Research
Working papers
Fed Information Effects: Evidence from the Equity Term Structure, 2023, Revise and Resubmit, Journal of Financial Economics
with Ben Golez
University of Virginia (Darden), SFS Cavalcade North America, Catalan Economic Society, Mid-Atlantic Research Conference in Finance at Villanova, University of Connecticut Finance Conference, Midwest Finance Association Annual Meeting, Boston College, Johns Hopkins University, USC Macro-Finance Conference, Rutgers University, University of Texas Austin, CUNY Baruch, Wabash River Finance Conference, Tilburg University, University of Notre Dame
Do investors interpret central bank target rate decisions as signals about the current state of the economy? We study this question using a short-term equity asset (dividend strip) that entitles the owner to the dividends of the aggregate stock market over the next six months. If monetary policy news causes investors to update their beliefs about near-term aggregate cash flows, this will immediately be reflected in the short-term asset return measured in a narrow window around each FOMC announcement. We develop a stylized model of monetary policy and the equity term structure and derive tests of Fed information effects using the short-term asset announcement return. Consistent with information effects, the short-term asset return in a 30-minute window around FOMC announcements loads positively on unanticipated changes in the target rate. Furthermore, this short-term asset announcement return positively predicts near-term macroeconomic growth. This predictability disappears on non-FOMC announcement days.
FOMC News and Segmented Markets, 2023, Revise and Resubmit, Journal of Accounting and Economics
with Ben Golez and Peter Kelly
Hawaii Accounting Research Conference, Analyst Research Conference, University of Notre Dame
A growing body of evidence suggests that FOMC announcements can affect private sector beliefs about near-term macroeconomic conditions. We measure index option trader beliefs about the short-horizon implications of central bank policy using the return of short-term dividend strips around each FOMC announcement (we term this short-term dividend strip return, “SDR”). We find that SDR predicts both future firm-level earnings and firm-level earnings announcement returns. Furthermore, using analyst earnings forecasts, we provide evidence of belief underreaction to FOMC announcements. We develop a stylized framework to show how investor specialization and segmented markets can generate our empirical results.
Institutional Investor Attention, 2022, Revise and Resubmit, Journal of Finance
Western Finance Association Annual Meeting, Behavioral Finance Working Group, Arizona State University, ITAM Finance Conference, University of Florida (Warrington), Zhejiang University, NBER Behavioral Finance Spring Meeting, University of Cincinnati, University of Notre Dame
Using a dataset of internet news reading, we measure fund-level attention to both aggregate and firm-specific news and relate it to fund portfolio allocation decisions. In the time-series, we find that funds shift attention toward macroeconomic news during periods of high aggregate volatility. Those funds which exhibit stronger attention reallocation patterns deliver higher returns. In the cross-section of fund portfolios, fund attention is positively related to stock holdings. Furthermore, fund attention to a stock increases the value-add of that position to the fund’s performance. This relationship is stronger using fund attention to more value-relevant news articles.
Measuring the Impact of Remote Work Using Big Data, 2023
with Alan Kwan and Alex Yuskavage
Western Finance Association (scheduled), University of Connecticut Finance Conference (scheduled), Midwest Finance Association (scheduled), Yale University, NBER Work-From-Home Shock to Labor Markets, University of Rochester, Dartmouth College, SFS Cavalcade North America, Young Finance Scholars Consortium, Stanford Conference on Remote Work, NBER Summer Institute (IT and Digitization Lightning Round), Asia Online Corporate Finance Workshop, Hong Kong Applied Micro Workshop, National University of Singapore, Hong Kong University
We develop a framework to measure remote work at the firm level using novel data of the daily internet activity for over 300,000 firms in the United States from 2019 to 2021. We observe whether employee internet activity originates from remote work locations or in-office and construct a measure of the fraction remote work activity for each firm over time. Validating this classification, we document a 30% increase in remote IP traffic in March 2020 at the onset of the crisis and a negative covariance of -0.756 between the share of remote IP traffic in a county and mobile phone data on workplace visits. Next, we study the impact of remote work on firm performance using confidential tax filings data. Instrumenting remote work decisions with firm-level pre-pandemic commuting distance, we document an economically significant rise in output following a shift to remote work. Micro-evidence from employee reading patterns are consistent with a rise in overall productive activity. We also find evidence that remote work policies provide advantages to firms in the labor market as workers flow to firms which work remotely.
Biased Assessment of Comovement, 2020
American Finance Association Annual Meeting, University of Notre Dame, University of Chicago, University of Southern California, Virginia Tech, University of Florida, National University of Singapore, Hong Kong University, Chinese University of Hong Kong, Yale University
I document a systematic bias in the assessment of comovement: individuals assess a moderate relationship between two variables regardless of the actual strength of the relationship between them. In a survey of finance professionals, participant-assessed betas of different financial and macroeconomic variables with the market are approximately 0.5 regardless of the actual historical betas. In an empirical setting, electricity futures exhibit moderate comovement with gas futures despite persistent heterogeneity in their relationship in the spot market. Trading against this bias generates annualized excess returns of 7.3 percent and a Sharpe ratio of 1.14.
Publications
Long Run Risk: Is It There?, 2022, Journal of Finance
with Yukun Liu
University of Notre Dame, Northern Finance Association Annual Meeting (Ph.D. Session), European Finance Association Annual Meeting, China International Conference of Finance, Hong Kong University Finance Seminar, ASU Sonoran Winter Finance Conference, USC Marshall Ph.D. Conference in Finance
This paper documents the existence of a persistent component in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons – our measure explains between 23 and 38 percent of cumulative future consumption growth at the 5-year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross-section and our 1-factor model outperforms many benchmark macro- and return-based multi-factor models.
Maio (2023) implements the cross-sectional asset pricing tests of the NI-index from Liu and Matthies (2022). Maio (2023) confirms that every pricing result in Liu and Matthies (2022) replicates successfully. Next, Maio (2023) runs new tests which test the asset pricing power of the NI-index on different subsamples of portfolios and argues that the cross-sectional pricing power of the NI-index is driven exclusively by the 10 momentum test portfolios. This claim is false. If the NI-index exclusively prices the momentum portfolios, then the pricing power of the NI-index should disappear after removing all momentum portfolios from the set of test assets. Despite this being the only direct test of the central claim in Maio (2023), the results of this test are never shown by the author. We implement it here by removing all 10 momentum portfolios from our sample and testing the asset pricing power of the NI-index on the remaining 41 test portfolios (25 Size-BM, 10 Industry, and 6 Bond portfolios). The price of risk of the NI-index is positive and significant with a sizeable adjusted R-squared of 50 percent. This simple test unequivocally rejects the claim that the pricing power of the NI-index is driven exclusively by the momentum portfolios. Maio (2023) makes several more minor points which we address in a similar fashion.
