In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for more reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.
Awards: 2024 Rising Scholar Award, Review of Asset Pricing Studies
Media mentions: Barron's
I find that short interest significantly and negatively predicts aggregate stock returns in 24 of 32 countries examined. This predictability survives out-of-sample tests, persists outside of recessions, and is not subsumed by other well-known return predictors. The results indicate that short interest contains valuable information for forecasting international market returns that is distinct and more powerful than that of other available predictors. However, the predictive power of short interest varies over time and across regions. It is higher around economic downturns when margin requirements tighten and in regions where short selling is constrained by regulations or equity lending market frictions.
Short interest in corporate bonds negatively predicts aggregate stock returns. In- and out-of-sample tests suggest that this predictability is stronger and more long-lasting compared to short interest in stocks, corporate bond variables, and other well-known predictors of stock market returns. Short interest in bonds captures informed trading as evidenced by its ability to predict aggregate bond return characteristics, credit spreads, and changes in firm fundamentals, including default probabilities and earnings surprises. Predictability is the strongest in periods when stock and bond markets have more frictions, which impair market integration and delay information diffusion between markets.
Presented at: 2024 Monash Q Group Colloquium, 2023 FIRN Annual Meeting, 2023 EasternFA, 2023 SWFA, 2022 CAFM, 2022 NZFM, Monash
Engelberg, Reed, and Ringgenberg (2012) demonstrate that short sales on days with public news predict future returns better than other shorts, suggesting that short sellers profit from processing public information. I show that these results significantly vary across countries. Shorts on negative news have stronger predictive power than non-news shorts, but only in countries with high-quality public information, which makes news trading strategies more reliable. Short sellers’ informational advantage in most countries seems to arise from their access to private information, as evidenced by their ability to anticipate future negative news and their trading in unison with insiders.
Awards: Amery Partners Best Paper Award, 2019 BFCM Conference
Presented at: 2021 CAFM, 2019 Paris December Finance Meeting, 2019 FIRN Annual Meeting, 2019 BFCM Conference, 2019 IFABS Angers Conference, 2019 SIRCA Young Researchers Workshop, UNSW
We describe a mechanism whereby rational learning and trading by investors induce a specific pattern of mispricing in the cross-section of stocks. In equilibrium, less capital-constrained investors allocate proportionately more learning resources to larger stocks and extract more profits, while price efficiency increases monotonically with stock size. Empirical investigation of institutional trading, mutual fund portfolios, and information acquisition activities supports these predictions. In the cross-section of stocks, size tends to explain mispricing better than any explicitly measured friction documented in prior literature, suggesting that most of the variation in mispricing can be attributed to scale-induced incentives.
Awards: Best Poster Award, 2019 UNSW Business School Research Fair
Presented at: 2019 AFBC, 2019 SBFC, 2019 UNSW Business School Research Fair
We find that increased speed competition from high-frequency market makers (HFT MMs) reduces but does not entirely eliminate the participation of slower liquidity-providing MMs. The presence of HFT MMs reduces slower MMs’ profits without impacting the profitability of executed trades. These results indicate that HFT MMs do not expose slower MMs to increased adverse selection. However, these findings only hold when the bid-ask spread is constrained by the minimum tick size. Tick-constrained spreads help slower MMs to retain profitability in their market-making business and remain as liquidity providers.