Speculating on Higher-Order Beliefs
(with Paul Schmidt-Engelbertz)
Review of Financial Studies 38(8) (2025): 2434-2466
Abstract [+] | Publisher's Version | PDF | SSRN| Replication Package
Higher-order beliefs - beliefs about others' beliefs - may be important for trading behavior and asset prices but have received little systematic empirical examination. Examining more than 20 years of evidence from the Robert Shiller Investor Confidence surveys, we find that investors' higher-order beliefs provide substantial motivations for nonfundamental speculation - taking a stock market position that conflicts with one's valuation of the market. To explore the equilibrium implications, we construct a model that matches the survey evidence and highlights that investors' higher-order beliefs amplify stock market overreaction and excess volatility.
Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price
(with Todd M. Hazelkorn and Tobias J. Moskowitz)
Journal of Finance 78(1) (2023): 301-345
Abstract [+] | Publisher's Version | PDF | Internet Appendix
We argue that deviations from the law of one price between futures and spot prices, known as futures-cash bases, capture important information about liquidity demand for equity market exposure in global markets. We show that bases (1) co-move with dealer and investor futures positions, (2) are contemporaneously positively correlated with spot and futures returns with the same sign, and (3) negatively predict futures and spot market returns with the same sign. These findings are consistent with a model where the futures-cash basis reflects liquidity demand that is common to futures and cash equity markets. We show persistent supply-demand imbalances for equity index exposure reflected in bases, where compensation for meeting that liquidity demand is large (5-6% annual premium).
Getting Schooled: Universities and VC-backed immigrant entrepreneurs
(with Natee Amornsiripanitch, Paul A. Gompers, and George Hu)
Research Policy 52(7) (2023): 104782
Abstract [+] | Publisher's Version | WP PDF | SSRN | NBER WP #28773
HLS Governance Forum
This paper analyzes how US universities contribute to the quantity and quality of VC-backed immigrant entrepreneurship in the US. Using a novel data set that identifies immigration status and education history for the near-universe of VC-backed founders in the US, we document several interrelated facts. First, immigrants contribute disproportionately to US VC-backed entrepreneurship, accounting for approximately 20 % of VC-backed companies. More than 75 % of these immigrant entrepreneurs obtained post-secondary education in the US, which suggests that higher education represents a primary entry channel for foreign entrepreneurial talent into the country. Given these facts, we assess how universities shape both the geographic distribution and the quality of immigrant entrepreneurship. Close to 40 % of US-educated immigrants start a company in the state of their alma mater, suggesting that place of education substantially impacts immigrant entrepreneurs' startup location choice. Regarding firm quality, immigrant founders are also more likely to found financially successful and scientifically innovative startups than their US-born counterparts. Altogether, the results suggest that foreign students educated in US universities substantially contribute to local and national VC-backed entrepreneurship, thereby identifying higher education's global scope as a potential tool to attract entrepreneurial talent and encourage entrepreneurial growth.
Policy by Committee (Updated 08/2025)
(with Toomas Laarits, Ben Matthies, and Will Yang)
Abstract [+] | PDF | SSRN
Committees shape decisions across numerous settings, but empirical examination of group decision-making remains limited due to measurement challenges. We address these challenges by constructing a novel dataset of Federal Open Market Committee members’ arguments and decisions from over forty years of meetings. Contrary to prevailing theories emphasizing private information aggregation, we find that members employ distinct models to interpret public information, with committee decisions favoring models that better fit recent data. We develop a theoretical framework showing that committees can improve decision-making but must balance against the risk of excess sensitivity to recent data.
Risk and Specialization in Covered-Interest Arbitrage (Updated 08/2025)
(with Tobias J. Moskowitz, Chase P. Ross, and Sharon Y. Ross)
Revise & Resubmit, Journal of Finance
Abstract [+] | PDF | SSRN | NBER WP #32707
Prevailing theories of financial intermediation assume an integrated financial sector with frictionless risk-sharing. However, we identify substantial risk-sharing frictions linked to intermediary specialization using the cross-section of covered-interest parity (CIP) deviations as a laboratory. Obtaining confidential supervisory data covering $25 trillion in daily bank exposures, we document that CIP arbitrage is risky for banks, which take on maturity mismatches and purchase risky assets to hedge their currency exposure from derivatives. These risks lead intermediaries to specialize in markets where they have expertise in managing them. Our results highlight the importance of intermediary specialization and its impact on risk premia
Betting Without Beta
(with Tobias J. Moskowitz)
Abstract [+] | PDF | SSRN
Sports betting markets offer a novel test distinguishing the roles of preferences and beliefs in asset prices. Analyzing two contracts on the same outcome – one where payoff risk varies with expected outcome (Moneyline) and one where it does not (Spread) – we find that preferences for lottery-like payoffs, rather than incorrect beliefs, drive the lower returns to betting on risky underdogs versus safe favorites. Drawing parallels to low-risk anomalies in financial markets, we find the magnitude of pricing effects matches those in options and equity markets, with a model of lottery preferences providing a unifying explanation.
The Role of Beliefs in Asset Prices: Evidence from Exchange Rates
(with Joao Paulo Valente and Tianhao Wu)
Abstract [+] | PDF | SSRN
A long-standing question is why asset prices sometimes underreact and sometimes overreact to news. We explore this question in currency markets. We use survey data to estimate a model featuring investors with noisy private information and extrapolative beliefs about interest rates, and find the estimated model quantitatively matches patterns of initial underreaction and delayed overreaction of currencies in response to interest rate news. The model also helps explain changes in the time-series predictability of currency returns by interest rates in recent years, the term structure of UIP deviations, and additional features of beliefs in survey data. Our results highlight the role of investors' beliefs in asset price behavior.
