate abnormal returns more than three times larger than that of the average anomaly portfolio. I provide evidence that the returns of these stocks reflect mispricing due to biased investor expectations. Overall, my analysis suggests that (i) anomalies are largely not independent of one another and (ii) that they likely reflect theoretically arbitrageable mispricing, rather than exposures to latent systematic factors.
Presentations: Eastern Finance Association Annual Meeting, Financial Management Association Annual Meeting, American Finance Association Annual Meeting (poster session), Chicago Quantitative Alliance Spring Conference, Financial Intermediary Research Society Annual Meeting, University of Arizona
Accolades: SSRN Top 10 Papers Lists (Behavioral & Experimental Finance eJournal, Capital Markets: Market Efficiency eJournal, Capital Markets: Asset Pricing & Valuation eJournal, Financial Economics Network Subject Matter eJournals, Financial Economics Network eJournal), AFA Travel Grant⁽$⁾, CQA Travel Grant⁽$⁾, FIRS Travel Grant⁽$⁾
⁽$⁾ Monetary award
Political Polarization and Stock Market Expectations [SSRN]
with Marco Angrisani, Richard Sias, and Harry Turtle
Abstract:
The interaction of affective polarization—the degree to which individuals hold favorable views of their own party and unfavorable views of the opposition party—and the party of the president is strongly related to stock market expectations. The effect size is large (both absolutely and relative to traditional respondent characteristics and return extrapolation) and has increased over time as Americans have become increasingly polarized. The effect persists around midterm or anticipated election losses. Affective polarization subsumes the role of ideology, party, media sources, and media trust. The relation is stronger for more numerate respondents and influences trading decisions.
Presentations: University of Arizona, University of Toledo
Accolades: SSRN Top 10 Papers Lists (Behavioral & Experimental Finance eJournal), SSRN Editor's Choice (Behavioral & Experimental Finance eJournal)
Political Polarization and Partisan Economic Cycles [SSRN]
with Nathan Fernig and Richard Sias
Abstract:
We show that political alignment, the match between a county's partisan composition and the party of the sitting president, shapes realized household financial behavior. Using county-level data on discretionary consumption from the BEA and on equity investment constructed from IRS dividend income, covering every county in the United States over six presidential terms, we find that counties increase both spending and equity investment when they become aligned with the party of the president. The effects are economically large relative to standard determinants of local economic activity and have intensified with the level of national affective polarization. Our estimates are robust to instrumenting alignment with a Bartik-style instrument built from pre-sample vote shares and to border discontinuity comparisons of contiguous counties, and hold at the commuting zone and metropolitan statistical area level. Taken together, these results provide direct evidence that partisan economic expectations transmit into household financial decisions at magnitudes detectable in aggregate data.
Presentations: Research in Behavioral Finance Conference (Scheduled), Souther Finance Association Annual Meeting (Scheduled), Chicago Quantitative Alliance Spring Conference*, Boulder Summer Conference on Consumer Decision Making (poster session)*, University of Arizona
* Presented by coauthor
Accolades: CQA Travel Grant⁽$⁾
⁽$⁾ Monetary award
Target Date Fund Glide Paths: Do Active Bets Enhance Retirement Outcomes?
with David Brown and Shaun Davies
Abstract:
Target Date Fund providers claim to provide value for investors through glide path design, implementation, and tactical asset allocations. We study time series variation in glide paths arising from these discretionary adjustments—what we call Glide Path Activeness. We document significant heterogeneity in Glide Path Activeness in the cross section (between TDFs, TDF series', and TDF providers) and in the time series. We provide evidence that Glide Path Activeness does not add value for investors—in the worst case, we estimate an annualized cost of 1.38% on a risk-adjusted basis. We find that this underperformance is due primarily to poor timing of asset classes and return chasing rather than the selection of more expensive underlying funds or larger management fees. Our results have implications for investors, plan sponsors, and policy makers.
Presentations: Investment Company Institute, University of Kentucky*, Vanguard*, Arizona State University*, Australian National University*, Baylor University*, Claremont McKenna College*, University of Arizona*, University of Hawaii at Manoa*, University of Melbourne*, University of New South Wales*, University of Sydney*, University of Tennessee*, Villanova University*
* Presented by coauthor
Accolades: Investment Company Institute Paper Acceptance Award⁽$⁾
⁽$⁾ Monetary award
Coverage: Rational Reminder Podcast
Hidden Liquidity, Off-Exchange Trading, and Crash Risk
Abstract:
We ask what a stock's hidden liquidity reveals about its future tail risk, using the SEC's MIDAS data on hidden executions for all U.S. stocks. Hidden orders are limit orders that rest in an exchange's order book without being displayed. A stock with a high rate of hidden trading is substantially less likely to crash the following month, and the protection concentrates ahead of scheduled earnings announcements. Dark-pool trading, which also conceals orders but executes them away from the exchange, predicts the opposite: more crashes. Both effects hold when estimated jointly and replicate in non-overlapping samples. Hidden trading predicts no crash reduction in ETFs, which have no fundamentals to learn about. Consistent with informed traders on the concealed side of the order book, hidden trading concentrates in stocks that anomaly strategies buy rather than sell, executed in the small orders characteristic of informed trading. The results suggest informed traders sort across venues: those who provide liquidity conceal their orders on the exchange and truncate the left tail of returns, while those trading on negative private information route their orders to dark pools before it reaches prices.