NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Frank Weikai Li

Lee Kong Chian School of Business,
50 Stamford Rd, #4065
Singapore

E-Mail: wkli@smu.edu.sg
Institutional Affiliation: Singapore Management University

NBER Working Papers and Publications

December 2016Climate Risks and Market Efficiency
with Harrison Hong, Jiangmin Xu: w22890
We investigate whether stock markets efficiently price risks brought on or exacerbated by climate change. We focus on drought, the most damaging natural disaster for crops and food-company cash flows. We show that prolonged drought in a country, measured by the Palmer Drought Severity Index (PDSI) from climate studies, forecasts both declines in profitability ratios and poor stock returns for food companies in that country. A portfolio short food stocks of countries in drought and long those of countries not in drought generates a 9.2% annualized return from 1985 to 2015. This excess predictability is larger in countries having little history of droughts prior to the 1980s. Our findings support regulatory concerns of markets inexperienced with climate change underreacting to such risks.

Published: Harrison Hong & Frank Weikai Li & Jiangmin Xu, 2018. "Climate risks and market efficiency," Journal of Econometrics, .

May 2015Days to Cover and Stock Returns
with Harrison Hong, Sophie X. Ni, Jose A. Scheinkman, Philip Yan: w21166
The short ratio - shares shorted to shares outstanding - is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically well-motivated measure because trading costs vary across stocks. Since turnover falls with trading costs, DTC is approximately the marginal cost of the shorts. At the arbitrageurs’ optimum it equals the marginal benefit, which is their opinion about over-valuation. DTC is a better predictor of poor stock returns than short ratio. A long-short strategy using DTC generates a 1.2% monthly return.
 
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