Ph.D. Candidate in Economics
Behavioral Finance, Empirical Asset Pricing, Short Sales, Commodities
Job Market Paper
Despite momentum's strong historical performance, its returns have large negative skewness and occasionally experiences persistent strings of sharp negative returns, referred as "momentum crashes" in the recent literature. I argue that momentum crashes are due to crowded trades which push prices away from fundamentals leading to strong reversals, and exacerbated by limits of arbitrage being more severe in the short-leg due to impediments to short selling. Using short interest and institutional ownership data together to measure the "crowdedness" of momentum, I show that momentum crashes can be avoided in the cross section by shorting only non-crowded losers. There is considerably more short-covering during times when momentum fails. I show using high frequency short sale transactions data that short covering is especially severe in the crowded loser portfolio. A placebo test using a set of 63 futures contracts show that momentum crashes do not exist in futures market after market exposure is correctly hedged, which is consistent with my hypothesis.
Days to Cover and the Risks of Shorting, (with Harrison Hong and Jose Scheinkman, Princeton University)
Margin Changes and Composition of Traders: Evidence from Metals Futures, Jan 2012, (with John S. Roberts, U.S. Commoditiy Futures Trading Commission)
Currently under CFTC embargo
The literature regarding impact of margin changes on market participants generally fails to document systematic changes in the composition of traders, and margins are generally viewed as a market neutral risk management device. Using CFTC's proprietary transactional audit trail with detailed account information, we document substantial changes in the composition of traders when a margin change is imposed. Levered speculators respond to even small changes in margin because their implied maximum leverage is determined by the level of margins. Hedgers are only sensitive to large margin changes and do not react to margin changes unless they hit their capital constraint. Regardless of the direction of margin change, market participants decrease their market exposure after controlling for volatility. Moreover, the effect of margin changes depends on the fraction of traders who are levered, and thus the effect of margin changes cannot be assessed with public data.