中文版

Director of PhD & MS-PhD Program
Associate Professor of Finance

Educational Background

PH.D.Finance, 2008, University of Pennsylvania
M.S.Economics, 2003, University of Wisconsin-Madison
M.S.Statistics, 2003, University of Wisconsin-Madison
B.S. Finance, 2001, Shanghai Jiao Tong University

Research Areas

Asset Pricing, Behavioral Finance, International Finance 

 

Seeking to exploit the profit opportunities following high sentiment

In 2012, an article called “The Short of It: Investor Sentiment and Anomalies” won Honorable Mentions of AQR Insight Award and Marshall Blume Prize right after its publication on The Journal of Financial Economics. Meanwhile, it also aroused much attention between financial media as well as financial industry. As one of the authors, Professor Yu Yuan, Associate Professor of Finance at Shanghai Advanced Institute of Finance, gave us this interview.

Professor Yuan specializes in the impact of mispricing on financial markets. In terms of the development of Chinese financial markets, he suggests that scholars carry out more in-depth fundamental research, and financial instruments to be enriched constantly. He believes that SAIF is expected to become one of the top 20 business schools around the world.

Seeking to exploit the profit opportunities following high sentiment, the short leg of long-short strategies is more profitable

Regarding the success of his paper “The Short of It: Investor Sentiment and Anomalies”, Professor Yuan shares the research motivation and critical concepts with us. “In the whole financial industries, everyone is always thinking about the reason for exploiting the profit opportunities, also known as seeking alpha.” He says, there is not much alpha to obtain, because according to the classical theory, profits are regarded as the compensation for the willingness to bear risk and to wait to receive income. Nevertheless, behavioral finance claims that mispricing creates a source of excess returns. During the past two and three decades, there has been much dispute over this question in academia. This research of Professor Yuan is intended to provide answers. As he introduces the methodology, the study combines two crucial concepts. One is investor sentiment, which has an impact on stock prices. The other is short-sale constraints, which make shorting harder and riskier than going long.

Professor Yuan continues, the market will become irrational during the periods of overoptimistic sentiment. Because when most people are far from rational, rational traders have to short sell in order to balance the market. However, with impediments to short selling, it becomes harder to limit the ability of irrational traders. On the contrary, when the market is running without optimistic views, rational traders can just buy underpricing securities, which seems relatively easy. Therefore, the study concludes that the market is irrational when it is full of optimistic traders, and the strategy of seeking alpha should be more profitable following high sentiment. Another conclusion is that when short selling becomes harder, investors may gain even more profit from so-called overpriced stocks by short selling. Those stocks with greater profitability and the short legs of the strategies can bring about alpha.

Professor Yuan says, the empirical paper “The Short of It: Investor Sentiment and Anomalies”, examines the most popular 11 long-short strategies in the U.S. market and reaches an insightful conclusion. They find greater profitability of the long-short strategies following high sentiment. Also, all these strategies include short selling overpricing stocks and buying underpricing securities. The short leg of each strategy is more profitable, creating the primary source of those greater profits. “The study provides explanations for each of the anomalies, and is applicable to all these 11 popular long-short strategies. It aroused attention in the academia and industries right after its publication on The Journal of Financial Economics,” Professor Yuan says, “as a cutting-edge research area, it offered informative guidance for financial industries that later issued Honorable Mentions of AQR Insight Award to our team. For the industries, they should prefer short selling overpricing stocks, and seeking to exploit the profit opportunities during periods of high sentiment.

More fundamental research and diversified investment tools are essential

Professor Yuan used to serve as a Research Associate in Federal Reserve Bank of Dallas. As he recalls, “at that time, I studied international finance, and created an investor sentiment index. We found out that investor sentiment can spread through capital cash flows. For example, if the investor sentiment in the United States is very high, and there are a lot of capital flow between the U.S. and the UK, the British investor sentiment will become high, too. The high consumption and high investor sentiment in the United States is also likely to affect the British stock trading prices. The study aroused interest of the Federal Reserve, because linkages between the stock markets of different countries have significance for them.

Professor Yuan was very impressed by Federal Reserve Bank of Dallas, which places much more emphasis on fundamental research than any other national central bank does. “The Federal Reserve System includes 12 regional Federal Reserve Banks, each of which has its own rigorous research department. There are many Ph.D. graduates in Economics and Finance doing research for it.” He suggests that it is worth learning from the Federal Reserve System. Academia needs to increase fundamental research, and rationally deliberate about the issues of China’s financial market. Only in this way can academia provide practical and constructive suggestions.

When it comes to the development of China’s financial markets, Professor Yuan suggests that it needs to be equipped with all sorts of relevant financial products, including short-selling mechanism and a variety of derivatives. “I can understand concerns of the government that excessive application of derivatives may lead to speculation. It is rational to cross the river by feeling the stones. However, it is worthy to note that China’s quantitative investment has experienced a lot over the past few years. A lot of people participated in it, and many of them failed. One of the main reasons is imperfection of financial products in China. Though the U.S. financial markets arouse the debate frequently, the simplest financial products including short-selling and stock index futures are manifold enough. Accordingly, China’s markets may fasten the pace in development of financial products.”

On April 16, 2010, CFFEX launched its first product, the CSI 300 stock index futures. Professor Yuan regards the CSI 300 as the stock index futures of a big stock, and suggests that China's stock index futures develop faster. “It doesn’t have to be the stock index futures of individual stocks. Something like the stock index futures of 800 stocks, or CSI 300 stock index options, would be beneficial. Another important aspect is the development of short-selling mechanism for individual stocks and the securities lending business. If China’s market greatly encourages quantitative hedge funds, risks can be more effectively controlled, and investment tools for public investors can be diversified as well. This is essential,” he says.

Expected to become a top 20 business schools around the world

“If working is not a hobby, I would say that I enjoy jogging the most, and dining with friends as well,” he says. While talking about hobbies, Professor Yuan smiled at his workaholic behavior, “I made a resolution to take one day off a week; otherwise I would be just doing research every single day.”

Professor Yuan also introduces his research plan, “My research area is mostly focusing on the impact of mispricing has on financial markets. Mispricing can influence not only asset pricing but also investors’ behavior.”

Prior to joining SAIF, Professor Yuan had been invited to a few U.S. and European top business schools. In term of the reason for devoting himself to SAIF, apart from familiarizing himself with the SJTU campus as an undergraduate student before, he has full confidence towards SAIF’s future. “The reason is actually quite simple. I believe, with in our collective efforts, SAIF is expected to become the best business school in the Asia, and in the long term, is very likely to become one of the top 20 business schools around the world.”

Professor Yuan started as an Assistant Professor at the University of Iowa, and later served as a visiting assistant professor at the Wharton School of the University of Pennsylvania from August 2010 to 2012. He suggests that in order to run a school that fulfills the education standards of U.S. top business schools, SAIF’s management team are looking for a group of like-minded thinkers to create opportunities and gain momentum. Eventually, to build a top business school is to make a top think tank for the society. How to present and spread the influence of the think tank? Professor Yuan introduces the four aspects. As he explains, first, is to make intellectual contributions by publications. Second, is to provide strategic advice to policy makers. Third, is to increasingly benefit the financial industries by applying research findings. Finally, cultivate more financial talents for the nation. To achieve these four aspects of goals to bring benefits to China, Asia, the global economy and financial markets, SAIF has a long way to go.

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