Mitch Warachka

A Quantum Field Theory Term Structure Model Applied to Hedging

A quantum field theory generalization, Baaquie [1], of the Heath, Jarrow and Morton (HJM) [10] term structure model parsimoniously describes the evolution of imperfectly correlated forward rates. Field theory also offers powerful computational tools to compute path integrals which naturally arise from all forward rate models. Specifically, incorporating field theory into the term structure facilitates hedge parameters that reduce to their finite factor HJM counterparts under special correlation structures. Although investors are unable to perfectly hedge against an infinite number of term structure perturbations in a field theory model, empirical evidence using market data reveals the effectiveness of a low dimensional hedge portfolio.

What Makes Uninformed Traders Tick

Using New York Stock Exchange ticker subscriptions, we find that the dissemination of market prices by the stock ticker strengthens return predictability and momentum by stimulating uninformed trading. Variation in ticker subscriptions is not explained by population growth, economic growth, or market returns. Instead, lower operating costs for a stock ticker increase ticker subscriptions and strengthen momentum. Higher idiosyncratic return volatility and lower systematic risk are also associated with an increase in ticker subscriptions. Therefore, the dissemination of firm-level market prices induces a trade-off between price efficiency and systematic risk.

How Do Households Set Prices? Evidence from College Football Rivalries and Airbnb

Airbnb hosts in college towns increase their listing prices more than hotels on home football games against rival teams. By setting listing prices too high as a result of their non-pecuniary preferences against rival fans, hosts experience a 30% reduction in rental income. The overestimation of demand, the cost (inconvenience) of having to temporarily relocate, and the expected cost of damage cannot explain the inverse relation between listing price increases and rental incomes on games against rival teams. Instead, greater financial constraints are associated with smaller listing price increases and higher rental incomes on rival games, suggesting that non-pecuniary preferences are a luxury.

The Impact of Market Price Dissemination on Price Efficiency and Systematic Risk

Using New York Stock Exchange ticker subscriptions, we find that the dissemination of market prices by the stock ticker strengthens return predictability and momentum by stimulating uninformed trading. Variation in ticker subscriptions is not explained by population growth, economic growth, or market returns. Instead, lower operating costs for a stock ticker increase ticker subscriptions and strengthen momentum. Higher idiosyncratic return volatility and lower systematic risk are also associated with an increase in ticker subscriptions. Therefore, the dissemination of firm-level market prices induces a trade-off between price efficiency and systematic risk.