Knowledge that Transforms

Price jump intensity is predictable using simple order book depth statistics. We examine the relationship between liquidity fragmentation, consolidated depth, and stock price jumps for S&P 500 stocks. Using a stylized model, we posit that liquidity suppliers fragment offered liquidity and reduce depth to manage adverse selection risk on days with high expected jump intensity. Consistent with our model’s predictions, we find 80% (19%) more jumps when fragmentation (depth) increases (decreases). The findings suggest that market makers anticipate volatility and the associated adverse selection cost, providing traders with advance warning.

While other commonly used aggregate stock market volatility measures are strongly priced in the cross-section of stock returns, the empirical evidence is considerably weaker for option-implied market volatility. The differential pricing of market volatility risks is hard to reconcile with existing theories, but potentially consistent with partial segmentation between index options and equity markets. The comovement between option-implied volatility and other stock volatility measures contains valuable information about equity and index option market segmentation. The two markets exhibit time-varying segmentation, but have become more integrated in recent years, partly due to declining transaction costs and broader participation in options market.

We examine how U.S.-China geopolitical tensions affect the informational role of activist short sellers. Using hand-collected data on 183 reports targeting U.S.-listed Chinese firms from 2010 to 2020, we find that campaign activity increases during high-tension periods, driven by follow-up reports on already-targeted firms rather than new investigations. Reports released during these periods contain more negative language, are associated with larger but reversing price declines, and include fraud allegations less likely to be verified. These patterns suggest that geopolitical tensions shift activist short selling from price discovery toward bear-raid-type activity.

We explain why the market underreacts to the certified extreme financial distress signal conveyed by the auditor's going-concern (GC) opinion. We conjecture that GC stocks attract retail investors with gambling proclivities. Splitting our GC sample into lottery-like and non-lottery-like firms, we find that the anomaly is concentrated in lottery-like firms, which underperform by −17 % to −32 % over the following year. A range of analyses confirm retail investors with greater propensity to gamble are more likely to trade lottery-like GC stocks. We conclude that retail investor gambling-motivated trading behavior is a key driver of the going-concern market paradox.

I study the role of geographical proximity in hedge fund activism and find that activist hedge funds are more likely to target firms located closer to their headquarters. Despite this proximity preference, activism returns are lower for nearer targets. Alternative factors, including lower activism costs, target selection effects, and reduced employee wealth transfers at nearby firms do not explain lower returns to proximate targets. Instead, results are consistent with familiarity bias in hedge fund targeting decisions. Additional tests focusing on small targets, openly confrontational campaigns, and passive investments reinforce this behavioral explanation. • This paper studies the role of geographical proximity in hedge fund activism. • Results show that activist hedge funds are more likely to target firms located closer to their headquarters. • Despite this proximity preference, activism returns are lower for nearer targets. • Other factors do not explain lower returns to closer targets but results support familiarity bias in hedge fund targeting. • Additional tests focusing on small targets, hostile activism, and passive investments buttress this behavioral explanation.

We apply machine learning methods to granular environmental variables and test if there is a strong positive relation between environmental sustainability and future stock returns. A long-short portfolio that longs stocks with high forecasted returns and sells stocks with low forecasted returns earns large abnormal returns, and it performs better when climate concerns in the media are more intense. Further diagnosis shows that various dimensions of environmental sustainability help return predictions. High forecasted returns are associated primarily with strong environmental operational performance. The return prediction based on a customized transformer model is similar.

Cryptocurrency prices differ across countries, and these price deviations fluctuate widely. We model cryptocurrencies as an asset immune from local government expropriation, and trust serves as the perceived probability of government misconduct. After political scandal outbreaks, Bitcoin prices rise by 1.31% and Ethereum prices by 0.83% relative to their U.S. dollar prices on average. The price deviation responses are larger in countries where citizens have less trust in government. With panel regressions, we show domestic cryptocurrency prices become more expensive when higher volumes of Google searches are related to domestic institutional failures.

We assess the information content of order flow for the cross-section of cryptocurrency returns. Our analysis is based on a set of international order flows denominated in 11 major currencies that reflect world order flow. We find that world order flow has strong explanatory and predictive power for cryptocurrency returns. Order flow tends to dominate economic fundamentals for out-of-sample prediction, especially in the context of non-linear machine learning models, and its performance cannot be explained by limits to arbitrage. Overall, our findings indicate that order flow has a permanent effect on cryptocurrency returns.

We investigate how peer-to-peer (P2P) platform collapses influence investor risk preferences using trading data from a major Chinese brokerage. We find that such collapses induce local investors to become more risk-averse, as evidenced by a significant decline in order imbalance and a reduced willingness to allocate funds into their stock trading accounts. Within their portfolios, investors become more likely to sell high-risk stocks and less inclined to trade unfamiliar ones. These shifts in risk preference appear to be driven by deteriorating investor sentiment, rather than cognitive decline or reduced wealth.