Working Paper

Abstract This paper examines how heterogeneity in intermediary capital - the equity capital ratio of the largest financial intermediaries in the U.S. - affects the cross-section of stock returns. I estimate the exposure (i.e., beta) of individual stocks to a shock in the dispersion of intermediary capital and find that stocks in the lowest beta decile generate an additional 6.8% - 8.2% annual return relative to stocks in the highest beta decile. Using data from Institutional (13F) Holdings, I also find evidence that low-capital intermediaries, who hold riskier assets than high-capital intermediaries, face leverage-induced fire sales during bad times. I propose a model of heterogeneous intermediary capital in which heterogeneous risk preference between high- and low-capital intermediaries leads to a countercyclical variation in aggregate risk aversion and a risk premium. The model states that the dispersion of intermediary capital is priced in the cross-section of asset prices, which supports the empirical findings.

    • 2018 FMA Doctoral Student Consortium; 2019 AFA Ph.D. Student Poster Session; 2019 FMA Annual Meeting (Scheduled); Texas A&M University; UNIST; University of Warwick

Abstract Little is known about how bank capital affects bank stock performance. We show that capital does not affect returns unconditionally, but high-capital banks have higher risk-adjusted stock returns (alphas) than low-capital banks in bad times in and out of sample. Trading strategies earn 3.60% – 4.44% annually. The results are robust to: using different bad times and capital definitions, alternative asset pricing models, and ex-ante expected returns; controlling for performance-type delistings, short-sale constraints, and trading costs; and dropping the largest or smallest banks. Our results seem to be driven by a “Surprised Investor Channel” rather than by an “Informed Investor Channel.”

    • 2017 FIRS Conference; 2017 FMA Annual Meeting (Semifinalist in the Best Paper Award); Texas A&M University; Southern Methodist University; George Washington University; Monash University; ANU-FIRN Banking and Financial Stability Meeting; Fixed Income – Financial Institutions Conference at the University of South Carolina
  • Momentum and Reversal: Information from Prior Returns (with James W. Kolari)

Abstract This paper studies the joint dynamics of momentum and reversal strategies in the U.S. stock markets. Momentum investors face uncertainty about whether past patterns of price movements will continue (momentum) or turn over (reversal), thereby increasing volatilities of momentum returns and occasionally leading to momentum crashes. We find that the forces that drive reversal over momentum tend to be strong if losers’ past return is extremely low (in the time-series) or if losers are small and illiquid (in the cross-section). We further propose new risk-managed momentum strategies by taking into account behavioral divergence between momentum and reversal in an effort to boost momentum profits and reduce volatilities. Empirical tests for the U.S. stock markets in the sample period of 1947 to 2015 document that momentum strategies in which investors implement stop-trading rules if losers’ past returns are extremely low as well as buy-small-loser rules substantially outperform traditional momentum strategies. Importantly, we find that the outperformance is mainly attributable to the increase in abnormal returns (i.e., alpha) from various factor models.

Current Project

  • Asset Pricing Anomalies (with Lexi Kang, Shane A. Johnson, Hagen Kim, and Shimeng Wang)

Abstract In this paper, we examine if return factors based on asset pricing anomalies can explain individual stock returns. To this end, we use a variable selection method, called least absolute shrinkage and selection operator (LASSO) to find which factors matter to explain time-series variations of individual stock returns. We also perform principal component analyses to find how many factors are necessary to span the cross section of individual returns. Interestingly, the LASSO approaches do not select the traditional factors such as the book to market factor or the size factor as the top picks. Factors related to investment, accounting, and systematic volatility appear to be important.


  • The Performance of Bank Mutual Funds: Managerial Incentives to Hedge (with Yonghwan Jo)

Abstract We study managerial incentives to hedge and performance of mutual fund arms in bank holding companies (BHCs). In detail, if fund managers have strong incentives to hold equity stocks that give rise to higher returns when BHCs’ net worth is low, the mutual funds run by those managers would have lower performance in compensation for their hedging demands. Using U.S. equity mutual funds and their BHCs, we empirically test the hypothesis to see the covariance between market capital ratio of BHCc and equity returns held by their funds explains fund alphas after controlling for various factors that potentially affect fund performance. We further investigate asymmetry in the hedging demand in that mutual funds run by high-levered BHCs would have stronger hedging demands (in turn, lower performance) than those run by low-levered BHCs, consistent with the fact that leverage is associated with risk aversion of BHCs.