Research
Publication
Heterogeneity in the Dynamic Effects of Uncertainty on Investment (with Soojin Jo), Canadian Journal of Economics, 2018, 51(1), pp. 127-155.
How does aggregate profit uncertainty influence investment activity at the firm level? To address this question, we introduce a Panel-ARCH process for aggregate profit volatility exploiting via a factor structure information in a large panel of firm sales. We include the resulting measure for profit uncertainty, interacted with firm fixed effects, in an investment forecasting model designed to examine the compositional effects of profit uncertainty on individual firms' investment activity. We find that higher profit uncertainty induces firms to lower future capital expenditure on average, yet to a different degree depending on firm characteristics, such as size, liability ratio, and sub-industry classification. This finding points to significant and substantial heterogeneity in the uncertainty transmission mechanism, a feature not highlighted in recent studies of uncertainty at the aggregate level.
Speculation in Commodity Futures Market, Inventories and the Price of Crude Oil [Online Appendix], Energy Journal, 2017, 38(5).
This paper examines the role of inventories in refiners' gasoline production and develops a structural model of the relationship between crude oil prices and inventories. Using data on inventories and prices of oil futures, I show that convenience yields decrease at a diminishing rate as inventories increase, consistent with the theory of storage. In addition to exhibiting seasonal and procyclical behaviors, I show that the historical convenience yield averages about 18 percent of the oil price from March 1989 to November 2014.
Although some have argued that a breakdown of the relationship between crude oil inventories and prices following increased financial investors' participation after 2004 was evidence of an effect of speculation, I find that the proposed price-inventory relationship is stable over time. The empirical evidence indicates that crude oil prices remained tied to oil-market fundamentals such as inventories, suggesting that the contribution of financial investors' activities was weak.
The Usefulness of Cross-sectional Dispersion for Forecasting Aggregate Stock Price Volatility, Journal of Empirical Finance, 36 (March 2016), pp. 162-180: DOI 10.1016/j.empfin.2016.01.013.
Does cross-sectional dispersion in the returns of different stocks help forecast volatility of the S&P 500 index? This paper develops a model of stock returns where dispersion in returns across different stocks is modeled jointly with aggregate volatility. Although specifications that allow for feedback from cross-sectional dispersion to aggregate volatility have a better fit in sample, they prove not to be robust for purposes of out-of-sample forecasting. Using a full cross-section of stock returns jointly, however, I find that use of cross-sectional dispersion can help improve parameter estimates of a GARCH process for aggregate volatility to generate better forecasts both in sample and out of sample. Given this evidence, I conclude that cross-sectional information helps predict market volatility indirectly rather than directly entering in the data-generating process.
Working Papers
(with Lawrence D.W. Schmidt, formerly circulated as "Importance of Cross-Sectional Shock on the Empirical Evaluation of Risk-Return Tradeoff in the Stock Market", the latest version is available from SSRN)
Given that the size distribution of publicly traded firms has fat tails, large idiosyncratic returns on large stocks can have nontrivial effects on the returns of value-weighted portfolios. We study effects of "granular measurement errors"--which are present when the law of large numbers fails and idiosyncratic returns are not fully diversified away-- on standard empirical asset pricing tests. We construct an empirical proxy for the granular measurement error and demonstrate that it contributes substantially to the observed volatility of the CRSP value-weighted index and other market proxies. Unpriced granular measurement errors lead to downward-biased estimates of the intertemporal risk-return relationship, generate biased estimates of systematic risk exposures in cross-sectional asset pricing tests. After making simple corrections to eliminate the effects of granular measurement errors, we .find much stronger evidence of an intertemporal risk-return relationship for the market index. In the cross section,
betas for most portfolios --especially portfolios of small stocks-- are severely biased downwards. After correcting estimated betas for the granular residual, the size anomaly disappears, and we find evidence of an expected return-beta relationship consistent with basic CAPM/APT theory. Finally, we use instrumental variables estimates to provide direct evidence that the granular residual is less informative about current and future real activity, suggesting an economic rationale for it having a lower or even zero risk price.
Community Banks and the Mitigation of the China Shock
(with Sanghoon Lee and Seung Hoon Lee, formerly circulated as "China Shock, local credit supply, and the amplified impact on the U.S. labor market ")
This paper investigates the impact of the ‘China Shock’ on banking institutions and their feedback effects on local economies. We find community banks in the regions hit hard by the China Shock experienced slower growths in deposits and loans while offering and charging higher interest rates on deposits and loans. The higher interest rates suggest that loan supply may have been negatively affected by the reduced deposits caused by the China Shock. However, community banks still provided relatively more loans to the distressed local economies, compared with non-community banks. On the extensive margin, non-community banks, typically operating in multiple regions, slowed down their branch expansions in the distressed regions. On the intensive margin, the average branch of a non-community bank supplied relatively fewer loans to the distressed regions, compared with the average branch of a community bank. Therefore, regions with higher community-bank market shares suffered relatively less employment loss compared with other regions with similar exposure to the China Shock.
Work in Progress
Disclaimer
The views in this site are my own and should not be interpreted as those of the Federal Reserve Bank of Dallas or the Federal Reserve System.