Publication
Are Survey Stock Price Forecasts Anchored by Fundamental Forecasts? A Long-run Perspective (with Pei Kuang, Tang Li, and Renbin Zhang), Economic Theory, published online.
This paper firstly shows that a wide range of asset pricing models, including full information and Bayesian rational expectations models, typically imply that agents use the long-run cointegration relationship between stock prices and fundamentals to forecast future stock prices. However, using several widely used survey forecast datasets, we provide robust new evidence that survey stock price forecasts are not cointegrated with forecasts of fundamentals (aggregate consumption, dividend, and output), both at the consensus and individual level. We argue that it is crucial to relax investors’ common knowledge of the equilibrium pricing function to reconcile this finding.
Forecast Disagreement about Long-run Macroeconomic Relationships (with Pei Kuang, Li Tang, and Renbin Zhang), Journal of Economic Behavior and Organization, 2022, vol. 200.
Using survey forecast data, this paper studies whether professional forecasters utilize long-run cointegration relationships among macroeconomic variables to forecast the future, as postulated in stochastic growth models. Significant heterogeneity exists among forecasters. The majority of the forecasters do not use these long-run relationships. The results are robust across different groups, to addressing the multiple testing problem and to allowing for structural break.
Stock Prices and the Risk-free Rate: An Internal Rationality Approach , Journal of Economic Dynamics and Control, 2021, vol.127.
The co-movement between stock and short-term bond markets in US data appears weak in terms of the correlation between stock price-dividend ratio and risk-free rate and the variance decomposition of stock excess returns. It is essential to market participants and policy makers to understand the lack of empirical relationship, especially in light of the fact that several rational expectation asset pricing models that match stock market volatility actually imply a much stronger relationship between stock and short-term bond markets than empirically observed. To explain this apparent inconsistency, this paper presents a small open economy model with "Internally Rational" agents, who optimally update their subjective beliefs on stock prices given their own model. Compared with risk-free rate's variation, agents' subjective beliefs are essential in generating stock price volatility. When testing our model using the method of simulated moments, quantitatively it can simultaneously match moments of the stock and bond markets as well as the weak co-movement between two markets.
Working Paper
AH Premium: A Tale of "Siamese Twin" Stocks (with Renbin Zhang)
A large proportion of Chinese stocks are traded in both the Shanghai (A-share) and Hong Kong (H-share) markets. A-shares sell at a premium, known as the AH premium; this premium is large and volatile. AH premium resembles a globally well-known premium puzzle in "Siamese twin" stocks. We find that a model of subjective stock price expectations where agents forecast the future capital gains by extrapolating from the past can provide a good explanation. This finding emphasizes the importance of modeling investors with extrapolative stock price expectations.
Going Green with Inadequately Supervised Fiscal Playgrounds for Local Governments (with Haoyang Li, Yuqin Wang, and Guohan Yang)
In this study, we examine how government debt responds to environmental policies when governments are endowed with inadequately supervised fiscal flexibility. We find that a strengthening of environmental policy worsened the local economy and encouraged Chinese local governments to increase the issuance of more flexible but less regulated off-budget debts. Further analysis indicates that the social costs of this additional flexibility were closely related to the urgency local officials felt to receive a promotion and the historical debt reliance. The Chinese experience is consistent with the predictions of theoretical models and also instructive for coordinating fiscal and environmental policies.
