Abstract: We propose a new theory of information production in financial markets. In this theory, speculators search for new predictors of asset payoffs and optimally decide to trade on predictors whose signal-to-noise ratio exceeds an endogenous threshold. We use the model to derive predictions regarding the effects of progress in information technologies on quantitative asset managers’ performance, the similarity of their holdings, and the informativeness of asset prices. We show that data abundance (an expansion of the search space for predictors due to greater data diversity) and greater data processing power do not have the same effects.
“Does Alternative Data Improve Financial Forecasting? The horizon effect”, with Olivier Dessaint and Laurent Frésard. Revised June 2022.
Latest draft (SSRN): Here; Online Appendix: Here; Slides: Here
Abstract: Existing research suggests that alternative data is mainly informative about short-term future outcomes. We show theoretically that the availability of short-term oriented data can induce forecasters to optimally shift their attention from the long-term to the short-term because it reduces the cost of obtaining short-term information. Consequently, the informativeness of their long-term forecasts decreases, even though the informativeness of their short-term forecasts increases. We test and confirm this prediction by considering how the informativeness of equity analysts’ forecasts at various horizons varies over the long run and with their exposure to social media data.
“Inventory Management, Dealers’ Connections and Prices in OTC Markets” with Jean-Edouard Colliard and Peter Hoffman. Last revised: May 2020. Forthcoming in the Journal of Finance.
Predicts that the distribution of aggregate inventories between core and peripheral dealers affect the distribution of transaction prices and bid-ask spreads in OTC markets.
Abstract: “We propose a new model of trading in OTC markets. Dealers accumulate inventories by trading with end-investors and trade among each other to reduce their inventory holding costs. Core dealers have access to a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers’ aggregate inventory position differs from zero. The resulting price dispersion increases in the size of this position. The model generates new predictions about the joint effects of peripheral dealers’ connectedness and dealers’ aggregate inventories on transaction prices, both among dealers and between dealers and their clients.”