Research

Published Papers

The Best of Both Worlds: Accessing Emerging Economies via Developed Markets (with Redouane Elkamhi and Mikhail Simutin)

Journal of Finance, October 2019
Presented at China International Conference in Finance (2016), Northern Finance Association Annual Meeting (2016), International Centre for Pension Management discussion forum (2016), SFS Cavalcade (2017)

A growing body of evidence suggests that the benefits of international diversification via developed markets have dramatically declined. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of economic activity of emerging countries. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.

Global Equity Correlation in International Markets (with Redouane Elkamhi)

Management Science, November 2021
Presented at Trans-Atlantic Doctoral Conference (2015), RMI Annual Risk Management Conference (2015), Financial Management Association Annual Meeting (2015), China International Conference in Finance (2016), Northern Finance Association Annual Meeting (2016)
Best Paper Award Semi-Finalist, FMA (2015)

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks.

The Opposing Effects of Complexity and Information Content on Uncertainty Dynamics: Evidence from 10-K Filings (with Frederico Belo, Jun Li, Xiaoji Lin, and Xiaofei Zhao)

Management Science, forthcoming
Presented at American Finance Association Annual Meeting (2017), China International Conference in Finance (2016), Financial Management Association Annual Meeting (2016), the Lone Star Finance Conference (2015), Midwest Finance Association Annual Meeting (2016), Mid-Atlantic Research Conference in Finance (2016)
Winner of 2015 Crowell Memorial Prize (second prize), Paper Competition, PanAgora Asset Management

We evaluate the impact of complexity and information content of 10-K filings on investors’ perceived uncertainty dynamics following the _lings. On average, the option implied volatility increases in the first four weeks after the filings, followed by a net decrease in the subsequent six weeks. This hump-shaped volatility dynamics is more pronounced for firms with larger 10-K file sizes. We provide a novel decomposition of 10-K file size based on the individual sections’ disclosure amount and topic analysis. We find that the discussions on topics in the Risk Factors section mainly capture the complexity aspect whereas the discussions on topics in the Managerial Discussion and Analysis (MD&A) section mainly capture the information content aspect of the 10-K filings. Economically, an options-based investment strategy exploring the volatility dynamics generates up to 17% annualized return spread. Our findings highlight the importance of the timing for understanding the opposing effects of complexity and information content on asset prices.

Digesting FOREXS: Information Transmission across Asset Classes and Return Predictability (with Zhi Da and Virgilio Zurita)

Management Science, forthcoming
Presented at the Lone Start Finance (2020), Financial Management Association Annual Meeting (2020), Eastern Finance Association Annual Meeting (2021), Northern Finance Association Conference (2021), China International Conference in Finance (2022, scheduled)

We provide novel evidence that investors of U.S. multinational ﬁrms react to ﬁrms’ foreign exchange exposure shocks with a delay. Using the cross-section of currency returns and the relative presence of the ﬁrm in the foreign economies, we compute a foreign operations related exchange shock (FOREXS) measure. We ﬁnd FOREXS to predict ﬁrms’ future cash ﬂows and stock returns. A strategy that buys stocks with high FOREXS and shorts stocks with low FOREXS yields a 6.74% annualized abnormal return. The predictive power arises from three reinforcing channels: incomplete hedging, information uncertainty, and limited investor attention.

Working Papers

Labor Market Networks, Fundamentals, and Stock Returns (with Turan G. Bali, Ali Sharifkhani, and Xiaofei Zhao)

Presented at American Finance Association Annual Meeting (2022), Eastern Finance Association Annual Meeting (2021), China International Conference in Finance (2021), Man Group, PanAgora Asset Management
Finalist of 2022 Crowell Memorial Prize, Paper Competition, PanAgora Asset Management

This paper proposes a measure of labor market connectivity based on the similarity in the composition of occupational knowledge characteristics across industries and provides evidence of return predictability in the cross-section of industries that are connected through the labor market. In long-short portfolios, an industry’s return is strongly predicted by the past return of its labor-market-connected neighboring industries with an annualized return of up to 9%, which is not explained by established asset pricing models. The return predictability remains significant after controlling for the supply chain momentum as well as the industry lead-lag effect, and is concentrated in stocks with higher arbitrage costs and higher ownership of uninformed investors. We find similar predictive relations for the labor productivity, wages, employment, and profitability of labor connected industries. Our findings are consistent with positive spillover of productivity shocks among industries that are connected through the labor market. Informational frictions, costly arbitrage, and investors’ limited attention magnify the delayed response of stock prices to the spillover of labor productivity shocks, which results in the observed return predictability.

Characteristics as Signal Process (with Huichou Huang and Serhiy Kozak)

Presented at 34th Annual Congress of the European Economic Association (2019), Frontiers of Factor Investing (2020), Royal Economic Society Annual Conference (2020), Point72 Asset Management

In this paper, we propose a portfolio-based framework that treats characteristics as signal processes to handle parameter and model uncertainty in the construction of characteristic-based factors. We reveal that different signal components correspond to distinctive characteristic-related risk premia. A comprehensive trading strategy that combines differentiated constituent portfolios through signal decomposition and transformation of a characteristic substantially improves the performance upon the traditional factor investing by harvesting these unexploited risk premia. The empirical results from asset pricing tests also suggest the existence of hidden risk premia. These findings raise concerns about the measurement errors in factors or omitted risk premia, and new challenges on classical asset pricing models.

Gravity in International Equity Markets

The size of economies and geographical distance are significant determinants of the contemporaneous and cross-serial correlations in international equity market returns across countries. Larger countries lead returns of small-countries, and this cross-country predictability decreases with geographical distance of the two countries. A long-short trading strategy that exploits this relation yields risk-adjusted returns of 10% per annum. The lead-lag relation is not driven by cross-country differences in the average size or liquidity of firms, the degree of stock market development, or the industry composition. Decomposing stock market returns into cash-flow and discount-rate news shows that the international transmission of discount-rate news is more pronounced than cash-flow news and that the size of economies and geographical distance are significant determinants for both components of returns.