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This article summarizes recent research in financial economics about why information, such as earnings announcements, moves stock prices. The article does not presume any prior exposure to finance beyond what you might read in newspapers.
We argue that an important contributing factor into market inefficiency is the lack of a robust mechanism for the stock price to rise if a company has good earnings, e.g., via buybacks/dividends. Instead, the stock price is prone to…
Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient…
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…
Over the past 60 years, there has been a gradual increase in the volatility of daily returns for the S&P 500 Index. Hypothetically, suppose that market forces determine daily volatility such that a daily leveraged S&P 500 fund cannot…
We argue that the recent growth in income inequality is driven by disparate growth in investment income rather than by disparate growth in wages. Specifically, we present evidence that real wages are flat across a range of professions,…
The world's stock markets display a decades-long pattern of overnight and intraday returns seemingly consistent with only one explanation: one or more large, long-lived quant firms tending to expand its portfolio early in the day (when its…
Over the past 30 years, nearly all the gains in the U.S. stock market have been earned overnight, while average intraday returns have been negative or flat. We find that a large part of this effect can be explained through features of…
The efficient market hypothesis has been considered one of the most controversial arguments in finance, with the academia divided between who claims the impossibility of beating the market and who believes that it is possible to gain over…
This paper studies the income fluctuation problem with capital income risk (i.e., dispersion in the rate of return to wealth). Wealth returns and labor earnings are allowed to be serially correlated and mutually dependent. Rewards can be…
As the decade turns, we reflect on nearly thirty years of successful manipulation of the world's public equity markets. This reflection highlights a few of the key enabling ingredients and lessons learned along the way. A quantitative…
When analyzing the components influencing the stock prices, it is commonly believed that economic activities play an important role. More specifically, asset prices are more sensitive to the systematic economic news that impose a pervasive…
It has been widely observed that capitalization-weighted indexes can be beaten by surprisingly simple, systematic investment strategies. Indeed, in the U.S. stock market, equal-weighted portfolios, random-weighted portfolios, and other…
We show that recent stock market fluctuations are characterized by the cumulative distributions whose tails on short, minute time scales exhibit power scaling with the scaling index alpha > 3 and this index tends to increase quickly with…
Understanding the mutual relationships between information flows and social activity in society today is one of the cornerstones of the social sciences. In financial economics, the key issue in this regard is understanding and quantifying…
Mounting evidences are being gathered suggesting that income and wealth distribution in various countries or societies follow a robust pattern, close to the Gibbs distribution of energy in an ideal gas in equilibrium, but also deviating…
This paper investigates the dynamics of in the S&P500 index from daily returns for the last 30 years. Using a stochastic geometry technique, each S&P500 yearly batch of data is embedded in a subspace that can be accurately described by a…
The article examines how institutions, automation, unemployment and income distribution interact in the context of a neoclassical growth model where profits are interpreted as a surplus over costs of production. Adjusting the model to the…
We solve in closed-form an equilibrium model in which a finite number of exponential investors continuously consume and trade with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification…
We show that under mild assumptions, the total value of information to informed traders in the market can be measured by the covariance between price changes and order flow. This covariance captures noise trader losses, which equal informed…