My research interest: empirical asset pricing, cross-sectional information on security prices, portfolio choice, financial econometrics.
Any comments, suggestions, or criticisms are very much welcomed!
Please E-mail me: pgao [at] ChicagoBooth.edu
1. Pre-Earnings Announcement Drift (with Peter Easton and Paul Gao)
We document a genuinely new market anomaly: a predictable drift in stock prices before the earnings announcements of firms that announce their earnings later than other firms in their industry. We dynamically form portfolios for late announcers based on the cross section information of early announcers (in terms of historical pairwise covariances of earnings announcement day returns). In terms of Sharpe Ratio, the pre-earnings announcement drift effect is as strong as other well-known anomalies. A long-short trading strategy based on the covariance implied returns generates monthly returns of more than 100 basis points. We show that transaction costs may help to explain the predictability of the returns of later announcers.
2. Firm Characteristics, Covariance, and Portfolio Optimization
The return covariance pattern of S&P 500 stocks is explicitly linked to firm characteristics without being associated with any common factors. This type of return co-movement (I call a spatial covariance pattern) cannot be fully characterized by a few pervasive factors. In comparison to the factor-based covariance model, an investor exploring the characteristic-based spatial covariance structure has substantial diversification benefits under the case of global minimum variance portfolio, and has substantial utility gains under the case of optimal tangency portfolio.
3. Characteristic-Based Covariances and Cross-Sectional Expected Returns (under revision)
I suggest a characteristic-based covariance model that directly links the predetermined firm characteristics to time-varying covariance risk. Using a large cross section of individual stock-level data, I parsimoniously estimate both conditional mean returns and conditional covariances as functions of firm characteristics. Main results: (i) I find a strong and positive relation between conditional market covariance and expected return; (ii) Two conditional covariance variables largely help explain the anomalous returns associated with size, BM, asset growth, accruals, investment-to-assets, return-on-assets, net stock issues, financial distress, and momentum; and (iii) Portfolio test as in Daniel and Titman (1997) suggests that the characteristic-based covariance structure of returns rather than the characteristics appears to explain the cross-sectional average returns.
4. Is the Market Optimistic about the Future Earnings of Initial Public Offering Firms?
My first-year term paper for a thoroughly empirical study. For a large sample of IPO firms, I investigate the investors reactions to their quarterly earnings announcements over a five-year horizon since equity issues. I construct benchmarks on non-issuing matching firms based on industry, size, and book-to-market equity. I find the earnings expectation of IPO firms is no more optimistic than their seasoned non-issuing counterparties. I carefully examine the statistical inference bias, the sample selection bias, and the delisting return bias.
Last update: Feb 23, 2010.
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