Risk, Specialization, and Covered-Interest Parity
(with Tobias J. Moskowitz, Chase P. Ross, and Sharon Y. Ross)
Journal of Finance, Forthcoming
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 currency derivatives markets as a laboratory. Using confidential supervisory data covering $25 trillion in daily bank exposures, we document imperfect hedging in banks' FX-swap intermediation: banks rarely hedge their synthetic dollar lending with maturity-matched foreign safe assets. Intermediaries specialize in markets where they have expertise in managing the associated exposures, giving rise to cross-market variation in deviations from covered-interest parity. Our results highlight the importance of intermediary specialization and its impact on risk premia.
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 (Revised 02/2026)
(with Toomas Laarits, Ben Matthies, and Will Yang)
Yuki Arai Research Prize in Finance, 2026
Reject and Resubmit, Quarterly Journal of Economics
Abstract [+] | PDF | SSRN
Consequential decisions are routinely delegated to groups, yet empirical examination of group decision-making remains limited due to measurement challenges. We address these by analyzing Federal Open Market Committee members' forecasts alongside a novel dataset of their arguments from over forty years of meetings. Departing from prevailing theories emphasizing information aggregation, we find that members hold distinct and persistent models: beliefs about causal relationships and steady-state values that generate divergent interpretations of the same macroeconomic data. We find that groups aggregate models by tilting toward members whose models better fit recent data. We show theoretically that fit-based model aggregation in committees may improve decision quality but risks excess sensitivity to incoming data.
Expertise and Specialization in Bank Trading (Available upon request)
(with Chase P. Ross and Sharon Y. Ross)
Abstract [+]
Firms must choose which activities to pursue and which to leave to competitors, but empirical examination of the determinants of organizational scope remains limited by measurement challenges. Using novel supervisory data on individual trading desks at U.S. banks, we find that, distinct from prevailing theories of diversification driving scope, banks concentrate information-processing capacity in clusters of related activities. We document that banks specialize in activity clusters where they earn higher profits and have more precise assessment models. Examining reallocations, we find that specialized labor flows to expert banks, particularly in response to changes in risk limits tied to forecasted demand. Finally, banks contract non-core activities as they approach constraints. Our results highlight the importance of labor and organizational frictions for trading.
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.
