Research
Publications
Review of Financial Studies, 2023, 36(9), 3825-3860.
Working Papers:
Revise and Resubmit at Management Science
Presentation: EFA 2019; CICF 2019; SFS Cavalcade AP 2019; NFA 2017; China International Conference in Macroeconomics (CICM) 2019; Econometric Society Asia Meeting 2019; COAP (Corporate Policies and Asset Prices) Conference at Cass Business School 2018; Paris December Finance Meeting 2018; Econometric Society North American Summer Meeting (NASM) 2018; AFFI 2018; University of Texas Dallas, Tulane University, AQR Capital Management, Singapore Management University, National University of Singapore, City University of Hong Kong, University of Melbourne, BI Norwegian Business School, Southwestern University of Finance and Economics, Shanghai University of Finance and Economics, Xi’an Jiaotong University
Abstract: I study how and why the two major types of business investment, equipment investment and structures investment, are differently linked to stock returns. I empirically show that equipment investment has a significantly stronger predictive power for stock market returns than structures investment, both in-sample and out-of-sample. To explain this empirical finding, I build a general equilibrium production model featuring a shorter time-to-build for equipment investment than for structures investment. In the model, equipment investment reacts to productivity shocks in a more timely manner, and reflects more of the information contained in stock prices.
Presentation: Society of Labor Economists Annual Conference 2023, China International Conference in Macroeconomics 2023, CEPR European Summer Symposium in Financial Markets (Evening Session) 2023, Asia Meeting of Econometric Society Beijing 2023, Asia Meeting of Econometric Society Singapore 2023, Econometric Society Australasian Meeting 2023
Abstract: Job search decisions of unemployed workers are forward-looking and respond to expected returns from the search process. When expected returns (or discount rates) are high, the discounted benefits from the search process are low. Thus unemployed workers search less intensively for jobs. We build a Diamond-Mortensen-Pissarides (DMP) search model with variable search intensity and Epstein-Zin preferences. We show: (a) the search return of unemployed workers equals the firm's stock return; (b) variable search intensity amplifies both labor market volatilities and stock market risks, relative to fixed search intensity; and (c) search intensity negatively predicts stock market returns in the model as in the data. Variable search intensity has two opposing effects on equity risk premium: It increases the price of risk by increasing the volatility of the stochastic discount factor; it decreases the quantity of risk by decreasing the procyclicality of dividends; quantitatively, the former effect dominates the latter.
Abstract: This paper studies how market power affects the well-documented positive relation between firms' profitability and future stock returns in the cross-section. We find that this relation is significantly more pronounced among firms with high markup. A long-short portfolio sorted on profitability earns an average monthly return of 0.57% among firms with high markup, and only 0.05% among firms with low markup. Firms' differential exposure to investment-specific technology shocks explains this gap. To understand these results, we introduce market power into a standard investment-based asset pricing model to study its impact on firms' endogenous investment and risk exposures. Market power exacerbates the displacement risk faced by highly profitable firms.
Presentation: CICF 2019; NFA 2016; Paris December Finance Meeting 2019; City University of Hong Kong International Finance Conference 2019; Hong Kong Joint Finance Research Workshop 2018; Econometric Society North American Summer Meeting (NASM) 2016; Econometric Society European Winter Meeting 2016; Becker-Friedman Institute Macro Financial Modeling (MFM) Summer Session 2016
Abstract: I study how heterogeneous preferences (heterogeneity in risk aversion and time discount factor) affect asset prices and risk sharing in an endowment economy, where financial markets are endogenously incomplete due to the contracting friction of limited enforcement. I find that heterogeneous preferences generate asymmetric risk sharing between agents and lead to conditional variation in the stochastic discount factor, which results in a higher and more volatile equity premium. In contrast to the standard findings under heterogeneous preferences, I show that the long run distribution of agents’ consumption is stationary and nondegenerate, since agents share limited risk under endogenously incomplete markets.