PhD in Finance, Yale School of Management
Research Interest: Asset Pricing, Behavioral Finance
Email: ch.wang at yale.edu
Abstract: The prices of dividends at alternative horizons contain critical information on the behavior of aggregate stock market. The ratio between prices of long- and short-term dividends, "price ratio" (pr), predicts annual market return with an out-of-sample R2 of 19%. pr subsumes the predictive power of traditional price-dividend ratio (pd). After orthogonalized to pr, the residuals of pd strongly predict dividend growth. Using an exponential-affine model, we show a one-to-one mapping between pr and the expected market return when the expectation of future cash flow is transient. Moreover, we find that return predictability is stronger after market downturns, and holds outside the U.S. As an economic test, shocks to pr are priced in the cross-section of stocks, consistent with ICAPM. Our measure of expected return declines during monetary expansions, and varies strongly with the conditions of macroeconomy, financial intermediaries, and sentiment.
Presentations: LBS TADC, Yale Finance PhD Seminar, Econometric Society Annual Meeting, NFA Annual Meeting
Abstract: We provide a new theoretical framework that highlights a generic nature of asset management -- professional managers have superior probability models of future asset returns. The equilibrium level of delegation depends on model uncertainty, and the cross-section variation of asset returns are driven by both the traditional risk beta and a new uncertainty beta whose price depends on delegation. The model resolves several puzzles in the empirical literature, such as delegation in spite of underperformance. Interestingly, even though asset managers exploit any opportunity to earn an alpha relative to the market, we show that alpha of certain assets shall never disappear even as the economy approaches the limit of 100% delegation. We provide evidence that supports the model's implications on delegation and asset pricing.
Presentations: CEPR ESSFM Gerzensee, Geneva Workshop on Financial Stability in a New Era
Bond Yield Expectation and Risk Premium, work in progress, 2018.