Publications

Sentiment and Speculation in a Market with Heterogeneous Beliefs (with I. Martin)
[American Economic Review (2022), 112:8: 2465‒2517 ]
Slides, Online Appendix

We present a model featuring risk-averse investors with heterogeneous beliefs. Individuals who are correct in hindsight—whether through luck or judgment—get rich, so sentiment is bullish following good news and bearish following bad news. Sentiment makes extreme outcomes far more important for pricing and has asymmetric effects on left/right-skewed assets. Investors take speculative positions that can conflict with their opinions about fundamentals. Moderate investors are contrarian: they trade against excess volatility created by extremists. All investors view speculation as socially costly; but they think it is in their self-interest, and the market can collapse entirely if speculation is banned. 

Trading Under Uncertainty about other Market Participants
[Financial Review (2023), 58:2: 343-367]

I present an asymmetric information model of financial markets that features rational, but uninformed, hedge fund managers who trade against informed and noise traders. Managers are uncertain not only about fundamentals, but also about the composition of informed and noise traders in the market and use prices to update their beliefs about these uncertainties. Extreme news leads to an increase in both types of uncertainty, while it decreases price informativeness. Price reacts asymmetrically to positive and negative news, with higher expected returns at times of increased uncertainty about market composition. The model generates a price-volume relationship that is consistent with established stylized facts. I then extend to a three-period model and study the dynamics of expected returns and volatility.

Managing Other People's Money: An Agency Theory of Financial Management Industry (with K. Tokis, G. Vichos and P. Mourdoukoutas) 
[Journal of Financial Research, forthcoming (2023)]

This paper builds an active asset management model to study the interplay between the career concerns of a manager and the prevailing market conditions. We show that fund managers over-invest in market neutral strategies, as these have a reputational benefit. This benefit is smaller in bull markets, when investors expect more managers to use high beta strategies, making their performance less informative about their ability than in bear markets. We empirically verify that flows of funds that follow high beta strategies are less responsive to the fund's performance and that the flow-performance sensitivity is higher in bear markets.

Working Papers

The Double-Edged Sword of 2020 European Short-Selling Bans (with P. Della Corte, R. Kosowski and N.P. Rapanos)
Video

 We study the effects of short-selling bans on liquidity and prices through the lens of a model that incorporates a regulator aiming at preventing a signicant price decline. Empirically, we evaluate our model's predictions by exploiting the introduction of short-sales restrictions in some but not all European countries during the COVID-19 pandemic, while measuring the share of informed stockholders with institutional ownership. Consistent with our model, bans were detrimental to market liquidity and failed to support average returns, but were effective in limiting large price drawdowns in countries that implemented short-selling bans, especially for stocks with low institutional ownership. 

Covering Trades Uncovered (N.P. Rapanos)

We investigate whether short sellers are informed when they exit their positions, using publicly disclosed short positions in European stock markets. We find that short covering trades are associated with positive price impact, and future abnormal returns depend on whether short sellers exit their positions at a profit or at a loss. When short sellers close profitable short positions, we find evidence that future abnormal returns are positive. In contrast, when short sellers cover their trades at a loss, future abnormal returns are negative. Our results suggest that short sellers are generally informed when covering their shorts, but they are also sensitive to limits to arbitrage leading them to sometimes close their positions prematurely.

Climate risks, near and far (with R. Bidder and S. Zhang)

Intermediaries and Noise Traders

All papers can be provided upon request.