Behavioral Finance, Household Finance, Social Networks, Retail Trading and Asset Prices, Financial Intermediation
Under Revision for Resubmission: Review of Financial StudiesLegal jurisdiction affects the development of credit markets causing economic growth. U.S. Congress allows the state legal system to adjudicate contracts on a subset of Native American reservations. Reservations that adopt the state's legal system have stronger credit markets. Credit affects real incomes with a stronger effect in sectors that depend on external financing.
Social considerations can produce behavioral biases. Using novel data from a social network linked to individual investment accounts, traders increase their susceptibility to the disposition effect following exposure to the network. To claim causality, I used the staggered entry of retail brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network. Data on common stock trading at a discount brokerage and a comparison to network simulations provides additional evidence.
Finalist for best paper award in Asset Pricing at the 2015 SFS Cavalcade
Leverage is inversely related to individual investor performance. Causality comes from CFTC regulation capping the maximum permissible leverage available to U.S. retail traders in the foreign exchange spot market and a comparison to a control group of unregulated European traders who trade on the same brokerages. Overconfidence jointly explains high leverage and subsequent poor performance. Supplemental Materials
Norman Award Grant for creative projects in the Social Sciences, NFA 2015, CESifo Behavioral Economics 2015
Subjective life-expectancies are fat-tailed. These expectation errors are correlated with different savings plans, financial participation rates, and financial literacy. A run-of-the-mill life-cycle model calibrated to these beliefs can explain under-saving while young, under-consumption while retired, and the high equity premium.
The patterns of communication between traders supports the growth of active strategies. Using novel data from a social network linked to individual investment accounts, traders broadcast their own successes, while recipients trade more when their peers perform well.
"Do Traders Learn from Others' Failures?"
This paper is among the first to make causal claims about the role of retail trading in the formation of asset prices. We examine a plausibly exogenous source of variation in retail stock trading that has both time-series and cross-sectional variation across the U.S. This frictions made trading less costly for retail investors and increased their ownership of local stocks. We then examine how this friction effects the efficiency of stock prices.
"Competition Creates Complexity" w/ Tony Cookson