Lance Young, an assistant professor of finance at the University of Washington Foster School of Business, has won the Fama-DFA Prize for the past year’s best asset pricing research published in the Journal of Financial Economics.
The prize recognizes the paper, “Why is PIN Priced?,” co-authored by Young and Jefferson Duarte of Rice University, and published in the February 2009 issue of the Journal of Financial Economics.
The paper examines the effect on stock prices of information asymmetry in the market—the presence of both uninformed traders and informed traders who possess private or inside information. Specifically, Young and Duarte refute a controversial previous finding that stocks which are more likely to attract informed traders yield higher returns.
Fixing a flawed model
Finding a flaw in the model, Young and Duarte rebuilt it to account for periodic increases in the volume of both buyer- and seller-initiated trades that are unrelated to the presence of informed traders with private information. Instead, these increases appear due to public events such as earnings announcements which spur many investors to rebalance their portfolios—what Young refers to as “liquidity events.”
“We re-ran the test to see if there is still this relation between expected returns and information asymmetries,” he says. “It’s not there.”
“This study is kind of deep ‘inside baseball,’ ” Young acknowledges. “But it matters a lot to asset pricers who were suspicious of this notion that uninformed traders require higher expected returns in the presence of informed traders. We find that it’s just this liquidity effect.”
As notable as the finding, Young adds, is the project’s epic back story. With crucial assistance from research consultant Lew Thorson and other members of the Foster School IT team, Young and Duarte were able to examine every trade and every quote of every stock listed on the New York Stock Exchange since 1982—a vast set of data measured in terabytes. It took weeks of processing on the Wharton School’s mainframe and in the Foster School’s executive computer lab, and deft, precise programming to ensure that the whole thing didn’t go boom.
“This kind of investment of time and effort is not something that many people would be prepared to make,” Young says.
The Fama-DFA Prize is an annual award given to the authors of the best capital markets and asset pricing research papers published in the Journal of Financial Economics. The award is named after Eugene Fama, the renowned financial economist who is co-founding editor of the Journal, research director for the Dimensional Fund Advisors, and widely recognized as the father of the efficient market hypothesis.
Young joined the Foster School faculty in 2005, after earning a PhD at the University of Rochester. In the years since, he has won professor of the year distinction in the School’s Undergraduate, Full-time MBA and Evening MBA Programs. A Neal and Jan Dempsey Faculty Fellow, Young’s research specializes in empirical asset pricing, behavioral finance, and capital market anomalies. He is a reviewer for the Journal of Finance, the Journal of Financial Economics and the Journal of Financial and Quantitative Analysis.