Research

Analysts Are Good at Ranking Stocks , joint with Adam Farago and Erik Hjalmarsson

Sell-side analysts’ forecasts of future stock returns are highly biased and the aggregated consensus forecast is a poor predictor of future returns. In sharp contrast, we show that the information revealed through the implicit ranking of return forecasts conducted individually by each analyst is highly informative of subsequent returns. Long-short portfolios sorted on these rankings result in large and highly significant excess returns that cannot be explained by previous anomaly characteristics or information extracted from consensus forecasts. The strong performance of the relative ranking forecasts is most easily understood by noting their similarity with within-analyst demeaned forecasts. The latter are equivalent to removing each analyst’s fixed effect and thus controlling in a general manner for unobservable analyst-specific biases, an effect which cannot be achieved when starting with the aggregated consensus forecast.


Inflation Risk, Ambiguity, and the Cross-Section of Stock Returns, joint with Guihai Zhao, R&R at  Journal of Financial Economics

Inflation premia among individual stocks are moderate on average, yet their magnitude increases by 1.6% to 3.2% per month when ambiguity is high. This finding aligns with an equilibrium model where investor concerns about model misspecification and uses the worst-case inflation model to price stocks. Stocks whose prices decline with unfavorable realized inflation risk also co-move negatively with ambiguity, leading to a large ambiguity premium. Meanwhile, higher exogenous inflation-ambiguity correlation makes stocks with higher inflation betas better hedges for ambiguity. Empirically, the monthly inflation premium is 0.20% under negative correlation but drops to -1.94% under positive correlation. Our findings are robust at the industry-level and imply that the time-varying inflation premium in the stock market is predominantly influenced by the ambiguity premium. This novel interpretation is unrelated to explanations based on inflation cyclicality, investor sentiment, or macroeconomic disagreement.

Presented at AMES, SMU, CMES, Gothenburg

Recent findings on the term structure of equity and bond yields pose serious challenges to existing equilibrium asset pricing models. This paper presents a new equilibrium model to explain the joint historical dynamics of equity and bond yields (and their yield spreads). Equity/bond yields movements are mainly driven by subjective dividend/GDP growth expectation. Yields on short-term dividend claims are more volatile because short-term dividend growth expectation mean-reverts to its less volatile long-run counterpart. Procyclical slope of equity yields are due to counter-cyclical slope of dividend growth expectations. The correlation between equity returns/yields and nominal bond returns/yields switched from positive to negative after the late 1990s, owing to (1) procyclical inflation and (2) higher correlation between expectations of real GDP and of real dividend growth post-2000. Equity returns are predictable but the strength of predictability decreases from short-term to long-term claims due to biased subjective cash-flow forecasts. The model is also consistent with the data in generating persistent and volatile price-dividend ratios, and excess return volatility. 

Presented at University of Gothenburg, Nordic Finance Network Young Scholars Finance Webinar , Singapore Management University,  2021 North American Summer Meeting of the Econometric Society , Stanford SITE 2021, WFA 2022, 18th Annual Conference of the Asia-Pacific Association of Derivatives, Stockholm Business School, Paris December Finance Meeting 2022 , EFA 2023 


Currency Carry, Momentum, and Global Interest Rate Uncertainty, Journal of Financial and Quantitative Analysis, forthcoming

Returns to currency carry and momentum are compensations for the risk of global interest rate uncertainty (IRU), with risk exposures explaining 92% of cross-sectional return variations. Higher carry and momentum signal increase investor's expectations for future excess returns and stimulate more risk-taking, yet the global IRU adversely affects investor's risk-bearing capacity and triggers losses of carry and momentum strategies. Expected returns estimated from those risk exposures predict carry and momentum returns, with large economic and statistical significance. Consistently, I find the risk of global IRU predicts contemporaneous and subsequent worsening of intermediary's financial constraints, and it is also priced in momentum returns across other asset classes. The explanatory power is robust to using currency-level tests and is not driven by existing measures of uncertainty or risk aversion.

Presented at  AP2 (Second Swedish National Pension Fund), KWC-CFF Workshop, University of Gothenburg, SJTU Antai, AFA PhD Poster Session, Fudan FISF, SMU, Nankai Finance, Renmin U, Zhejiang U, CUFE, SWUFE IFS, PKU HSBC

 We document substantial heterogeneity across forecasting horizons and currencies regarding the determinants of exchange rates. At short horizons, the dominant force is predictability of future spot rates. At long horizons, return predictability drives most of the variation in exchange rates, with predictability of interest differentials playing a secondary role. However, for the Japanese Yen the main determinant is interest spread predictability. We develop a liquidity-based model to explain such evidence. Agents value liquidity benefit of near-money assets and have non-separable utility over consumption and liquidity. Cross-country differentials in liquidity demand determine exchange rates and quantitative simulation replicates our empirical findings. 

Political sentiment and MAX effect, joint with Shuyang Huang, The North American Journal of Economics and Finance, 2022


The Term Structure of Sovereign CDS and the Cross-section of Exchange Rate Predictability, joint with Giovanni Calice, International Journal of Finance and Economics, 2019

We provide novel evidence on exchange rate predictability by using the term premia of the sovereign credit default swap (CDS). Using a sample of 29 countries, we find that the sovereign CDS term premia significantly predict the exchange rates out-of-sample in the cross-section. On average, a steeper CDS spread curve for a country predicts its currency appreciation against the US dollar (USD). We show that while the sovereign CDS level mainly reflects global risk, the information in the term premia of the sovereign CDS reflects country-specific risk. The predictive power of the term premia is robust after controlling for the sovereign CDS levels and other conventional macroeconomic or financial factors. Further analysis suggests that the information in the sovereign CDS term premia is also helpful for forecasting the international stock markets. 

Presented at LSE, Cubist Systematic Strategies, CityU of Hong Kong, Glasgow, Cambridge, SAIF, Zhejiang U, FMA, Wolfe Research Global Quantitative and Macro Investment Conference, Conference on Frontiers of Factor Investing, Birkbeck College

Understanding US Firm Efficiency and its Asset Pricing Implications, joint with Giovanni Calice and Levent Kutlu, Empirical Economics, 2019

We investigate the link between firm-level total factor productivity (TFP) growth, technical efficiency change, and their implications on firm-level stock returns. We estimate total factor productivity growth of US firms between 1966 and 2015 and decompose TFP growth into returns to scale, technical progress, and efficiency change components. We show that most of the variation in TFP growth is explained by technical efficiency change. Moreover, we examine the effects of important macro and micro level factors on inefficiency as well as its asset pricing implications. We find that low-efficiency firms are uniformly more sensitive to a wide class of macroeconomic shocks, and the classical stock return anomalies are more pronounced among those firms. Our results emphasize the role of macroeconomic determinants of efficiency, and the stability effects of many useful policy targets on firm-level TFP.

Permanent working paper

The Share of Systematic Risk in Foreign Exchange and Stock Markets

Presented at FMA, EEA-ESEM, IAAE, CMES, AMES, AFBC, SMU