Can Gao
[tsæn]
Assistant Professor (tenure track since 2023 fall), School of Finance and Swiss Institute of Banking and Finance at University of St.Gallen
Faculty Member, Swiss Finance Institute
Research Affiliate, Leibniz Institute for Financial Research SAFE, Frankfurt
New: St.Gallen Financial Economics Workshop, co-organised with Konrad Adler since 2024
Working Papers
Pricing News and No News with Heterogeneous Beliefs, with Brandon Yueyang Han.
We present a general-equilibrium model in which investors trade risky assets and derivatives while holding heterogeneous beliefs about news content and news intensity. Hindsight winners become richer, and their beliefs carry greater weight in equilibrium prices. Risky-asset positions vary linearly with subjective return expectations; derivative positions are U-shaped: investors with extreme beliefs, regardless of direction, demand convexity exposure through options. When disagreement is primarily about news intensity, realized news raises implied volatility by increasing the market's wealth-weighted assessment of future event risk. Conversely, quiet periods shift wealth toward investors who believe news is unlikely to arrive, compress risk-neutral tail probabilities, support prices, and make ``no news'' effectively good news. The persistence of this mechanism depends on the information structure of the news process: discrete news arrivals make intensity disagreement persistent because the per-period wealth-share-decay penalty for incorrect beliefs becomes small; in contrast, a continuous news process induces large and frequent wealth losses via derivative trading for agents with biased beliefs, which also rapidly eliminates intensity disagreement. When disagreement is primarily about news content, news accelerates market selection and induces mean reversion in risk-neutral variance. Our model links asset prices and volatility to speculation about uncertainty, rather than speculation about expected returns alone.
Presentations: Annual Financial Markets and Liquidity Conference 2026, NFA 2026, Asset Pricing Conference by LTI@UniTO 2026, Risk Sciences Annual Conference 2026, Vienna-Copenhagen Conference on Financial Econometrics 2026, Aarhus Finance Forum 2026, FMARC 2026, SGF Conference 2026, CEPR ESSFM 2025 (evening session), St. Gallen Financial Economics Workshop 2025; ESCP-Paris, University of Bonn, Warwick Business School, Bayes Business School, University of Geneva, University of St. Gallen (Econ), CEMFI Madrid, University of Vienna, University of Maryland, École Polytechnique Fédérale de Lausanne, University of Lausanne.
Options on Drugs, with Niclas R. Käfer and Mathis Mörker.
One industry accounts for much of the equity option anomaly zoo. Writing delta-hedged options on pharmaceutical stocks earns the highest returns of any industry, and because drug developers combine large cash holdings, operating losses, and high valuations, option strategies sorted on these characteristics load heavily on the industry. A pharmaceutical option portfolio subsumes the cash-holdings anomaly and, with industry-adjusted risk factors, leaves 3% of 141 characteristic-sorted strategies significant, against 8% for standard factors. Drug-development risk is largely idiosyncratic, yet it arrives in jumps that option dealers cannot hedge, which makes these options a clean setting for testing intermediary asset pricing.
Presentations: Modern Finance Conference 2025; University of Konstanz, University of St. Gallen.
Debt and Deficits: Fiscal Analysis with Stationary Ratios, with John Campbell and Ian Martin. Revise & Resubmit
Best Paper Award, 2025 China International Conference in Finance.
We introduce a measure of a government's fiscal position, a loglinear combination of taxes, spending, and the market value of the government debt, that appears stationary in long historical data from the US and UK, and in postwar data from these and 13 other developed countries. The fiscal position forecasts persistent changes in tax and spending growth, which bring it back to its unconditional mean within a decade, but predicts only transitory variation in debt returns and GDP growth. Mean-reversion substantially reduces the impact of the fiscal position on future growth of the debt-GDP ratio.
Presentations: NBER Conference on "Long term fiscal policy: the economics of debt and deficits" 2026, CEPR Workshop on Modelling of Fiscal Policy 2025, EFA 2025, SFI Research day 2025, CICF 2025, 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; Bank of Italy, EDHEC-Nice, CEMFI Madrid, LIF-SAFE Frankfurt, NHH School of Economics, University of Lugano (USI), BIS, University of Cambridge, SFI brown bag, Stockholm School of Economics, University of Hamburg, University of St. Gallen (Econ), Collegio Carlo Alberto, ESCP-Turin, HSG-SoF Research Day 2024, Fulcrum Asset Management, Hong Kong University of Science and Technology (GZ), Copenhagen Business School, University of Washington, London School of Economics, Harvard, MIT Sloan.
Survey Expectations Meet Option Prices: New Insights from the FX Markets, with Pasquale Della Corte and Alexandre Jeanneret.
Supported by Canandian Derivative Institute.
Best Paper Award, 2026 FIRN Melbourne Asset Pricing Meeting.
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.
Presentations: Örebro Workshop on Macro- and Financial Econometrics 2026, FIRN Melbourne Asset Pricing Meeting 2026, WESEAMS 2026, SGF Conference 2026, CDI Annual Conference 2025, 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; University of Neuchatel, HSG Brown Bag, Bank of Canada, University of Hong Kong, Univerity of Laval, HEC Montreal, Fulcrum Asset Management, LIF-SAFE Frankfurt, HSG, UNSW.
What 200 Years of Data Tell Us About the Predictive Variance of Long-Term Bonds?, with Pasquale Della Corte, Deniel P.A. Preve and Giorgio Valente.
BME Best Paper Award on Fixed Income Markets, 2025 Spanish Finance Association Forum.
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.
Presentations: Cambridge FX Symposium 2026, WESEAMS 2026, Spanish Finance Association Symposium 2025, 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; University of Bergamo, Bank of England, HKMA, ESSEC, Fulcrum Asset Management, CUHK.
Betting Against Correlations: A Measure of Global Market Risk, with Paul Schneider.
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.
Presentations: Cancun Derivative Workshop 2022, Swiss Finance Institute Research Day 2022.
Publications
Volatility, Valuation Ratios and Bubbles: An Empirical Measure of Market Sentiment, with Ian Martin, Journal of Finance (2021), 76:6:3211‒3254.
Slides; Sentiment Indicator Data (US 1996-2019); UK application: Bank of England Underground Post.
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.
Presentations: NBER Behavioral Finance 2019, CICF 2019, Econometric Society Asian 2019, FRIC 2019; Sveriges Riksbank, Fed NY, ECB, Bank of England, Duke, LSE, Imperial College.