Yixin Chen

Working Papers

Tomorrow Is Another Day: Stocks Overweighted by Active Mutual Funds Predict the Next-Day Market

with Shuaiyu Chen and Randy Cohen

We show that active mutual fund managers effectively incorporate information about future short-term market movements into security prices. Specifically, when high active-mutual-fund ownership stocks outperform, the market tends to do well the next day, and vice-versa. These effects are modest day by day but are quite large in the aggregate - trading the S&P 500 futures daily based on the strategy delivers an average annual return over 15% with a Sharpe ratio over 0.9. The same findings are also present in other major equity markets all around the world. Various additional tests further suggest that the novel short-term market return predictability results from active mutual fund managers' collective information advantage about future market movements, as opposed to informed fund flows or temporary price pressure.

Conferences: Wabash River Finance Conference 2021, SWFA 2022, Young Scholars Finance Consortium 2022, Eastern Finance Association 2022

Firm Characteristics and Stock Price Levels: A Long-Term Discount Rate Perspective

with Ron Kaniel

We study how firm characteristics are correlated with stock price levels by measuring the long-term discount rates (defined as the internal rate of return) of anomaly portfolios over a long horizon. We develop a simple, non-parametric methodology to estimate the long-term equity discount rate from ex-post realized payouts and prices. Our estimates show that the cross-sectional patterns in the long-term discount rates can be substantially different from that of the average short-term holding period returns; and appealing to mean-reversion in anomaly premia does not reconcile the wedge between the two for a group of prominent anomalies. We argue that the long-term discount rate is a better measure of firm's equity financing cost than the premium from a dynamically-rebalanced trading strategy; and we demonstrate with a representative example that structural models that interpret the spreads in the latter as the differences in the former could generate counterfactual patterns in the long-term discount rates. Our empirical exercise uncovers numerous new stylized facts regarding firms' equity financing cost; and these findings could shed new light on the mechanisms underlying various asset pricing anomalies, and advance our understanding about the determinants of stock price levels.

Conferences: The Finance Symposium 2021, CAFM 2021 (best paper award), New Zealand Finance Meeting 2021, European Winter Finance Summit 2022, SWFA 2022, Eastern Finance Association 2022

Famous Firms, Earnings Clusters, and the Stock Market

with Randy Cohen and Zixuan (Kevin) Wang

We show that much of the market premium for the year occurs on a handful of days, identifiable well in advance, on which several of the market’s most famous, high-media-attention firms simultaneously announce earnings after the market close. Puzzlingly, the market surges occur during the 24 hours prior to the earnings announcements, from close to close. Since there is no overlap between the price increase period and the information revelation, the high returns do not appear to represent a risk premium, and our tests seem to rule out information-leakage explanations. Deepening the puzzle, the market delivers high returns only prior to post-close earnings-announcement clusters, not in advance of clusters that occur in the pre-open period. In addition to being economically large and easily tradeable, the effect is statistically significant, and the results hold in all subperiods in our sample. We argue that the best explanation for our findings is that of Miller (1977) as extended by Hong and Stein (2007): when over a short “attention” period difference of opinion combines with short-sale constraints, prices will rise as optimists buy while pessimists cannot sell.

Conferences: NBER Asset Pricing Meeting 2020, CICF 2021, The Finance Symposium 2021, SFA 2021, New Zealand Finance Meeting 2021, Jackson Hole Finance Group Conference 2022, SWFA 2022, SFS Cavalcade North America 2022

Identifying Stock-Picking Skills with Counterfactual Portfolios

Due to weak performance persistence, it is challenging to identify active mutual funds that can predictively outperform passive benchmarks. I focus on a specific type of “stock-picking” skills and aim to identify funds possessing such skills ex-ante by developing a novel first-order stochastic dominance (FSD) test based on counterfactual portfolios. The new method has appealing properties because it evaluates the entire fund return distribution, developing robustness to a missing-factor problem. Empirically, the FSD-identified funds deliver an annualized out-of-sample before-fees (after-fees) Carhart alpha of 2.84% (1.58%). These funds are smaller in size, charge higher fees, hold fewer stocks, attract more flows, and show stronger performance persistence.

Work in Progress

Teaching

FIN 505: Finance Theory (PhD)

This course provides an introduction to financial economics. Its main objective is to rigorously develop the foundations of modern finance theory regarding asset pricing and financial markets. The topics include arbitrage asset pricing, optimal consumption-portfolio choices, static equilibrium models of asset pricing, asymmetric information, and dynamic modeling. The course prepares students for further study of asset pricing theories, corporate finance and econometric work in finance. The course is designed for first-year PhD students in finance, and assumes familiarity with basic microeconomics and macroeconomics.

FIN 462: Foundations of Financial Economics (MSF)

This course serves as an introduction to the theory and practice of financial economics. It provides a market-oriented framework for analyzing the investment and financing decisions made by households, institutions or corporations. The three major questions, which this course aims to answer, are: 1) How should the participants of the financial market evaluate financial claims 2) How do corporate managers decide which projects to undertake? and 3) How do they decide how to finance these projects? Topics discussed include valuation of financial assets, capital budgeting techniques, theories of capital structure, and capital market efficiency.