Research

Directional Information in Equity Returns (with Carlo Sala and André BM Souza). 

We document the existence of sign predictability in equity returns. An investment strategy that buys stocks deemed most likely to have positive returns and sells stocks with the lowest probability of positive returns generates about 1% monthly alpha and is not explained by established asset pricing models. The proposed strategy has higher Sharpe ratios and exhibits fewer crashes than the renowned momentum strategy. We show that profits from exploiting directional information are driven by shifts in retail investors’ expectations after periods of excessive pessimism or optimism, rather than compensation for risk. A simple model of investors’ biased expectations underlies the empirical analysis.

Management Guidance Imprecision and Stock Returns (with Menatalla El Hefnawy and Lenos Trigeorgis)

This study examines the effect of management earnings forecast imprecision (IMP) on future equity returns. We find that a wider management forecast range (high IMP) is associated cross-sectionally with lower stock returns. The IMP-returns inverse relation is consistent with Miller’s (1977) conjecture that increased divergence of opinion allows optimist investors to dominate stocks’ pricing leading to lower subsequent returns. We further exploit a quasi-natural experiment to address the endogenous nature of man- agement guidance and imprecision. The negative association of IMP with subsequent returns is incremental to dispersion of analyst forecasts and a host of other previously documented predictors of future returns.

Bank Anomalies, Mispricing and FED Interventions (with Maosen Wang)

We delve into the determinants of bank returns by analyzing a comprehensive set of 124 char- acteristics (anomaly) portfolios. Our study uncovers that mispricing emerges as the primary factor influencing bank returns, yielding an average monthly return premium of approximately 1%. This underscores the significance of news pertaining to banks’ performance in driving anomalous returns. Notably, we find that open market operations directly influence and sen- timent derived from Federal Reserve (FED) officials affects mispricing in bank stocks. Our findings contribute to resolving the debate surrounding the impact of the Basel III endgame on banks’ cost of capital. By shedding light on the mechanisms driving bank returns, our study provides valuable insights for understanding how regulatory changes, such as those introduced by Basel III, may influence the financial landscape.

Earnings News Insights: Option-Implied Predictors, Bias Expectation, and Mispricing (with Carlo Sala and Maosen Wang)

We propose an option-implied measure, ONET, by aggregating 17 option characteristics. This ONET factor strategy generates monthly anomaly returns around 1.3% and can not be ex- plained by eight established asset pricing models. This ONET is also proved to represent higher efficiency in option market by provides incremental information for return predictability around EAD. It also captures investors’ biased expectations correction process corrections on earnings announcement days (EAD). The ONET return is significantly elevated around EAD, outper- forming traditional stock-based NET. Stocks with high (low) ONET experience significantly returns elevation that is around three (nine) times higher (lower) on EAD than non-EAD. Furthermore, ONET effectively forecasts analysts bias expectation cycle and amplifies their forecasting errors over extended periods. Managers’ sentiment during earnings calls positively predicts future ONET. Additionally, the build-up mispricing factor predominantly accounts for variations in ONET, which exacerbates market mispricing by build-up effect, aligning with mispricing rather than risk explanations.