Xiaotong
(Vivian) Wang
Ph.D. Candidate in Financial Economics
Asset pricing, financial accounting, market microstructure, and financial
econometrics are the areas inspiring my research interest. My dissertation
consists of essays on cross sectional asset returns and return volatility.
The prime aim of these papers is to take a broad approach to resolving
neoclassical models with empirical findings by introducing market
frictions and market participants¡¯ opportunistic behavior. A brief
summary of each paper is given below.
My job market paper, ¡°Stock
Return Dynamics under Earnings Management,¡± develops a rational
expectations earnings smoothing model to analyze the implications
of real earnings management on asset returns and return volatility.
In the model, firms smooth earnings via the costly and economically
suboptimal intertemporal transfer of assets and liabilities. Under
real earnings management, managers always try to hide bad news and
spread out large positive shocks. As a result, the firm¡¯s stock
return follows a process that conforms to an EGARCH-like statistical
model, the market may seem to overreact to bad news and underreact
to good news, and no news is always good news to the market. Empirical
evidence that earnings innovations impact future return volatility,
in line with the model¡¯s predictions, is found in the data.
¡°Cross
Sectional Variation in Stock Returns: Liquidity and Idiosyncratic
Risk,¡± is a joint paper with Matthew Spiegel. Questions regarding
the time-series factors and firm-level characteristics that influence
expected stock returns have long interested both academic and practitioner
audiences. One of the main findings of modern finance is that idiosyncratic
risk, by definition, is diversifiable and should not matter for
asset pricing. There is a hot debate in both asset pricing and the
market microstructure literature on whether liquidity should matter
for asset pricing. This paper explores the relationship between
idiosyncratic risk and liquidity and their role respectively and
jointly in explaining the cross sectional variation in stock returns.
Idiosyncratic risk based trading strategy and liquidity based trading
strategy are examined. Having established their separate roles in
explaining the cross sectional variation in stock returns, this
paper further finds that idiosyncratic risk and liquidity are negatively
correlated. After controlling for idiosyncratic risk, the role of
cost-based liquidity measures is limited. After controlling for liquidity,
idiosyncratic risk still plays a major role.
¡°Market
Liberalization and Return Volatility: Another View,¡± joint with
Steve Jordan, explores the much-debated question: is foreign money
hot? We find that opening the market to foreign investors decreases
the firm level volatility in emerging markets instead of increasing
the volatility. Our studies show that foreign money is indeed smart
money which times the market correctly.
¡°Break the Silence: Estimating the Mean and Variance of the Return
of Stocks with No Trades,¡± joint with Peter Phillips, is my research
work in progress. A simple glance over the CRSP daily return file
tells us that there are lots of stocks with literally no trades
for days. Other than reporting a missing value for those stocks,
there is not much for CRSP to do. However, there are reasons to
believe stock prices move even if actual trading does not occur.
Asynchronous trading is a serious market microstructure problem
that challenges both academics and practitioners. We propose a new
method using the TAQ quotes data to estimate the drift and the quadratic
variation of the unobservable diffusion process which is assumed
to represent the unobservable price movement of a non-traded stock.
|
