Gambling preferences, options markets, and volatility.Journal of Financial and Quantitative Analysis, 2016, 51(2): 515-540(with Ben Blau and Ryan Whitby)
This study examines whether the gambling behavior of investors affects volume and volatility in financial markets. Focusing on the options market, we find that the ratio of call option volume relative to total option volume is greatest for stocks with return distributions that resemble lotteries. Consistent with the theoretical predictions of Stein (1987), we demonstrate that gambling-motivated trading in the options market influences future spot price volatility. These results not only identify a link between lottery preferences in the stock market and the options market, but they also suggest that lottery preferences can lead to destabilized stock prices.
Anomaly time. R&R - Journal of Finance(with Adam Reed, Matthew Ringgenberg, and Jacob Thornock)
We examine the timing of returns around the publication of anomaly trading signals. Using a database that measures when information is first publicly released, we show that anomaly returns are concentrated in the first month after information release dates, and these returns decay soon thereafter. We also show that the academic convention of forming portfolios in June underestimates predictability because it uses unnecessarily stale information, which makes some anomalies appear insignificant. In contrast, we show many anomalies do predict returns if portfolios are formed immediately after information releases. Finally, we develop guidance on forming portfolios without using stale information.
Institutional investors, short-selling constraints, and information acquisition.(with Jesse Davis)
This paper highlights an important interaction between short-sale prohibitions and information acquisition. Investors faced with a short-sale prohibition acquire less information when the likelihood of trading is low. Unconstrained investors react to their competitors' constraint and acquire more information. Equilibrium prices are non-linear in fundamentals and price informativeness is asymmetric as a result of the short-sale prohibition. The novel predictions of the model are tested using unique measures of information acquisition from sophisticated market participants. When likely bound by their short-selling prohibition, investors decrease their information acquisition activity by up to 16%.
(Not) everybody's working for the weekend: a study of mutual fund manager effort.(with Richard B. Evans)
We provide the first measure of mutual fund manager effort. We describe effort in the cross-section of mutual funds and across time. Changes in effort have important outcomes, including a boost to overall performance. This effect is especially true of mutual funds with more competitive characteristics, who have higher active share, and who have lower turnover. We also show causality by using an exogenous shock to effort driven by weather conditions.
Mutual fund shorts and the marginal benefits of acquiring information.(with Adam Reed)
We investigate mutual fund short positions and information acquisition. Our analysis, based on a unique dataset and proprietary matching, reveals that managers acquire more information about shorts than longs. Strikingly, their shorts generate higher returns. The relationship between information acquisition and returns is negative for shorts, suggesting greater benefits for uncertain trades. While overall information acquisition positively relates to performance, managers acquire less information about clear winners. Our findings underscore the significance of considering costs and benefits in comprehending information acquisition.
Failures-to-deliver: when short sale constraints bind.(with Jeremiah Green and Edward Swanson)
We study the impact of Failures-to-Deliver (FTD) on price efficiency and future returns. When a stock experiences high FTDs, this (i) predicts high future FTDs, (ii) reduces price efficiency, such as increasing bid-ask spreads and price-impacts, and (iii) predicts lower future abnormal returns. We show that among a large set of anomalies, high FTDs result in higher future anomaly returns, driven primarily in the short-leg. Further, we show the effect of FTDs on anomaly returns is time-variant; high FTDs do not effect anomaly returns immediately, but instead lengthen the period of time in which anomaly returns are earned. Our results all suggest that FTDs represent a limit to arbitrage driven by illiquidity in the equity lending market.
Anomaly returns and information acquisition.
Using conventional methods (i.e., annual rebalancing) to study anomaly returns shows no relationship between abnormal returns and information acquisition. However, using a more focused event-time approach to measure anomaly returns following precise information release dates, we show that abnormal returns are drastically reduced by increased levels of information acquisition from sophisticated investors. This result is robust across a large subset of anomalies, controlling for confounding factors such as size, and even within recent time-periods. Our results suggest that anomaly returns are not entirely spurious or the result of data-mining and are not wholly driven by omitted risk-factors. Instead, a large portion of anomaly returns are the result of mispricing and the slow-diffusion of value-relevant information.
Predicting anomalies.(with Adam Reed, Matthew Ringgenberg, and Jacob Thornock)
Mutual fund flows and information acquisition.(with Dora Hortsman)
The financial sophistication of CEOs and CFOs.(with Toshi Fukui and Brad Cannon)