Date of Award
Spring 2023
Document Type
Dissertation
Degree Name
Doctor of Philosophy (PhD)
Department
Management
First Advisor
Moskowitz, Tobias
Abstract
This dissertation consists of three essays in financial economics. The first essay, joint with Paul Schmidt-Engelbertz, is titled `Asset Pricing with Higher Order Beliefs.' Higher order beliefs -- beliefs about others' beliefs -- may be important for trading behavior and asset prices, but have received little systematic empirical examination due to challenges in measurement. We circumvent these challenges using the insight that return expectations for an asset encode higher order beliefs, as they depend on forecasts of other investors' future demand. Analyzing survey data on the beliefs of U.S. equity market and global currency market investors, we find that the term structure of investors' cumulative return expectations follows a hump shape: when investors report high return expectations for the following month or quarter, they report low return expectations for subsequent quarters. We use novel survey data to directly relate this pattern to investors' higher order beliefs. Guided by the evidence, we construct a tractable asset pricing model that we use to theoretically and quantitatively explore investors' higher order beliefs and their impact on asset prices. In a quantitative application, we find that the higher order beliefs of financial institutions exhibit systematic biases, but nevertheless play a corrective role for exchange rates. The second essay, joint with Joao Paulo Valente and Tianho Wu, is titled `The Role of Beliefs in Asset Prices: Evidence from Exchange Rates.' 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. The third essay, joint with Tobias Moskowitz, is titled `Betting Without Beta.' 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.
Recommended Citation
Vasudevan, Kaushik, "Essays in Financial Economics" (2023). Yale Graduate School of Arts and Sciences Dissertations. 1096.
https://elischolar.library.yale.edu/gsas_dissertations/1096
