Working Papers

Portfolio Choice with Non-Fungible Brokerage Cash  (SSRN) 

with Ning Zhu

Revise and Resubmit, Journal of Financial and Quantitative Analysis

Investors perceive cash in savings accounts (“cold cash”) differently from cash recycled in brokerage accounts (“hot cash”). We propose a novel “temperature” framework for dynamic and repeated mental account refreshing process. We find individual investors buy stocks more cautiously with colder cash. Exploiting a quasi-natural experiment of the Chinese IPO-lottery reform, we show the effect is causal. An online experiment indicates the differential loss aversion is a potential channel. Building on observational and experimental findings, we propose a model featuring preferences with temperature-dependent sensitivity to future gains-and-losses, which generates our empirical patterns and provides a cash-temperature perspective for other puzzles.

Risk Revisited (SSRN) 

with Yucheng Liang

This study explores how stock price path shapes investors’ risk perceptions. In four experiments, we present participants with real and fabricated price charts and elicit risk perceptions. We document that a parsimonious set of three features – recency, clustering, and sign – can explain large proportions of risk perception variations. We find that the effects are partially mediated by perceived volatility, which is not fully explained by Bayesian inference. Additionally, a significant portion of the effects occurs independently of perceived volatility. Using observational data, we show that these three features explain cross-sectional variations in stock returns and predict mutual fund negative flows.

Investor Demand on the Extensive and Intensive Margins: Learning from Prices with Subjective Beliefs on Flows (SSRN)

with Allen Hu and Zigang Li

We study investor demand through its extensive margin (entry and exit flows in stocks) and intensive margin (adjustments to existing positions). Using institutional and retail holdings, we show that extensive flows are large in magnitude and exhibit a less negative, often positive, estimated price elasticity. Extensive flows are driven by past returns and attention, while intensive flows reflect fundamentals, and the composition of the two helps explain variations in stock returns, volatility, and price informativeness. We develop a Grossman-Stiglitz-style model with investors learning from prices: intensive investors rebalance holdings based on fundamentals; extensive investors switch among assets and form subjective beliefs about unobserved flows into or out of assets. Subjective beliefs about flows can lead to misinference from prices and to different price elasticities across these two margins. Embedding the model in an asset demand system, we structurally estimate price elasticities and evaluate how prices and their informativeness would change in a counterfactual of reallocating capital from intensive to extensive investors. The results from structural estimation corroborate our empirical evidence.