I have a broad interest in macro finance, with a focus on understanding the interaction of belief heterogeneity, asset pricing and wealth distribution.
Working Papers and Work in Progress
Disagreement and Macro Announcement Day Returns (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.
Hope for the best, plan for the worst (with Kenneth Kasa)
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%.
How do stock market experiences shape wealth inequality?
Abstract: This paper develops a continuous-time OLG model, incorporating rare disasters and agents who learn more from their own experiences. Disasters such as the Great Depression make investors distrustful of the market. Generations that experience disasters save in the form of safer portfolios, even if similar disasters are not likely to occur again during their lifetimes. "Fearing to attempt," therefore, inhibits wealth accumulation by these "depression babies" relative to other generations. This effect is amplified in the general equilibrium since the equity premium is relatively high following a disaster. When calibrated to US data, the model can explain around half of the old-to-young wealth ratio decrease between the Great Depression and the 1980 s, and around 7 % of the subsequent increase. The model can also explain about a quarter of the increase of top 1 % wealth shares and is consistent with observations of life cycle portfolio choices, and changes in asset returns following disasters.
Risk, Uncertainty and Entrepreneurship (with Chenchuan Shi)
Oil Price and Inequality (with Xiaohan Ma and Julian Ludwig)
The rise of the two-working-parent family (with Geoffrey Dunbar)
Publications
Information and Inequality (Journal of Economic Theory)
Risk, Uncertainty and the Dynamics of Inequality (Journal of Monetary Economics, with Kenneth Kasa) [online appendix]
"Wait and See" or "Fear of Floating"? (Macroeconomic Dynamics, with Dong Lu and Kenneth Kasa)
"Wait and See” Monetary Policy (Macroeconomic Dynamics, with Michael Tseng)