Research

Working Papers:

Strategic Blindness: Optimal Inattention and Momentum Profitability (with Gabriel Cuevas Rodriguez and Jane Danyu Zhang)  [Working Paper] (Updated: November 2024) [Slides]

Previously circulated under the title "Endogenous Inattention and Momentum"

 We develop a model featuring overconfident agents who optimally choose their information acquisition rate. We show that our model explains several empirical regularities documented in the asset pricing literature, including the unconditional profitability of momentum, the inverse relation between market volatility and the profitability of momentum, and the enhanced profitability of volatility-managed momentum strategies. We then examine the implications of our model for the differential impact of market volatility on the profitability of short-horizon and long-horizon momentum strategies, and show that the predictions of our model are supported in the data. Finally, we show that sell-side analysts’ earnings forecasts exhibit patterns consistent with the predictions of our model.

Confirmation Bias: Implications for Forecast Error Predictability (Updated: November 2023) [Working Paper]

This paper develops a model of confirmation bias whose central premise is that forecasters face a tradeoff between the pecuniary costs of providing inaccurate forecasts and the psychological costs of updating their expectations. I test the implications of the model using sell-side analysts' earnings-per-share forecasts and find that, consistent with the predictions of the model, (1) forecasters overreact to private signals, (2) forecasters underreact to public signals, and (3) the extent of a forecaster's underreaction to a public signal increases in the absolute difference of the public signal and the forecaster's prior beliefs. An additional contribution of the model is that it provides a novel microfoundation for the stickiness of professional forecasters' expectations documented by Coibion and Gorodnichenko (2015).

Interest Rate Expectation Errors and Foreign Exchange Returns (Updated: January 2025) [Working Paper]

Subsumes "Deviations from Rational Expectations and the Uncovered Interest Rate Parity Puzzle"

In this paper, I document that the extent to which interest rate expectations underreact to news declines during periods of high interest rate volatility. To explain this finding, I propose a model featuring rationally inattentive agents who optimally choose their information acquisition rate. I then integrate this expectations formation process into a present value framework of exchange rate determination and show that the resultant model explains the reversal in the sign of the slope coefficient in regressions of foreign exchange returns on interest rate differentials during high-volatility periods. Finally, I decompose realized foreign exchange returns into risk premia and exchange rate expectation errors and show that expectation errors are the primary drivers of realized returns.

Work in Progress:

Deviations from Rational Expectations, Value and Profitability Anomalies

A Note on Polarization and Forecast Error Predictability