Research

Publications

The Short-Termism Trap: Catering to Informed Investors (with James Dow and Francesco Sangiorgi), Journal of Financial Economics, Forthcoming

Informative stock prices reduce agency costs and boost firm value. However, since informed trading capital is limited, firms competing to attract informed investors by focusing on short-term projects can lead to a "short-termism trap," where excessive short-termism negates the benefits of price informativeness but from which no firm can escape.

A Horizon Based Decomposition of Mutual Fund Value Added Using Transactions (with Jules H. van Binsbergen, Hongxun Ruan and Ran Xing), Journal of Finance,  2024, 79(3), 1715-2393 

Short-term investment ideas are less scalable due to the inability to spread associated trades over time, leading to negative correlations between fund turnover and the value-added horizon. High-turnover mutual funds generate substantial value within the first two weeks, with over 80% earned on FOMC and earnings announcement days, while low-turnover funds contribute value over longer horizons. 

Hysteresis in price efficiency and the economics of slow moving capital (with James Dow and Francesco Sangiorgi), Review of Financial Studies, 2021, 34, 2857-2909 

A shock that reduces efficiency increases the duration of arbitrage and diminishes available capital for new positions, potentially causing arbitrage capital to exit the market and intensifying the impact on price efficiency, resulting in a lasting shift known as "hysteresis." 

Searching for Information (with Francesco Sangiorgi), Journal of Economic Theory, 2018, 175, 342-373

This paper presents a search-based information acquisition framework that utilizes an urn model to demonstrate how limited information searchability can create a trade-off between precision and commonality of information. In a "beauty contest" game, this trade-off generates non-fundamental volatility through the channel of information acquisition. 

Speculative Equilibrium with Differences in Higher-Order Beliefs (with Albert S. Kyle), Management Science, 2018, 64(9), 4317-4332

Modest differences in higher-order beliefs among investors can lead to significant price effects, as inconsistent beliefs about expectations create overvaluation and destabilize prices when common knowledge is lacking.

The Paradox of Financial Fire Sales: the Role of Arbitrage Capital in Determining Liquidity (with James Dow), Journal of Finance, 2018, 73(1), 229-274

Brattle Group Prize Distinguished Paper Award for 2018

This paper combines rational expectations equilibrium and "lemons" models to explain fire sales during liquidity crises, where liquidity-constrained specialist participants result in less informative prices, leading to an adverse selection problem that reduces the supply of high-quality assets and discourages non-specialist investors from supporting prices. 

Contractual Incompleteness, Limited Liability and Asset Price Bubbles (with James Dow), Journal of Financial Economics, 2015, 116(2), 383-409

Asset substitution alone cannot cause bubbles because it is priced into the intermediaries׳ securities. But incomplete contracts and managerial agency problems can make intermediaries take excessive risk to exploit limited liability, bidding up risky asset prices. 

Working Papers

Multiple Rational Bubbles (with Yenan Wang)

Dao Governance (with Jongsub Lee and Tao Li)

Mutual Fund Managers' Career Concerns, Investment Horizons, and Value Added: Theory and Empirics (with Jules H. van Binsbergen, Hongxun Ruan and Ran Xing)

The More Illiquid, The More Expensive: A Search-Based Explanation of Illiquidity Premium (with Jaewon Choi, Sean S. Shin and Ji Hee Yoon)

Collateralization, Market Incompleteness and Asset Overvaluation (with James Dow)

Should We Commit to Bailing Out? (with James Dow)

Liquidity with High-Frequency Market Making (with Mariana Khapko and Albert S. Kyle)

A Model of Self-Reinforcing Financial Fads