Publications

Engineering Lemons

Journal of Financial Economics, Volume 142, Issue 2, November 2021, Pages 737-755.

Paper, Online Appendix, SSRN Preprint, Video, Coverage by Alpha Architect

Abstract: Recent complex financial products sold to households contradict the basic premise of canonical innovation theories: financial innovation benefits its adopters. In my 2006–2015 sample of over 28,000 yield enhancement products (YEP) the securities offer attractive yields but negative returns. The products lose money both ex ante and ex post due to their embedded fees: on average, YEPs charge 6–7% in annual fees and subsequently lose 6–7% relative to risk-adjusted benchmarks. Simple and cheap combinations of listed options often statewise dominate YEPs. Competition, disclosure, or learning do not eliminate this inferior financial innovation over my sample period.

Growth Forecasts and News About Monetary Policy

with Nina Karnaukh, Journal of Financial Economics, Volume 146, Issue 1, October 2022, Pages 55-70.

Paper, SSRN Preprint, Orthogonalized MP shocks

Abstract: We find that 30-minute changes in bond yields around scheduled Federal Open Market Committee (FOMC) announcements are predictable with the pre-FOMC Blue Chip professionals’ revisions in GDP growth forecasts. A positive pre-FOMC GDP growth revision predicts a contractionary policy news shock (positive change in bond yields), a negative GDP growth revision predicts an expansionary policy news shock (negative change in bond yields). Failing to account for this predictability biases the estimates of monetary policy effects on the economy. First, the Fed’s information effect dissipates as the truly unpredictable policy news shock does not affect professionals’ beliefs about the economy. Second, net policy shock has a more negative impact on actual future GDP than the raw policy shock.

Working Papers

Household Responses to Phantom Riches

with Samuli Knüpfer, Ville Rantala, and Erkki Vihriälä, Revise and Resubmit at Review of Financial Studies

November 2024 | SSRN Working Paper

Abstract: We study the consequences of investment fraud victimization using unique administrative data on Ponzi scheme investors. A matched control event-study design shows that the victims experience a 6% annual labor income loss. Income first declines when an investor joins the scheme, consistent with distorted beliefs lowering labor supply. The scheme’s collapse triggers a further decrease, which we attribute to financial stress caused by the collapse. Investors also face higher indebtedness and tilt their portfolios away from delegated investments. The income loss persists in the long run, equals twice the direct investment loss, and substantially adds to the social cost of fraud.

Conferences: EFA, CEPR European Conference on Household Finance (Turin), Virtual Household Finance Seminar, NFA

Salient Attributes and Household Demand for Security Designs

April 2023 | SSRN Working Paper

Abstract: Using a novel database of complex securities, I study how salient attributes of security design distort household investment decisions. I show banks add non-standard (fine-print) conditions to artificially increase advertised headline returns—a phenomenon I term "enhancement." Enhancement increases headline returns by 11 percentage points, on average, but does not increase realized returns. Flexibly controlling for all other product attributes and using high-frequency shocks to structuring costs of enhancement for identification, I find demand is highly elastic to enhancement. Enhancement is costly to investors: a one standard deviation decrease implies savings of more than $1 billion in fees.

NFA 2023 Best Paper Award in Asset Pricing and Market Microstructure

Conferences: AFA (San Antonio), NBER Behavioral Finance, CEPR Workshop on Household Finance, Finance Down Under, Virtual Derivatives Workshop, HEC-McGill Winter Finance Workshop, SGF, MFA, WAPFIN @ NYU, CFPB Research Conference, NFA, CDI

DO HOUSEHOLDS MATTER FOR ASSET PRICES?

with Carter Davis, Samuli Knüpfer, Jens Soerlie Kvaerner, Bahar Sen-Dogan

May 2024

Abstract: Contrary to the common assertion that households have little impact on stock prices, we find their importance is of first order. We quantify their impact using an asset-demand system applied to the complete ownership data for all Norwegian stocks over 2007--2020. Households are the most important contributor to stock market volatility relative to their market share. Even in absolute terms, they come second, surpassed only by institutional investors. Our granular data on households reveal a strong factor structure in household demand: The demand of the rich is distinct from less affluent investors, accounts for the bulk of volatility attributable to households, tilts away from ESG, and is informative about future fundamentals. We conclude by quantifying key frictions preventing other market players from absorbing household demand shocks.

Conferences: European Finance Association, Midwest Finance Association

Work IN Progress

Democratizing Private Markets: Private Equity Performance of Individual Investors

with Cynthia Balloch, Federico Mainardi, and Simon Oh

Abstract: Using new data on wealthy U.S. households, we provide the first systematic study of private equity investments by individual investors. Contrary to concerns about adverse selection, we find that private equity investments by individual investors perform similarly to those of institutions and outperform public markets. We identify three innovations that enable individuals to invest in private equity: the proliferation of funds with low minimum commitments, pooling capital via advisors, and leveraging advisors' networks to access fund managers. Our findings demonstrate how advisors and access to private equity funds can enhance household portfolio returns.

Conferences: Western Finance Association; RCFS Winter Conference; Columbia PE Conference; Aalto Institutional Investor Conference (Helsinki); IPC Alternative Investments Conference & Spring Research Symposium 2025; 12th Annual Conference on Financial Market Regulation (SEC)

BELIEFS, REFERENCE POINTS, and The disposition Effect: Evidence from Option Traders

with Aleksi Pitkäjärvi and Matteo Vacca

Abstract: We use over 15 years of microdata on Finnish option traders to test competing explanations for the disposition effect. By isolating situations where an investor simultaneously holds multiple options on the same underlying asset, we show that the disposition effect arises even when beliefs about expected underlying returns are fixed. Consistent with strike prices acting as target-driven reference points, we document a discontinuity in selling propensities at the strike price and significant bunching of sales on the day when the price of the underlying crosses the strike for the first time. These patterns are not driven by rational rebalancing or transaction costs, are inconsistent with pure belief-based explanations, and provide new support for reference-dependent preferences.