I have a broad interest in macro finance, with a focus on understanding the interaction of belief heterogeneity, asset pricing and wealth distribution.
Publications
Oil Price and Inequality (Accepted, European Economic Review, with Julian Ludwig and Xiaohan Ma)
How do stock market experiences shape wealth inequality? (Journal of Economic Dynamics and Control)
Information and Inequality (Journal of Economic Theory)
"Wait and See" or "Fear of Floating"? (Macroeconomic Dynamics, with Dong Lu and Kenneth Kasa)
Risk, Uncertainty and the Dynamics of Inequality (Journal of Monetary Economics, with Kenneth Kasa) [online appendix]
"Wait and See” Monetary Policy (Macroeconomic Dynamics, with Michael Tseng)
Working Papers and Work in Progress
Averaging vs. Aggregating Inflation Expectations
Abstract: A large literature documents that household inflation expectations are heterogeneous and biased, and summarizes them by the equal-weighted average across survey respondents. I argue that the policy-relevant object is instead an aggregate that weights each household by its stake in the macroeconomic variable being forecast. My central result is that this stake is pinned down twice over: the consumption share is both the weight that reconciles household forecasts with the published price index and, in an otherwise standard heterogeneous-agent New Keynesian model perturbed only by heterogeneous beliefs about next-period inflation, the weight on household beliefs in the aggregate Euler equation. The weight that reconciles the survey with measured inflation is the weight that drives aggregate demand. Because lower-spending households expect higher inflation, the correctly aggregated belief lies well below the average: households look far less irrational, aggregating closes about a third of the gap to professional forecasters and roughly halves the forecast bias, and what remains is a modest level bias rather than the information rigidity that afflicts the professionals. Because the average sits above the belief that governs demand, a central bank that reads it overstates how pessimistic households are and risks tightening more than the demand-relevant expectation warrants. Other macroeconomic objects call for other stakes, labor income for the wage Phillips curve and wealth for bond pricing, but the equal-weighted average matches none of them.
Hope for the best, plan for the worst (with Kenneth Kasa)
(aka: Asset Pricing with a Human Brain)
Abstract: This paper studies asset pricing when individuals struggle to strike a balance between doubt and hope. We argue this internal struggle is consistent with recent evidence from neuroscience. We operationalize it using the robust control and filtering approach of Hansen and Sargent (2008). Our key innovation is to assume that filtering is optimistically biased. Investment decisions, however, reflect doubts about model specification and are pessimistically biased. We show that empirically plausible doubts about model specification, combined with optimistically distorted beliefs about dividend growth, can not only explain low average price/dividend ratios and high average returns, but can also generate the sort of large procyclical swings in price/dividend ratios that are observed in the data. High and volatile returns occur despite investors having low (approximately logarithmic) risk aversion. The model's belief distortions are empirically plausible, with detection error probabilities in the neighborhood of 13%.
Disagreement and Macro Announcement Day Returns (Reject, with option to Resubmit at Management Science, with Zhenzhen Fan)
Abstract: This paper investigates disagreement as a key driver of macro-announcement returns. Using signed SPX option volumes, we separate investor disagreement from uncertainty of expected returns. We show that announcements that more effectively resolve disagreement have higher announcement-day returns. We further decompose the overall disagreement into pre-announcement uncertainty-induced disagreement and post-announcement differential interpretation. We find that the former positively predicts immediate announcement returns, while the latter is significantly negatively associated with post-announcement returns. A two-period asset pricing model with heterogeneous beliefs supports our findings, highlighting disagreement's critical role in shaping announcement returns.
The effect of Expectations: Evidence from Text-Based Infectious Disease Data (Revise Resubmit, Empirical Economics, with Ram Joshi, Julian Ludwig and Xiaohan Ma)
Abstract: This paper investigates the causal impact of expectations on real economic outcomes by developing a novel identification strategy that isolates the effect of expectations on the macroeconomy. Our approach avoids the need to make specific assumptions about how expectations interact with business cycles or how these expectations are generated. Using newspaper coverage of infectious disease outbreaks in the United States as an instrumental variable, we capture shifts in economic agents’ expectations that are unrelated to actual economic fundamentals. Applying this method within a Structural VAR framework, we find that a 1% decline in GDP forecasts can lead to a reduction in real GDP by up to 0.49%. These results provide clear evidence that expectations do influence macroeconomic outcomes, supporting a wide body of research that highlights the importance of expectations in shaping economic dynamics.
Risk, Uncertainty and Entrepreneurship (with Chenchuan Shi)
Abstract: Why are wealthy individuals more likely to become entrepreneurs? With no prior experience, starting a private business is an uncharted territory. As a result, an entrepreneur’s investment decision is subject to Knightian uncertainty, which is modelled as wealth-dependent preference for robustness. Agents with a history of good income shocks select themselves to become entrepreneurs, since the buffer of higher wealth allows them to hold relatively optimistic beliefs about investment returns. The decline in the proportion of entrepreneurs since the 1980s can be largely attributed to an increase in uncertainty, resulting in a ``hollowing out" effect on the middle class.