Behavioral finance and corporate finance are both organized in the exact same way. Neither is based on a grand unified theory. Instead, both fields proceed by looking for deviations from a benchmark model. The behavioral-finance literature is a list … [Continue reading]
Asset-pricing models as theories of good synthetic controls
In 1988, California passed a major piece of tobacco-control legislation called Proposition 99. This bill increased the tax on cigarettes by \$0.25 a pack and triggered a wave of bans on smoking indoors throughout the state. After the bill was passed … [Continue reading]
Interpreting the LASSO as a *really* simple neural network
Suppose you want to forecast the return of a particular stock using many different predictors (think: past returns, market cap, asset growth, etc...). One way to do this would be to use the LASSO. Alternatively, you could use a neural network to make … [Continue reading]
Where’s the “narrative” in “narrative economics”?
Bob Shiller defines "narrative economics" as the study of "how narrative contagion affects economic events". This research program focuses on two things: "(1) the word-of-mouth contagion of ideas in the form of stories and (2) the efforts that people … [Continue reading]
Adversarial examples and quant quakes
Imagine you're a quantitative long-short equities trader. If you can predict which stocks will have above-average returns next period and which will have below-average returns, then you can profit by buying the winners and selling short the losers. … [Continue reading]