Working Papers

Disagreement and Asset Prices (with Francis Longstaff and Kyle Matoba)

How do differences of opinion affect asset prices? Do investors earn a risk premium when disagreement arises in the market? Despite their fundamental importance, these questions are among the most controversial issues in finance. In this paper, we use a novel data set that allows us to directly measure the level of disagreement among Wall Street mortgage dealers about prepayment speeds. We examine how disagreement evolves over time and study its effects on expected returns, return volatility, and trading volume in the mortgage-backed security market. We find that increased disagreement is associated with higher expected returns, higher return volatility, and larger trading volume. These results imply that there is a positive risk premium for disagreement in asset prices. We are also able to distinguish empirically between two competing hypotheses regarding how information in markets gets incorporated into asset prices. We find that sophisticated investors appear to update their beliefs through a rational expectations mechanism when disagreement arises.

Model Disagreement, Volatility, and Trading Volume (with Daniel Andrei and Michael Hasler)

We study the impact of model disagreement on the dynamics of asset prices, return volatility, and trade in the market. In our continuous-time framework, two investors have homogeneous preferences and equal access to information, but disagree about the length of the business cycle. We show that while the absolute level of volatility is driven primarily by long-run risk, the variation and persistence of volatility (i.e., volatility clustering) is driven by disagreement. Not only can disagreement amplify volatility, but it is the primary channel through which volatility affects trading volume. Compared to previous studies that consider model uncertainty with a representative agent or those which study heterogenoeus beliefs with no model disagreement, our paper helps us to understand the evolution of the persistent, time-varying volatility process that we observe empirically. 

Consumer search is not only costly but also tiring. We characterize the intertemporal effects that search fatigue has on monopoly and oligopoly prices, the product lines offered by firms, and the provision of consumer assistance (i.e., advice). These effects vary based on whether search is all-or-nothing or sequential in nature, whether learning takes place, and whether consumers exhibit brand loyalty. In contrast to standard search models, accounting for fatigue leads to product proliferation, time-varying prices and consumer assistance. We analyze the welfare implications of search fatigue and highlight the novel empirical implications that our analysis generates.

We explore a theoretical model of product regulation in which the social planner chooses an optimal level of market complexity, given that people have varied sophistication. We investigate how several dimensions affect the quality of regulation: the skill of the social planner, imperfect information, lobbying efforts, voting behavior in elections, and political philosophy. We find that both sophisticated and unsophisticated market participants often vote to elect the least informed and educated planners, which erodes social welfare. Further, when concerns regarding equality are sufficiently large (i.e., a socialistic agenda), the social planner limits the market to one product. In such case, adequacy suffers and all market participants are equally worse off.

Published Papers

Episodic Liquidity Crises: Cooperative and Predatory Trading (with Miguel Lobo and S. Viswanathan). Journal of Finance 62: 2235-2274, 2007.

Work Ethic, Employment Contracts, and Firm Value (with Simon Gervais). Journal of Finance 64: 785-821, 2009.

Strategic Price Complexity in Retail Financial Markets. Journal of Financial Economics 91: 278-287, 2009.

A Welfare Analysis of Regulation in Relationship Banking Markets (with Raphael Rob). Review of Finance 13: 369-400, 2009.

Public Trust, The Law, and Financial Investment (with Florin Dorobantu and S. Viswanathan). Journal of Financial Economics 92: 321-341, 2009.

Fear and Loathing in Las Vegas: Evidence from Blackjack Tables (with David Robinson). Judgement and Decision Making 4: 385-396, 2009.

Forced Liquidation of an Investment Portfolio. The International Journal of Central Banking December 2009: 173-176.

Optimal Portfolio Liquidation with Distress Risk (with David Brown and Miguel Lobo). Management Science 56: 1997-2014, 2010.

Obfuscation, Learning, and the Evolution of Investor Sophistication (with Gustavo Manso). Review of Financial Studies 24: 754-785, 2011.

Investment in Organization Capital (with Bhagwan Chowdry and Mark Garmaise). Journal of Financial Intermediation 21: 268-286, 2012.

Financial Education and Timely Decision Support: Lessons from Junior Achievement (with David Robinson). American Economic Review Papers and Proceedings 102: 305-308, 2012.

What Does Financial Literacy Training Teach Us? (with David Robinson). Journal of Economic Education 43: 235-247, 2012.

Legal Protection in Retail Financial Markets (with Simon Gervais). Review of Corporate Finance Studies 1: 68-108, 2012.

Competition, Comparative Performance, and Market Transparency (with Shaun Davies and Andrew Iannaccone). American Economic Journal: Microeconomics 4: 202-237, 2012.

Trading Complex Assets (with Shimon Kogan and Richard Lowery). Journal of Finance 68: 1937-1960, 2013.

Libertarian Paternalism, the Production of Knowledge, and Financial Decision-Making (with Simon Gervais and Gustavo Manso). Review of Financial Studies 26: 2204-2228, 2013. 

Work in Progress

Generation Y Learning (with Li Jiang and Stephen Spiller).

Complexity and Trust (with Shimon Kogan)

Endogenous Switching Costs

Optimal Contracting in Health Care Markets (with Tony Bernardo and Bhagwan Chowdry).