Joel Peress
Professor of Finance

Joël Peress is the Claude Janssen Chaired Professor of Business Administration. He joined INSEAD in 2001 after graduating from Ecole Polytechnique in France and obtaining a PhD in Economics from the University of Chicago.

Joël teaches at INSEAD in the MBA and PhD programs as well as in various executive programs. His research interests revolve around the generation and diffusion of information in financial markets, with applications to asset pricing, portfolio theory, the mass media and economic growth. His works have been published in various journals including The Journal of Finance, The Review of Financial Studies, The Journal of Portfolio Management, and The Journal of Economic Theory. He was twice awarded the Smith Breeden prize for the best paper published in The Journal of Finance.

Joel's Research | Detailed CV | Finance department

Research

For a description of my research (Jan. 2016), click here.

Published and Accepted Papers

"Noise Traders Incarnate: Describing a Realistic Noise Trading Process" (with Daniel Schmidt)
Forthcoming in The Journal of Financial Markets.
Retail trades look a lot like noise trades. We use them to estimate a realistic process for noise trading to help theorists calibrate their models. Abstract

"Network Centrality and Managerial Market Timing Ability" (with Theodoros Evgeniou, Theo Vermaelen and Ling Yue)
Forthcoming in The Journal of Financial and Quantitative Analysis.
Theory and evidence that managerial market timing ability is related to firm’s centrality in the input-output trade flow network. Abstract.

"Glued to the TV: Distracted Noise Traders and Stock Market Liquidity" (with Daniel Schmidt)
The Journal of Finance, (2020), 75(2), 1083-1133. Internet Appendix.
Noise traders suffer from limited attention. When they are distracted by sensational news exogenous to the stock market, trading activity, liquidity, and volatility decrease, and prices reverse less, as predicted by theory. We discuss the evolution of these outcomes over time and the influence of technological changes. Abstract.

"Learning from Stock Prices and Economic Growth"
The Review of Financial Studies, (2014), 27(10), 2998-3059.
A model of information acquisition, signaling through prices, capital allocation and economic growth. The economy’s growth is characterized by rising capital efficiency, total factor productivity, industrial specialization, stock trading intensity and idiosyncratic stock return volatility. The model is calibrated, and used to analyze the growth impact of two common forms of investor irrationality, overconfidence and inattention. Abstract.

"Does Media Coverage of Stocks Affect Mutual Funds’ Trading and Performance” (with Lily Fang and Lu Zheng)
The Review of Financial Studies, (2014), 27(12), 3441-3466.
Mutual fund vary in their propensity to trade stocks covered in the mass-media. This propensity is persistent, and negatively related to future fund performance. These results suggest that professional investors are subject to limited attention, which harms their investment performance. Abstract.

"The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes"
The Journal of Finance 69(5) (2014), 2007–2043.
Evidence that the media help propagate news. On newspaper strike days, trading volume, the dispersion of stock returns and their intraday volatility all fall. Abstract.

"Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change"(with Harald Hau and Massimo Massa)
The Review of Financial Studies 23(4) (2010), 1681-1717.
Evidence that exogenous global equity flows move exchange rates. Abstract.

Product Market Competition, Insider Trading and Stock Market Efficiency
The Journal of Finance 65(1) (2010) (lead article).
Winner of the Smith Breeden Prize (Distinguished Paper) for the best paper published in the Journal of Finance in 2010.
Competition in firms’ product markets influences their trading in equity markets as firms use their monopoly power to insulate their profits (theory and evidence).Abstract.

Media Coverage and the Cross-Section of Stock Returns (with Lily Fang)
The Journal of Finance, 64(5) (2009), 2023-2052.
Winner of the Smith Breeden Prize (Distinguished Paper) for the best paper published in the Journal of Finance in 2009.
Evidence that stocks with no media coverage earn higher returns than stocks with high media coverage, suggesting that the breadth of information dissemination matters to stock returns. Abstract.

The Tradeoff between Risk Sharing and Information Production in Financial Markets
The Journal of Economic Theory, 145(1) (2010), 124-155.
The production of information in financial markets is limited by the extent of risk sharing: the benefit of private information, unlike its cost, rises with the scale of investment, so a more widely-held stock is less actively researched. Abstract.

Information vs. Entry Costs: What Explains U.S. Stock Market Evolution
Journal of Financial and Quantitative Analysis, 40(3) (2005), 563-594.
A falling information cost (the cost of collecting information about the market) cannot explain the observed long term increase in stock market participation and other facts, unlike a falling entry cost (all other costs, including commissions and fees). Abstract.

Wealth, Information Acquisition and Portfolio Choice
Review of Financial Studies, 17(3) (2004), 879-914. Erratum
An approximate solution to a Grossman-Stiglitz economy with wealth effects. Because information generates increasing returns, decreasing absolute risk aversion and the availability of costly information explain why wealthier households invest a larger fraction of their wealth in risky assets. Abstract

Optimal Portfolios of Foreign Currencies” (with Jamil Baz, Francis Breedon and Vasant Naik)
Journal of Portfolio Management, Fall 2001.
How to form portfolios of currencies that benefit from the forward bias and trade off risk and return optimally. Portfolios returns have a better Sharpe ratio than Treasury indices and are uncorrelated with major fixed-income and equity indexes. Abstract.

Working Papers

"Fast and Slow Arbitrage: Fund Flows and Mispricing in the Frequency Domain” (with Xi Dong and Namho Kang))
Hedge and mutual fund flows play an important role in the persistence of anomaly returns (aka, factor momentum) and their cyclicality. Fund managers, rather than fund investors, are responsible for this influence, and frictions explain their behaviour. Theory and evidence.) Abstract.

Firm R&D and Financial Analysis: How Do They Interact?” (with Jim Goldman)
Knowledge about technologies (financial analysis) and technological knowledge (firm R&D) are mutually reinforcing. Evidence and implications for economic growth. Abstract.

Media Coverage and Investors’ Attention to Earnings Announcements
Evidence that limited attention is an important source of friction in financial markets: earnings announcements covered in the media generate stronger price and trading volume reactions upon announcement and less subsequent drift, than those not covered. Abstract.

Other Publications

Dynamics of Swaps Spreads: A Cross-Country Study” (with Jamil Baz, David Mendez-Vives, David Munves and Vasant Naik)
Lehman Brothers Analytical Research Series, 1999.
The empirical behaviour of swap spreads in Germany, Britain and the US during 1994-1999. Abstract.

Paper Abstracts

"Glued to the TV: Distracted Noise Traders and Stock Market Liquidity"
We study the impact of noise traders’ limited attention on financial markets. We exploit episodes of sensational news (exogenous to the market) that distract noise traders. On “distraction days”, trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those that result from the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the influence of technological changes. Back to top. Internet Appendix.

Learning from Stock Prices and Economic Growth
A competitive stock market is embedded into a neoclassical growth economy to analyze the interplay between the acquisition of information about firms, its partial revelation through stock prices, capital allocation and income. The stock market allows investors to share their costly private signals in a cost-effective incentive-compatible way. It contributes to economic growth by raising total factor productivity (TFP). A calibration indicates the effect on TFP to be large but that on income to be modest. Several predictions on the evolution of real and financial variables are derived, including capital efficiency. Finally, the growth impact of two common forms of investor irrationality, overconfidence and inattention, are analyzed.
Back to top

Does Media Coverage of Stocks Affect Mutual Funds’ Trading and Performance
We study the relation between mutual fund trades and mass-media coverage of stocks. We find that funds exhibit persistent differences in their propensity to buy media-covered stocks. Moreover, this propensity is negatively related to their future performance. Funds in the highest propensity decile underperform funds in the lowest propensity decile by 1.1% to 2.8% per year. These results do not extend to fund sells, likely due to funds' inability to sell short. Overall, the findings suggest that professional investors are subject to limited attention. Back to top

"The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes"
The media are increasingly recognized as key players in financial markets. I investigate their causal impact on trading and price by examining national newspaper strikes in several countries. Trading volume falls 12% on strike days.The dispersion of stock returns and their intraday volatility are reduced by 7%, while aggregate returns are unaffected. Moreover, an analysis of return predictability indicates that newspapers propagate news from the previous day. These findings demonstrate that the media contribute to the efficiency of the stock market by improving the dissemination of information among investors and its incorporation into stock prices.
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"Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change".
Traditional portfolio balance theory derives a downward sloping currency demand function from limited international asset substitutability. Historically, this theory enjoyed little empirical support. We provide direct evidence by examining the exchange rate effect of a major redefinition of the MSCI global equity index in 2001 and 2002. The index redefinition implied large changes in the representation of different countries in the MSCI world index and therefore produced strong exogenous equity flows by index funds. Our event study reveals that countries with a relatively increasing equity representation experienced a relative currency appreciation upon announcement of the index change. Moreover, it shows that uninformative shocks can propagate from one asset class to another.
Back to top

“Product Market Competition, Insider Trading and Stock Market Efficiency
How does competition in firms' product markets influence their behavior in equity markets? Do product market imperfections spread to equity markets? I examine these questions in a noisy rational expectations model in which firms operate under monopolistic competition while their shares trade in perfectly competitive markets. Firms use their monopoly power to pass on shocks to customers, thereby insulating their profits. This encourages stock trading, expedites the capitalization of private information into prices and improves the allocation of capital. Several implications are derived and tested.
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Media Coverage and the Cross-Section of Stock Returns
By reaching a broad population of investors, mass media can alleviate informational frictions and affect security pricing even if it does not supply genuine news. We investigate this hypothesis by studying the cross-sectional relation between media coverage and expected stock returns. We find that stocks with no media coverage earn higher returns than stocks with high media coverage even after controlling for well-known risk factors. These results are more pronounced among small stocks and stocks with high individual ownership, low analyst following, and high idiosyncratic volatility. Our findings suggest that the breadth of information dissemination affects stock returns.
Back to top

The Tradeoff between Risk Sharing and Information Production in Financial Markets”
show that the production of information in financial markets is limited by the extent of risk sharing. The wider a stock's investor base, the smaller the risk borne by each shareholder and the less valuable information. A firm which expands its investor base without raising capital affects its information environment through three channels: (i) it induces incumbent shareholders to reduce their research effort as a result of improved risk sharing, (ii) it attracts potentially informed investors, and (iii) it may modify the composition of the base in terms of risk tolerance or liquidity trading. These results have implications for individual firms and the market as a whole.
Back to top

Information vs. Entry Costs: What Explains U.S. Stock Market Evolution
I investigate whether changes in stock market participation costs can explain the long term increase in the number of U.S. stockholders. I separate these costs into two components, an information cost (the cost of collecting information about the market) and an entry cost (all other costs, including commissions and fees). I disentangle their general equilibrium implications in a noisy rational expectations economy. A falling information cost cannot explain the observed increase in stock market participation, unlike a falling entry cost. In addition, a falling entry cost accounts for several other features of the U.S. economy, (i) the falling equity premium, (ii) rising return variances and (iii) the boom in passive investing relative to active investing.
Back to top

Wealth, Information Acquisition and Portfolio Choice
I solve (with an approximation) a Grossman-Stiglitz economy under general preferences, thus allowing for wealth effects. Because information generates increasing returns, decreasing absolute risk aversion, in conjunction with the availability of costly information, are sufficient to explain why wealthier households invest a larger fraction of their wealth in risky assets. One no longer needs to resort to decreasing relative risk aversion, an empirically questionable assumption. Furthermore, I show how to distinguish empirically between these two explanations. Finally, I find that the availability of costly information exacerbates wealth inequalities.
Back to top

Optimal Portfolios of Foreign Currencies
We show how an investor can form portfolios of currencies that benefit from the forward bias and that trade off risk and return optimally. Applying a mean-variance analysis under the assumption that exchange rates behave as random walks leads to portfolio weights that are stable over time without resorting to exogenous constraints on weights. Optimal currency portfolios invested in the German deutschemark, the Japanese yen, the British pound, and the Swiss franc with the U.S. dollar as the risk-free asset generate an average excess return of 2.79% per year over the period 1989 through 1999. The Sharpe ratio on these returns is better than that on a U.S. Treasury index and that on a global Treasury index (unhedged for currency risk). Moreover, the returns are uncorrelated with major fixed-income and equity indexes. These findings suggest that the methodology can provide a useful benchmark for fund managers interested in optimal currency overlays.
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"Noise Traders Incarnate: Describing a Realistic Noise Trading Process"
We estimate a realistic process for noise trading to help theorists derive predictions from noisy rational expectations models. We characterize the trades of individual investors, who are natural candidates for the role of noise traders because their trades are weakly correlated with fundamentals, in line with how such models define noise trading. Data from a retail brokerage house, small and price-improved trades in TAQ, and flows to retail mutual funds yield consistent estimates. The properties of noise trading are highly sensitive to the frequency considered, with the common assumption of i.i.d.-normal noise appropriate only at monthly and lower frequencies. Back to top

"Network Centrality and Managerial Market Timing Ability"
We document that long-run excess returns following announcements of share buyback authorizations and insider purchases are a U-shape function of firm centrality in the input-output trade flow network. These results conform to a model of investors endowed with a large but finite capacity for analyzing firms. Additional links weaken insiders’ informational advantage in peripheral firms (simple firms whose cash flows depend on few economic links) provided investors’ capacity is large enough, but eventually amplify that advantage in central firms (firms with many links) due to investors’ limited capacity. These findings shed light on the sources of managerial market timing ability. Back to top

Fast and Slow Arbitrage: Fund Flows and Mispricing in the Frequency Domain"
Using spectral analysis, we document that hedge fund and mutual fund flows explain much of the persistence and cyclicality of anomaly returns. Indeed, they correct and amplify mispricing slowly, 24 and 4 times more, respectively, over horizons longer than one year compared with shorter horizons. Passive fund flows, in contrast, have no effect on mispricing. Over long horizons, hedge fund flows are most influential among fund types on a per-dollar basis. Hedge fund managers, rather than investors, helm this “slow-moving” effect, and frictions explain their behavior. We propose a model highlighting the horizon-dependent effects of capital on market efficiency. Back to top

Media Coverage and Investors’ Attention to Earnings Announcements”
Does investors’ inattention contribute to the post-earnings announcement drift? I study this question using media coverage as a proxy for attention. I compare announcements made by the same firm in the same year and generating the same earnings surprise, when one announcement is covered in the Wall Street Journal while the other is not. I find that announcements with media coverage generate a stronger price and trading volume reaction at the time of the announcement and less subsequent drift. Moreover, this effect is less pronounced for more visible firms and on high-distraction days. These results are both economically and statistically strong. They lend support to the notion that limited attention is an important source of friction in financial markets.
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Firm R&D and Financial Analysis: How Do They Interact?
Entrepreneurs undertake more R&D when financiers are better informed about their projects because they expect to receive more funding for successful projects. Conversely, financiers learn more about projects when entrepreneurs perform more R&D because then the opportunity cost of mis-investing is higher. Thus R&D and financial analysis are mutually reinforcing. Evidence based on two quasi-natural experiments supports this interaction. Quantitatively, investors' learning accounts for over a quarter of the total effect of a policy designed to stimulate R&D. A calibration suggests that the interaction's contribution to income growth represents a third of the total contributions of learning and R&D.
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Dynamics of Swap Spreads: A Cross-Country Study”.
We examine the empirical behavior of swap spreads in Germany, Britain and the US over the last five years. Swap spreads of three maturities (2-, 5- and 10-year) are considered. The movements of swap spreads are explained using the movements in credit spreads, Libor-gc spreads, the shape of the government curve and returns on equity market indices.
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Contact

Joël Peress
Associate Professor of Finance

INSEAD Europe Campus
Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Phone: +33 1 60 72 40 35
Fax: +33 1 60 72 40 45
Email: [email protected]

Assistant: Stéphanie Dair
Email:[email protected]

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