Knowledge that Transforms

We introduce implied variance asymmetry (IVA) — the weighted difference between out-of-the-money call and put option prices — as a predictor of cross-sectional option returns. We find that IVA negatively predicts future delta-hedged call returns and positively predicts future delta-hedged put returns. These predictive relationships reflect distinct investor behaviors: retail investors drive the overpricing of high-IVA call options through speculative demand, whereas informed short-sellers bid up prices of low-IVA puts as substitutes for constrained stock short-selling. Furthermore, stocks and put options characterized by low IVA and high short-sale costs experience significantly lower subsequent excess returns. This pattern suggests that low-IVA put buyers pay a premium and they correctly anticipate future stock price declines. In contrast, high-IVA call options exhibit temporary mispricing driven by uninformed speculation, which rapidly reverses.

This paper proposes a novel monetary policy uncertainty (MPU) measure aggregating information from policy communication, policy operation and news coverage. We find that the aggregate MPU measure significantly commands a negative risk premium in the cross-section of the Chinese stock market. Stocks with higher (lower) MPU beta, favored (avoided) for hedging against MPU shocks, contribute to the premium through their under-performance (outperformance). Our results remain robust after controlling for economic uncertainty, economic policy uncertainty, and monetary policy surprises. We further show that the aggregate MPU measure outperforms its individual components in both portfolio- and stock-level asset pricing tests.

Analyzing a sample of Chinese firms, we find that when companies receive more coverage from FinTech advisory firms, their stock prices move less in tandem with the overall market. This suggests that FinTech coverage improves how accurately stock prices reflect firm-specific information. Our results hold true across multiple testing methods and alternative ways of measuring stock price synchronicity. Further analysis shows that FinTech coverage reduces stock price synchronicity primarily by addressing information gaps between companies and investors. Additionally, greater FinTech coverage improves stock liquidity and lowers the costs of raising debt or equity financing. When examining the topics covered by FinTech firms, we find that diverse coverage topics are linked to lower stock price synchronicity, with discussions on finance, corporate governance, and negative sentiment playing a particularly effective role. Finally, a textual analysis reveals that FinTech coverage includes significantly more firm-specific information than traditional analyst reports.

We investigate the real effects of tail risk on firm-level capital investment. Using an option-implied tail measure, we find that tail risk impedes investment, controlling for investment opportunities and existing uncertainty measures. This relation is stronger for firms with higher tail exposure and crash risk. The tail risk effect is more pronounced for firms with higher investment irreversiblility and demand uncertainty, consistent with the real options mechanism. Corporate resilience built by hedging activities attenuates the effect, while stressed debt financing conditions weaken the resilience and amplify the effect. Tail risk also delays investment spikes. Two instrumental variables enhance the causal interpretation. Overall, we highlight the distinctive role of tail risk in shaping real investment.

We characterize the relationship between the rent-to-price ratio, expected returns, and expected rent growth in a dynamic housing valuation model, where the middle-aged-to-young (MY) ratio determines the slowly evolving mean of the rent-to-price ratio. The link between demographic trends and the housing market dynamics is established by analyzing how individuals’ housing demand varies across age cohorts using household-level survey data. Empirical results show that deviations of the rent-to-price ratio from its slowly evolving mean, which is determined by the MY ratio, exhibit pronounced predictive power for returns but weak predictive power for rent growth. Further analysis reveals heterogeneous evidence across sample cities.

An initial public offering (IPO) can have diverse impacts on incumbent firms. We identify a valuation channel using a pairwise measure of technological proximity between the new entrant and incumbent firms. By analyzing the patent data of firms listed on the Shanghai Stock Exchange’s STAR Board, we find a significant increase in the valuation of the incumbent firm when its patent portfolio exhibits a higher degree of similarity to the IPO firm. This positive spillover effect differs from other well-documented peer effects of IPO shocks, suggesting a novel mechanism that operates through technological linkages, particularly among technology-intensive firms.

With the recent evolution of the cryptocurrency market, financial misconduct has become a major concern. Using on-chain data from the 500 most traded NFT (non-fungible token) collections, this study investigates wash trading in NFT markets. We first detect suspicious wash trades that form closed loops and then validate the prices of these trades using Benford’s Law. Excluding token-incentivized wash trades, we propose a conceptual model and argue that collusion between wash traders and insiders is the primary motivation of wash trading. Empirical analysis reveals that insiders tend to sell during or shortly after wash trading. This manipulation creates a pump-and-dump effect, causing losses for buyers during the pump phase. Our research reveals the underlying mechanisms of such misconduct and highlights the need for regulation in the cryptocurrency market.

Stronger creditor rights in bankruptcy are often viewed as adding deadweight costs and leading to inefficient liquidation. However, ex ante, they also increase firms' borrowing capacity and reduce financial constraints. This study investigates shareholders' overall attitudes toward enhanced creditor rights in bankruptcy by examining the impact of the staggered adoption of anti-recharacterization laws across U.S. states on the cost of equity capital. We find that the strengthening of creditor rights leads to a significant reduction in the cost of equity capital, with the effect being more pronounced among financially constrained firms and firms with more growth opportunities and volatile cash flows. The reduction is stronger among firms that are more likely to utilize securitized debt. Overall, our results suggest that enhanced creditor rights in bankruptcy improve shareholder value through increased borrowing capacity.

A barrage of regulatory requirements has been issued to increase the impartiality of sell-side analysts’ research reports and create a wall between equity research and investment banking departments. Yet studies suggest a persistent organizational culture within the profession that encourages optimistically biased research reports for current and potential investment banking clients. To examine potential solutions to this issue, we focus on sell-side analysts’ target price optimism and find that analysts at brokerages with higher female representation issue significantly less optimistic target prices, especially when they face incentives to inflate forecasts due to their brokerage’s affiliation to the firm being analyzed. To identify the mechanism behind this result, we explore analysts’ optimism bias in situations when mergers between banks change gender composition in a way that is exogenous to the analysts, as well as when analysts voluntarily switch between brokerages with different gender compositions. The results of these analyses, along with a lag and forward test of the relation between the female proportion of analysts and optimism bias, indicate that gender composition plays a significant role in shaping brokerage culture. We rule out that results are driven by the gender of the individual analyst and confirm our results’ robustness to various specifications. Our findings suggest the potential for gender composition of the workforce to aid self-regulation in the financial industry.

This study examines the long-term effects of the 1990s Japanese bank bailouts on borrower firms’ financing policies. Using a two-way fixed effects model on data from Japanese banks and listed companies, I find that these interventions significantly influenced firms’ financial strategies. Firms associated with banks that received bailouts exhibited persistent increases in their long-term debt-to-asset ratios and decreases in their cash-to-asset ratios. The effects diverged between zombie and non-zombie firms: while non-zombie firms exhibited minimal capital structure changes, zombie firms demonstrated pronounced increases in long-term debt ratios, decreases in cash ratios and retained earnings, and were more likely to maintain relationships with their main banks. These findings suggest that bank bailouts can influence capital allocation patterns, potentially favoring less efficient zombie firms, with implications for economic efficiency and financial stability.