Publications

The Portfolio-Driven Disposition Effect

    with Joey Engelberg, Matt Henriksson, Baolian Wang, and Jared Williams, Journal of Finance, 2024, Vol 79 (5): 3459-3495.

Abstract: The disposition effect for a stock significantly weakens if the portfolio is at a gain, but is large when it is at a loss. We find this portfolio-driven disposition effect (PDDE) in four independent settings: US and Chinese archival data, as well as US and Chinese experiments. The PDDE is robust to a variety of controls in regression specifications and is not explained by extreme returns, portfolio rebalancing, tax considerations, or investor heterogeneity. Our evidence suggests investors form mental frames at the stock and portfolio level and these frames combine to generate the PDDE. 

Attention Spillover in Asset Pricing

    with Xin Chen, Jianfeng Yu, and Zhengwei Wang, Journal of Finance, 2023, Vol 78 (6): 3515-3559.

Abstract: Exploiting a screen display feature whereby the order of stock display is determined by the stock’s listing code, we lever a novel identification strategy and study how the interaction between overconfidence and limited attention affect asset pricing. We find that stocks displayed next to those with higher returns in the past two weeks are associated with higher returns in the future week, which are reverted in the long run. This is consistent with our conjectures that investors tend to trade more after positive investment experience and are more likely to pay attention to neighboring stocks, both confirmed using trading data. 

Wealth Redistribution in Bubbles and Crashes

    with Dong Lou and Donghui Shi, Journal of Monetary Economics, 2022, Vol. 126: 134-153. (Internet Appendix)

    [VoxChina Summary]

    Winner of Best Paper Award, China Financial Research Conference, 2019

    Nominee of the Masahiko Aoki Award for Economics Paper, 2023

    On the program of 2019 NBER SI

Abstract: What are the social-economic consequences of financial market bubbles and crashes? Using comprehensive daily administrative data from China, we document a substantial increase in inequality of wealth held in risky assets by Chinese households in the July 2014 to December 2015 bubble-crash episode. Specifically, we show that relative to a buy-and-hold investor, the largest 0.5% households in the equity market gain 254B RMB while the bottom 85% lose 250B in this period, or 30% of either group’s initial equity wealth. This wealth redistribution is at least in part due to heterogeneity in households’ investment skills; in particular, trading activity of the top 0.5% strongly and positively forecasts, whereas that by the bottom 85% negatively predicts, future stock returns. Compared to the two-and-half years prior to June 2014, when the market is relatively calm, the impact of heterogeneity in investment skills on wealth concentration is greatly amplified in the bubble-crash episode.

Lottery-Related Anomalies: The Role of Reference-Dependent Preferences 

    with Huijun Wang, Jian Wang, and Jianfeng Yu, Management Science, 2020, Vol. 66 (1): 473-501.

    Winner of First Prize, Chicago Quantitative Alliance Asia (CQAsia) Academic Competition, 2016

Abstract: Previous empirical studies find that lottery-like stocks significantly underperform their non-lottery-like counterparts. Using five different measures of the lottery features in the literature, we document that the anomalies associated with these measures are state-dependent: the evidence supporting these anomalies is strong and robust among stocks where investors have lost money, while among stocks where investors have gained profits, the evidence is either weak or even reversed. Several potential explanations for such empirical findings are examined and we document support for the explanation based on reference-dependent preferences. Our results provide a unified framework to understand the lottery-related anomalies in the literature.

Asset Pricing When Traders Sell Extreme Winners and Losers 

    Review of Financial Studies, 2016, Vol. 29 (3): 823-861. 

    previously distributed under the name “The V-shaped Disposition Effect” 

    [CFA Digest summary]

    Winner of First Prize, Chicago Quantitative Alliance (CQA) Academic Competition, 2014

    Winner of Third Prize, Crowell Memorial Award for Best Paper in Quantitative Investments, 2014

    Winner of Young Scholar Award, Outstanding Scientific Research Award (by the Ministry of Education of China), 2020.

Abstract: This study investigates the asset pricing implications of a newly documented refinement of the disposition effect, characterized by investors being more likely to sell a security when the magnitude of their gains or losses on it increases. I find that stocks with both large unrealized gains and large unrealized losses outperform others in the following month (trading strategy monthly alpha = 0.5–1%, Sharpe ratio = 1.5). This supports the conjecture that these stocks experience higher selling pressure, leading to lower current prices and higher future returns. Overall, this study provides new evidence that investors' trading behavior can aggregate to affect equilibrium price dynamics.

Overselling Winners and Losers: How Mutual Fund Managers' Trading Behavior Affects Asset Prices 

    with Bronson Argyle, Journal of Financial Markets, 2021, Vol. 55, 100580.

    previously distributed under the names "V-Shaped Disposition: Mutual Fund Trading Behavior and Price Effects" and "Overselling Winners and Losers: How Mutual Funds Trading Behavior Affects Asset Prices"

Abstract: We link a seemingly biased trading behavior to equilibrium asset prices. U.S. equity mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we find that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are signi.cantly more likely to manifest this trading pattern, and unrealized pro.ts from such funds have stronger return predictability. This cross-sectional return predictability is di.cult to reconcile with alternative explanations.

Barriers to Long-Term Cross-Border Investing: A Survey of Institutional Investor Perceptions

    with Rachel Harvey, Patrick Bolton, Laurence Wilse-Sampson, and Frederic Samama, Rotman International Journal of Pension Management, 2014, Vol. 7 (2).

Abstract: Because of market failures, domestic investment resources are often insufficient to fully finance the public and private capital formation critical to global wealth preservation and growth. It is thus important to understand the factors that drive cross-border investments, including the potential fit between the objectives of international long-term investors and public policy objectives. This article reports the results of a survey of such investors. This research revealed that foreign policy factors were most likely to affect cross-border investment decisions; other influential factors included organizational issues. The survey also found a surprising gap between the responding funds’ aspiration to be long-term investors and their apparent willingness and/or ability to implement long-term investment strategies. These findings highlight the importance of a facilitative policy environment for understanding the benefits of, and implementing, long-horizon cross-border investments.

Working Papers

Why Don't Most Mutual Funds Short Sell

    with Shiyang Huang, Dong Lou, and Jiahong Shi, current draft: Jun. 2025

    Management Science, Reject & Resubmit

    previously distributed under the name “An Anatomy of Long-Short Equity Funds "

2022 CICF

Abstract: Despite the removal of all regulatory barriers by 1997, long-short equity mutual funds have seen disappointing growth over the past two decades. We shed new light on this puzzle by documenting a novel set of facts: long-short mutual funds: 1) hold a substantial amount of cash (in excess of cash-collateral requirements) and have an average market beta of 0.6; 2) generate a 5% annual alpha on risky holdings but do not outperform their long-only peers in total returns; and 3) face much higher flowperformance sensitivities and more volatile flows, and use cash buffers more aggressively. These findings challenge prevailing explanations for this puzzle–such as client restrictions, lack of short-selling skills, or high short-selling costs and risks–and motivate a new framework centered on investor clientele and flow responses.

Extrapolative Beliefs and Financial Decisions: Causal Evidence from Renewable Energy Financing

    with Yinghao Pan and Yu Qin

2022 Fivestar workshop, 2023 CFRC, 2023 CCER Summer Institute

Abstract: How do expectation biases causally affect households’ financial decisions? We exploit a unique setting and study the repayment decision in solar loans, in which households borrow to purchase and install solar photovoltaic (PV) systems. Electricity production – the benefit that solar panels generate – primarily depends on sunshine duration. This creates exogenous within-person across-period variation in recent signals that borrowers observe and thereby expectations of future electricity production. We find that a one-standard-deviation decrease in sunshine duration in the week right before the repayment date leads to a 20.8% increase of delinquency, even though past sunshine duration does not predict that in the future. Survey evidence shows that agents make more positive forecasts of future electricity production after experiencing longer sunshine duration in the past week. We examine a battery of alternative explanations and rule out mechanisms based on liquidity constraints and wealth effects. 

Inferring Mutual Fund Intra-Quarter Trading: An Application to ESG Window Dressing

with Shiyang Huang, Dong Lou, Xudong Wen, and Mingxin Xu

2023 Fivestar workshop; 2024 WFA; 2024 EFA; 2025 CICF

Abstract: We develop a novel method to infer details of intra-quarter trading of individual mutual funds. Although mutual funds report their holdings once every quarter, they are required to report their returns every day. After a mutual fund executes a trade on day t, its reported portfolio return should further deviate from its quarter-end-holdings-based return. This sudden jump in return deviation allows us to infer the transaction date and amount. We apply our method to studying the strategic trading behavior of mutual funds around the turn of each quarter. We find strong evidence of quarter-end ESG-rating manipulation in the post-2015 period: mutual funds buy high-ESG stocks and sell low-ESG stocks right before quarter ends, and reverse their trades immediately at the beginning of the next quarter. This trading pattern is concentrated among mutual funds right around the cutoff of four and five ESG rating stars, which have the strongest incentives to boost their ESG performance. These trades also affect prices: high-ESG stocks outperform low-ESG stocks right before quarter ends, and yet underperform at the beginning of the next quarter.

The Distribution Side of Insurance Market

with Wei Huang, Dong Lou, Jiaxing Tian, and Yongxiang Wang

2025 ABFER; 2025 CICF

Abstract: This paper provides causal evidence for the impact of sales channels on insurance product adoption. Specifically, we utilize policy-level data provided by one of the largest life insurers in China, where we observe granular information on policy features and investor characteristics. We then exploit a regulatory change in the aftermath of the Global Financial Crisis that requires at least a portion of the insurance contracts sold through bank agents in each quarter to be long-term insurance products. Using a discontinuity-in-slope design, we show that bank agents falling below their target qualified ratios in the first two months of a quarter make up for the shortfall in the third month; conversely, bank agents that have exceeded their target ratios in the first two months do not alter their behavior in the last month of the quarter. This shift in qualified ratio in the last month of the quarter is entirely driven by a product-composition change -- switching from short-term life insurance to long-term annuity products. We further show that this switch is not achieved by changing the relative pricing (or features) of insurance contracts or client compositions.

Works in Progress

Efficient Coding in the Field

     with Li Chen and Lawrence Jin