with Jiacheng Liu
Abstract: Minable cryptocurrencies are designed in a way that new tokens are minted and transactions are processed when new blocks are confirmed and added to the blockchain. We hypothesize and test that through a “delay” channel, block confirmations create swiftly changing mismatch in trading demand in the secondary market. Consistent with our hypothesis, Bitcoin data reveal drastically changing dynamics of trading and returns around block confirmations. Block-level wait time (the “delay”) and exchange flows both contribute to this pattern. Tradable strategies exploring this confirmation effect generate large after-cost returns and exceptional Sharpe ratios, ruling out costs of arbitrage as an explanation. Bitcoin block confirmations also move the prices of other cryptocurrencies, suggesting strong non-fundamental price comovement in the cryptocurrency market.
with Jia He and Grace Xing Hu
Abstract: We document a large and robust monthly cyclical pattern in option prices. The implied volatilities (IVs) of non-expiring options tend to rise prior to, and fall after, the third Friday of each month -- the standard expiration day for stock option contracts. The magnitude of this monthly IV cycle is large, averaging approximately 2% in absolute terms. Evidence supports an explanation of monthly demand fluctuations driven by option investors' collective rollover activities, combined with supply-side frictions that constrain market makers' capacity to intermediate. Cross-sectionally, the IV drop is predicted by the ex ante rolling demand. Over time, this IV cycle becomes more pronounced during periods of higher market risk, increased risk aversion, or more stringent constraints on intermediaries' capital. A Delta-neutral straddle strategy exploiting this cycle yields up to an 11.5% return per month.
with Dayong Huang and Yuhang Xing
Abstract: Adverse environmental events, such as natural disasters, are associated with lower future yields on green municipal bonds. We explore several plausible channels and find that the results are likely driven by heightened environmental concern following these events, which increases the relative pricing of green municipal bonds. The effect is more pronounced in states with high state income taxes or those that lean Democratic. Climate-related search activity rises sharply after natural disasters. Our results remain robust with regulatory negative shocks to municipalities, such as non-compliance with air quality standards. Overall, these events lead to lower borrowing costs for green municipal projects.
with Haozhe Han and Grace Xing Hu
Abstract: At IPO, SPAC securities are not backed by any operating businesses and thus have virtually no fundamentals. Taking advantage of this feature of the SPACs, we investigate the role of non-fundamental information in the financial market from the perspectives of both the firm and the investors. We model this non-fundamental information in a simple framework and derive testable hypotheses. Consistent with the model predictions, we document that low-capability SPAC sponsors use a more positive tone for the non-fundamental disclosure to attract capital. Consequently, the tone at the SPAC IPO negatively predicts the subsequent performance of the SPAC. But a more positive tone is associated with a reputational cost which prevents the sponsors from launching new SPACs in the future.
Abstract: I derive the term structure of expected market exposure for equity stocks using options data. Consistent with a downward sloping term structure, stocks with higher expected long-term exposure relative to short-term exposure earn lower expected returns. The spread portfolio generates a risk-adjusted return of up to 15.33% per annum. Evidence supports an explanation that investors care more about short-term than long-term exposure to the market volatility risk premium. This downward sloping return term structure is stronger during periods of higher market risk and risk aversion and among stocks with higher valuation risk and uncertainty. The term structure of the expected idiosyncratic risk does not have return implications.
with Jo Drienko and Yifei Liu
Abstract: The return cross-section of a mutual fund’s portfolio holdings is positively skewed on average. At the fund level, portfolio skewness varies substantially across funds yet is highly persistent over time. We show that actively managed mutual funds with high portfolio skewness outperform funds with low portfolio skewness by 2.88% ($7.35 million) on an annualized basis. This association becomes stronger amid more investment opportunities in the market. Further stock-level analyses reveal that shares added or tilted to by high skewness funds relative to low skewness funds significantly outperform their counterparts, pointing to stock selection skill as an explanation for both the portfolio skewness and its predictability of fund performance.
with Wen Zeng
Abstract: Geographic proximity plays an important role in dissemination of soft information. Consistent with theories of information frictions, we find that remotely headquartered stocks outperform proximate stocks by 8.59% annually on a risk-adjusted basis. This highly persistent return pattern is mitigated by geographic dispersion of operations. The post-earnings announcement drift and return predictability of aggregate mutual fund trading are only observed among remote firms, further highlighting the role of soft information in price discovery. We also formally document a causal link between geographic remoteness and lack of soft news in the market. Releases of public soft news surprise the market more and induce larger market reactions for remote firms.