Research

“FX Option Volume” (with R. Czeck, S. Huang, and T. Wang). 

R&R, Journal of Finance

We study the information content of foreign exchange (FX) option volume using a unique dataset on over-the-counter FX options with disclosed counterparty identities, contract characteristics, and trading direction. Our study shows that FX option volume can predict future exchange rate returns, especially when the demand for the US dollar is high. In support of information-based arguments, we also document that exchange rate predictability is stronger around macro-announcement days or when using options with higher embedded leverage. Finally, directional option trading shows that hedge funds and real money investors are better informed than other groups of investors in predicting future exchange rates.

“Best Short” (with R. Kosowski and N. Rapanos). 

We infer investors' expectations about future stock returns through a measure of short conviction that exploits net short positions disclosed at the investor-stock level for European stock markets. A strategy that sells high-conviction stocks and buys low-conviction stocks, named Best Short, generates a risk-adjusted excess return that is larger than 8% per annum and differs from the performance of traditional strategies based on aggregate short interest. Its profitability, moreover, cannot be explained by transaction costs, stock characteristics, frictions in the securities lending market, leverage constraints, and measures of price inefficiency.  

Accepted for presentation at: 2021 ABFER Annual Conference, 2019 Factor Investing Conference, 2019 EFA.

“Presidential Cycles and Exchange Rates” (with Hsuan Fu). 

This paper shows that US presidential cycles can predict dollar-based exchange rate returns. Armed with nearly 40 years of data and a large cross-section of currency pairs, we document an average US dollar appreciation during Democratic presidential terms and an average US dollar depreciation during Republican presidential mandates. The difference in these average exchange rate returns is larger than 5% per annum and is primarily linked to trade tariffs. In contrast, we nd no relationship with cross-country interest rate differentials, inflation differentials, and pre-existing economic conditions. We relate these findings to trade policy uncertainty within a model of exchange rate determination with constrained financiers.

Accepted for presentation at: 2021 AFA.

“The Double-Edged Sword of 2020 European Short-Selling Bans” (with R. Kosowski, D. Papadimitriou, and N. Rapanos). 

A number of European countries -- Austria, Belgium, France, Greece, Italy, and Spain -- responded to the market disruption caused by the Covid-19 pandemic by introducing temporary bans on short-selling activity. These restrictions were imposed on all stocks and remained in place between March 18 and May 18 across all six countries. Other European countries, unlike the 2007-09 global financial crisis, abstained from introducing any form of short-selling constraints. We exploit this cross-country variation in short-sale regimes to identify their effects on liquidity, price discovery, and stock prices. We find that bans were detrimental for liquidity and failed to support prices, in line with the early work of Beber and Pagano (2013). Finally, we build a theoretical model, to understand why regulators impose these restrictions; we conclude that when institutional ownership is low bans manage to support the left tail of returns, even though bid-ask spreads may widen.