Finalist, Bank of Canada Graduate Student Paper Award (2023)
Abstract: This paper examines the effects of social transmission of information within echo chambers on financial markets. In an equilibrium model, investors competitively trade in the market based on public information revealed by asset prices and private information obtained through word-of-mouth communication within echo chambers. I demonstrate that unconscious biases are endogenously formed in investors' private signals as information circulates within echo chambers. These biases foster polarized views among investors, leading to belief polarization, increased trading volume, and influencing assets' expected returns. The process of information sharing intensifies these effects. While public asset prices can mitigate belief polarization, they don't fully eradicate investors' unconscious biases.
Presented at: MFA(2024 Scheduled), SWFA (2024 Scheduled), AFA Poster Session (2024), Bank of Canada Graduate Student Paper Award Workshop (2023), NFA (2023), EasternFA (2023), SGF Conference Poster Session (2023 Accepted), AFA Poster Session (2022), McGill University (2021, 2023)
Abstract: I empirically determine that momentum (value) anomalies predominantly earn abnormal returns on days with high (low) market uncertainty resolution, identified by a sudden and significant decrease in VIX. To account for this pattern, I introduce a dynamic noisy rational expectation equilibrium model. In this model, market uncertainty diminishes upon the release of a public signal about the market portfolio. According to my model, this reduction in uncertainty results in a positive alpha for momentum portfolios and a negative alpha for value portfolios. Notably, the model may inform us of the theoretical origins of the well-known value and momentum anomalies.
(with Michael Hasler and Charles Martineau)
(with Yang Ning)
(with Weiyu Jiang)