Knowledge that Transforms

I exploit the leveraged exchange-traded funds’ (ETFs’) primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs’ primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing between ETFs’ shares and their underlying assets. The arbitrage activity proxies for the magnitude and direction of speculative demand shocks and I use them to form the Speculation Sentiment Index. The measure negatively relates to contemporaneous market returns (e.g., it is bullish in down markets) and negatively predicts returns. The results are consistent with speculation sentiment causing market-wide price distortions that later reverse.

Analyzing several developed and emerging international markets, I test the ability of global, regional, and local models to explain a large set of 134 cross-sectional anomalies. My main finding is that both global and regional factor models create substantially larger average absolute alphas than local factor models. Annual (absolute) anomaly portfolio alphas are on average 1.7 and 1.1 percentage points higher, respectively, with global and regional than with local factor models. Even for the most recent period, there is no evidence of a catch-up of global and regional factor models. There is substantial potential for international diversification of anomaly strategies.

We report the results of a longitudinal intervention with students across 5 universities in China designed to reduce online consumer debt. We allocate participants to either a financial literacy treatment group, a self-control treatment group, or a zero-touch control group. Our self-control training intervention features detailed tracking of spending and borrowing, budgeting, and introspection about consumption choices. This intervention reduces online borrowing and delinquency charges, mainly driven by a reduction in entertainment-related spending and borrowing. In contrast, financial literacy interventions improve test scores but only marginally affect borrowing. Our results suggest that cultivating self-regulation and budgeting skills can improve borrowing behavior on e-commerce platforms.

Exploiting exogenous variations in corporate ratings due to sovereign credit downgrades and sovereign ceiling policies, we assess how firms respond to a reduction in credit ratings. We find that firms bounded by the sovereign ceiling significantly increase information production in response to a sovereign downgrade. The effects are stronger for firms relying more heavily on external finance and operating in a more opaque environment. Enhanced information production, in turn, affects firms’ subsequent access to bond markets. These findings suggest that firms actively manage information environments to maintain access to public debt markets.