Below I list recent working papers in themes
Theme 1: Delegated Portfolio Management and Demand-side Frictions
My first research theme considers the investor side of the financial market. I am particularly interested in how delegated portfolio management affects investor welfare and market efficiency. My early papers (2007 RoF; 2008 RFS; 2013 JFE) examine fund incentives and strategies. More recently, I explore the economic grounds affecting the dual-efficiency of security prices and delegated portfolio management, e.g., search frictions (2020 JF), social trust (2020 JFQA), offshore tax evasion, and strategic complementarity.
“Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds,” with Si Cheng and Massimo Massa, working paper 2020. SSRN version
Using the FATCA as an exogenous shock that reduces the tax advantage of offshore funds sold to U.S. investors, we document that the affected funds significantly increase their performance as a response. These funds also increase the price efficiency of their invested stocks. Overall, offshore tax evasion affects the dual-efficiency of the mutual fund industry and asset prices.
“Information Specialization, Strategic Complementarity, and Market Efficiency: Evidence from Institutional Trading ,” with Massimo Massa and Yijun Zhou, working paper 2020. (SSRN version coming soon)
Traditional theories on market efficiency often simplify information filtration as a representative investor processing one signal about a firm in a given period. In practice, however, multiple investors process multiple dimensions of information about firms simultaneously.
We show that skillful institutional investors tend to specialize in subsets of news-categories. This structure gives rise to two types of inefficiency: 1) the inattention of even a small fraction of such investors can impede information discovery in their specialized aspects of firms; 2) the informativeness about other aspects of firms can be negatively influenced due to strategic complementarity. Our results suggest that the market for firm-specific information is likely segmented, which hinders market efficiency. 2020 ABFER.
Theme 2: Strategic Firms and Risk Factors
My second reach theme investigates the firm (supply) side of the market, with a particular focus on how strategic firms and heterogeneous characteristics may affect market efficiency and asset prices. Strategic business groups, for instance, can alter firm risk via within-group asset allocations (JFE 2021), as I had previous shown in a series of cases developed for the revolution of corporate treasury. This theme dates back to my Ph.D. thesis exploring “anomalies” associated with strategic firm decisions that can generate non-normally distributed cash flows.
“An Anatomy of Characteristics in Dynamic Trading,” with Matthew Spiegel and Tao Huang, working paper, 2021. SSRN version
We propose testing the joint and marginal power of characteristics in predicting returns via their contribution to a dynamic trading algorithm (e.g., Kyle 1985). Applying optimal trading portfolios to a sample of 147 characteristics over 1980-2019 confirms that characteristics can jointly deliver significant out-of-sample returns (23% annually). However, most characteristics (88%) fail to supply independent information to dynamic trading — removing these subsumed characteristics can further enhance the optimal portfolio returns to 33.7%. Our analysis further reveals a leading role played by Fama-French-Carhart factors as informative characteristics.
“Measuring Mispricing in the Global Market: An ADR-benchmarking Perspective,” with Massimo Massa, Diyi Wang, and Yang (Gloria) Yu, working paper updating in 2021. (SSRN version coming soon)
We propose and test a novel intuition that cross-country mispricing can be identified by benchmarking assets against dual-listed firms. Empirically, underpricing measured in this way has significant predicting power over industry returns in the global market. Moreover, domestic firesale flows give rise to mispricing, whereas international mutual funds slowly chase such opportunities, suggesting that the global market is segmented at the industry level. 2019 ABFER.
Theme 3: The Real and Social Impacts of Financial Markets
But why do we need financial markets in the first place? To understand this broad question, I examine how market-based mechanisms can affect the real economy and human society. I show that short selling can serve as an “invisible hand” to discipline firm incentives and gauge information flow (2015 RFS; 2015 JFE; 2016 JFE). My recent research also aims to uncover the potential social impact of financial globalization (e.g., in influencing inequality).
“Financial Globalization vs. Income Inequality: The Surprising Role of Delegated Portfolio Flows in Taming the Top 1%,” co-authored with Si Cheng and Massimo Massa, working paper 2019. SSRN version
We document a surprising finding that foreign capital inflows delegated through the global mutual fund industry reduce the top 1% income. To rationalize this observation, we utilize a worldwide database to trace income inequality to its micro-foundations of sales revenue accrued to rich families. We find that large foreign inflows induce local rich families to sell concentrated yet profitable industrial assets, consistent with a diversification channel for financial globalization to influence income inequality. 2019 ABFER.
“Security Lending and Corporate Financing: The Case of the Bond Issuance,” co-authored with Jennie Bai and Massimo Massa, working paper 2018. SSRN version
The security lending market allows institutional investors to lend out their holding assets in exchange for cash collaterals, an important but understudied source of funding for corporate bond lenders. We find that this motivation can spill over to the traditional corporate bond market to influence bond issuance and prices. Our results highlight a “lender’s perspective” in digesting the real impacts of bond lending. 2018 CICF, 2019 AFA.
Theme 4: Social, Environmental, and Cultural Issues
The reverse question is how social considerations and norms may influence firms and investors in financial markets. My first paper on this theme (2014 RFS) argues that a country’s weak institutions can pose a fundamental challenge to its financial market. My more recent papers examine the impact of air pollution (2019 JFE), social trust (2020 JFQA), and social norms.
“Culture vs. Bias: Can Social Trust Mitigate the Disposition Effect?” co-authored with Jie (Jennifer) Li and Massimo Massa, working paper 2017. SSRN version
We propose that cognitive biases may have a social element. Based on a proprietary dataset of a large mutual fund family in China, we find that a higher degree of social trust is associated with higher flow-performance sensitivity, which subsequently mitigates the disposition effect. 2017 AsFA, FMA Asia, 2018 AFA.
Theme 5: New Developments in the Market
This theme explores new developments in the market, such as social media, innovation, and blockchain technologies. I am particularly interested in new developments that have a “blue ocean” flavor due to my interest in and the case series I have developed for Blue Ocean Strategy.
“Asset Pricing on Blockchains: slow-moving capital, momentum, and bubbles-crashes of cryptocurrencies,” co-authored with Dexin Hou, Jennifer Li, and Li Liao, working paper 2020. (SSRN version coming soon)
Blockchains have limited scalability in processing transactions. We argue that this feature may have a profound influence on the pricing of these assets, giving rise to both momentum and bubbles/crashes as two distinct stages of slow-moving capital. Analysis drawing on a sample of 1392 cryptocurrencies over 2013-2018 lends support to this implication. Newer generations of blockchain technologies do not eliminate this issue.