New:  St.Gallen Financial Economics Workshop, co-organised with Konrad Adler since 2024

Working Papers

When No News is Good News: Multidimensional Heterogeneous Beliefs in Financial Market, with Brandon Yueyang Han.

• Abstract: We present a model featuring risk-averse investors with multidimensional heterogeneous beliefs. Prices embed mixed information about the intensity and content of fundamental news. Due to the multidimensional belief heterogeneity, net news is not a sufficient statistic to characterize wealth distribution and equilibrium. As a result, price and sentiment become path-dependent — both realized intensity and content of fundamental news affect risk premia. ‘No news’ is usually good news for risky asset valuation because volatility sellers become richer and extreme payoffs are lightly weighted in the consensus. However, if disagreement of news intensity is very low, price and volatility could go up at the same time when extremists endure large wealth losses during intense market fluctuations. 

• Conferences: St. Gallen Financial Economics Workshop 2025

• Seminars: École Polytechnique Fédérale de Lausanne, University of Lausanne

Debt and Deficits: Fiscal Analysis with Stationary Ratios, with John Campbell and Ian Martin.

• Abstract: We introduce a new measure of a government's fiscal position that exploits cointegrating relationships among fiscal variables. The measure is a loglinear combination of tax revenue, government spending and the market value of government debt that---unlike the debt-GDP ratio---appears stationary in the US and 15 other developed countries. A weak fiscal position must ultimately be resolved by low future returns on government debt or by fiscal adjustment, a combination of high tax growth and low spending growth. Empirically, we find that debt returns play a negligible role and fiscal adjustment predominantly consists of changes in spending growth. 

• Online appendix.

• Slides.

• Conferences: SAIF Annual Research Conference 2025, Turin Macro-Finance Workshop 2025, Adam-Smith Workshop 2025, CEPR Paris Symposium 2024, Macro-Finance Society 2024 Oslo, NBER Summer Institute 2023 

• Seminars: LIF-SAFE Frankfurt, NHH School of Economics, University of Lugano (USI), CEMFI Madrid, BIS, Univeristy of Cambridge, SFI brown bag, SSE, University of Hamburg, University of St. Gallen, Collegio Carlo Alberto, ESCP Business School, HSG-SoF Research Day 2024, Fulcrum Asset Management, Hong Kong University of Science Technology (GZ), Copenhagen Business School, University of Washington, London School of Economics, Harvard.

Survey Expectations Meet Option Prices: New Insights from the FX Markets, with Pasquale Della Corte and Alexandre Jeanneret.

• Abstract: This paper provides new insights into the risk preferences of FX market participants. The novelty of our approach is to exploit two forward-looking measures of currency return expectations: consensus forecasts from major financial intermediaries and currency option prices. To connect these expectations, we adopt a no-arbitrage framework coupled with more than twenty years of data on a large cross-section of currency pairs with maturities between one month and two years. We estimate a risk aversion level of approximately 4, indicating that FX investors receive a high premium for exposure to U.S. equity market return, variance, and tail risk. Also, we uncover that the term structure of risk aversion is upward-sloping in `good times' but turns downward-sloping during `bad times'. These findings offer a novel perspective on the horizon-dependent and dynamic nature of risk preferences in the FX market.

• Supported by Canandian Derivative Institute.

• The earlier draft circulated under the title: Expected currency returns and term structure of risk preferences.

• Conferences: Exchange rates workshop by BIS-ECB-BoI-BoB-BoS 2024, New methods and indicators in new markets at SDA Bocconi 2024, The economics of risk by BIS-ESM-EUI-CCA-HEC 2024, Swiss Finance Institute Research Day 2024, CUHK-RAPS Conference 2023, ICEEE 2023, QRFE Asset Pricing Workshop (Durham U) 2023, Vienna Symposium of FX 2022, Doctoral Consortium of the Asian Finance Association 2022

• Seminars: University of Neuchatel, Collegio Carlo Alberto, HSG internal brown bag 2024, Bank of Canada, HKU, U of Laval, HEC Montreal, Fulcrum Asset Management, LIF-SAFE Frankfurt, HSG, UNSW. 

Betting Against Correlations: A Measure of Global Market Risk, with Paul Schneider.

• Abstract: We measure the systemic risk of FX exchange rates by relating the joint distribution of exchange rates to a distribution that assumes independence. A sharp upper bound of the distance between those two can be constructed through a quadratic portfolio problem where the representative agent bets against correlations among exchange rates. Using forward-looking information from the cross-section of option prices and consensus forecasts, we can compute the systemic foreign exchange risk in real-time, and investigate it in a broader macroeconomic context.

• Conferences: Cancun Derivative Workshop 2022, Swiss Finance Institute Research Day 2022.

Understanding the Predictive Variance of Long-Term Bonds, with Pasquale Della Corte, Deniel P.A. Preve and Giorgio Valente.

• Abstract: We study the long-horizon risk profile of a currency strategy, whereby a US investor earns excess returns by entering in an unhedged long position in a foreign long-term bond funded at the domestic risk-free rate. After showing the drivers of the strategy returns, we derive and estimate their long-horizon predictive variance using data on long-term bonds denominated in major currencies over the past two centuries. We find that the long-horizon risk of such strategies increases with the investment horizon and that it is mainly driven by the uncertainty associated with the predictions of future returns originating from interest rate differentials and exchange rate returns.

• Conferences: HKIMR 2023, ABFER annual meeting 2022, Workshop on Bayesians in Finance 2022, 4th Asset Pricing Conference by LTI 2021, SoFiE 2019, Belgrade Symposium in Economics and Finance 2018 

• Seminars: University of Bergamo, BoE, HKMA, ESSEC, Fulcrum, CUHK. 

Publications

Volatility, Valuation Ratios and Bubbles: An Empirical Measure of Market Sentiment, with Ian Martin, Journal of Finance (2021), 76:6:3211‒3254. 

• Abstract: We define a sentiment indicator based on option prices, valuation ratios, and interest rates. The indicator can be interpreted as a lower bound on the expected growth in fundamentals that a rational investor would have to perceive to be happy to hold the market. The bound was unusually high in the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. Our approach exploits two key ingredients. First, we derive a new valuation ratio decomposition that is related to the Campbell and Shiller loglinearization but that resembles the Gordon growth model more closely and has certain other advantages. Second, we introduce a volatility index that provides a lower bound on the market’s expected log return.

• Slides. 

• Sentiment Indicator Data (US Market, 1996-2019).

• See the top of this page for a dynamic chart, updated occasionally.

• UK application: Bank of England underground post.

• Conferences: NBER Behavioral Finance 2019, CICF 2019, Econometric Society Asian 2019, FRIC 2019 (by CBS)

• Seminars: Sveriges Riksbank, Fed NY, ECB, BoE, Duke, LSE.