research Archives - Chicago Global


January 30, 20200

Congratulations to one of Chicago Global’s Board of Advisors – Professor Samuel Hartzmark for winning the 2019 Exeter Prize for the best paper published in the previous calendar year in a peer-reviewed journal in the fields of Experimental Economics, Behavioural Economics and Decision Theory.

Sam and Kelly Shue (Yale) are winning the award for their paper titled “A Tough Act to Follow: Contrast Effects in Financial Markets” which documents that investors appear to compare a firm’s performance with the performance of a firm immediately preceding its own announcement, creating predictable returns.

From the announcement email, “The contrast effect has previously been shown to be a psychological bias that inversely distorts humans’ perception of information… individuals perceive signals as higher or lower than their true values, depending on what the recently observed signal was – even if that “benchmark” signal is actually irrelevant for the present evaluation.

While this bias has been demonstrated primarily in controlled laboratory environments, evidence from the field is more limited but available for individual decision making contexts of, for example, speed dating and consumer housing and commuting choices.

Hartzmark and Shue’s paper goes substantially further by providing evidence for the existence of contrast effects in the presence of typically disciplining arbitrage opportunities and expertise; that is, in sophisticated markets with professionals who make repeated investment decisions. Hartzmark and Shue show that contrast effects to preceding earnings’ announcements of oftentimes even irrelevant firms distort equilibrium prices and capital allocation.

Furthermore, they find that this costly mispricing effect reverses within approximately 50 trading days. Finally, the authors argue convincingly that this contrast effect likely biases perceptions of news rather than expectations. Together, Hartzmark and Shue’s paper demonstrates to us that markets may not be as efficient as economists typically assume:  Prices react not only to the absolute content of information but are also prone to perceptional errors stemming from relative comparisons.”


January 30, 20200

From a research summary in the June 2019 issue of the NBER Digest (PDF embedded below) written by Steve Maas at the National Bureau of Economic Research. Our annotations are in bold.

Drawing on newspaper stories about stock market volatility, Scott R. BakerNicholas BloomSteven J. Davis (the William H Abbot Professor of International Business and Economics at the University of Chicago Booth School of Business), and Kyle J. Kost examine the importance of various types of news in contributing to swings in equity prices.

The researchers create an Equity Market Volatility (EMV) tracker that links articles about economic, political, and national security developments to the VIX index, a measure of expected stock market volatility based on option prices. In Policy News and Stock Market Volatility (NBER Working Paper No. 25720 – PDF Embedded below), they report that movements in their EMV tracker closely mirror the ups and downs in the realized and option-implied volatility of the S&P 500 between January 1985 and October 2018.

The EMV tracker is constructed by searching articles published in 11 major U.S. newspapers, including The New York Times, the Los Angeles TimesThe Dallas Morning News, and The Wall Street Journal.

The researchers classified the EMV articles into about 30 categories of factors that influence volatility. These included 10 related to general economic factors, such as macroeconomic news, labor disputes, and financial crises. The rest related to political or policy factors such as taxes, government spending, and monetary policy. Each category is associated with a set of search terms. In most cases, journalists who authored the articles tied instability to factors in multiple categories.

News about the macroeconomic outlook appears in 72 percent of the articles that enter into the EMV tracker. This category covers reports about GDP, inflation, housing starts, jobs, and other indicators of the broad economic outlook. That compares with 44 percent of EMV articles in the “commodity market” category, citing terms such as wheat, steel, and oil pipeline. Journalists attributed volatility to news about interest rates in 31 percent of the articles; national security matters were cited in just 13 percent of the articles.

The share of news stories about market volatility that fell into each category fluctuated over time. For example, the period since the 2016 election has seen a sharp increase in trade policy concerns as an apparent source of market volatility.

The researchers created not just an overall EMV tracker, but several category-based versions as well. The EMV tracker for macroeconomic news jumped in response to the October 1987 market crash, the Russian financial crisis, and the 2008–09 global financial crisis. In contrast, it registered little reaction to the Enron and WorldCom scandals. The “financial crisis” EMV tracker has registered consistently higher volatility in the years since the 2008-09 meltdown, but it also reacted strongly to earlier crises such as those involving the Mexican peso in 1994 and the Russian and Asian financial crises in 1997-98. An EMV tracker for petroleum markets, using such search terms as oil, Alaska pipeline, and Keystone pipeline, mirrors most movements in oil-price volatility but missed badly during times of economic crisis like the 1987 stock market crash and the 2008-09 global financial crisis.

News about policy matters is an important and growing contributor to volatility. The researchers find that 35 percent of EMV articles refer to fiscal policy, mostly taxes, 30 percent discuss monetary policy, 25 percent refer to one or more forms of regulation, and 13 percent mention national security. They find “an upward drift over time” in the share of articles about market volatility that discuss policy matters, with a peak contribution of policy matters in 2017-18.


January 30, 20200

Ben Charoenwong & Alan Kwan

As Asian economies grow and wealth accumulates, more households turn towards experts for investment advice. There is no denying that the financial services sector in Asia has exploded. A recent industry report by Ernst and Young estimates that the wealth of high net-worth individuals alone in Asia is over USD$9 trillion as of 2016. But despite this astronomical growth in the asset management industry, the regulatory framework in Asia is still developing.

The main responsibility of an investment adviser is to provide clients advice on financial planning and asset allocation but may also help to implement such recommendations. To protect investors who might be less sophisticated, the United States and many other countries uphold advisers to fiduciary duty standards. In our research, we show that not only the fiduciary standard is important, but the quality of local regulators in the United States makes a large difference in misconduct. This highlights the importance of the fiduciary standard, but also the importance of having an international standard so that both advisers and clients can operate in comparable settings. Yet, the fiduciary duty is not a standard requirement between financial advisers and clients for most countries in Asia.

The consequence of this regulatory gap reveals itself intermittently on the front pages of financial news. Just recently in December of 2017, a large online investment scheme in China was found out to be a fraud. Founded in 2012, promised returns of up to 60 percent a year and raised over USD$4.7 billion. When found out to be a Ponzi scheme, protests broke out in the Jiangsu province of Nanjing. But prior to the founder turning himself in, the official state news Xinhua news simply warned the company, “Don’t organize and don’t participate in illegal activities”. Worse yet, this scandal came on the heels of a $7.7 billion financial scam in online lender Ezubo in 2015.

The absence of a coherent regulatory and enforcement framework means that authorities do not have a systematic approach to dealing or monitoring misconduct in the investment advisory industry. As this industry grows, the role of regulators become more important in ensuring a fair environment for investors. To this end, regulators in Asia is considering whether to impose and enforce a fiduciary duty on investment advisers.

Whether financial advisers have a fiduciary duty determines the legal liability of their actions.  A fiduciary duty is an ethical and legal relationship of trust between two people. If a person violates their fiduciary duty, they are personally liable to account for the ill-gotten profits. They may face both civil or criminal legal consequences.

Compared to the regulatory environment in the United States, established by the Investment Adviser Act in 1940, the regulatory framework in Asia for financial advisers is both young and lax. For example, according to the Investment Adviser Act of 1940 in the United States, all investment advisers are fiduciaries. Investment advisers shown to commit fraud or knowingly sell unnecessarily expensive financial products may face fines, lose their advising license, or even face jail time.

Out of the 9 countries for which we could find data, only three dictates a fiduciary relationship between advisers and clients. This is in stark contrast to the fiduciary relationship required of all board of directors and shareholders for all 9 countries.

Asian countries also differ in the stringency of the investment adviser regulatory landscape. In Singapore, financial advisers are required to show their compensation scheme in writing, be it fee-based or commissions-based or both. On the other hand, in Hong Kong, financial advisers do not even need to disclose their commission rebates, remuneration, or soft dollar benefits which they receive from product providers.


Country Investment Adviser Industry Size
(billions USD)
Fiduciary Duty Regulator Governing Law Year Enacted[1]
China 28,000 No China Securities Regulatory Commission Securities Investment Fund Law of the People’s Republic of China 2012
Hong Kong 23,000 No Securities and Futures Commission Securities and Futures Ordinance 2002
Singapore 2,000 No Monetary Authority of Singapore Financial Advisers Act 2001
South Korea 434 Yes Financial Services Commission Financial Investment Services and Capital Markets Act 2007
Taiwan 163 Yes Financial Supervisory Commission Republic of China (Taiwan) Financial Consumer Protection Act 2011
Malaysia 151 No Securities Commission Malaysia Securities Commission Act 1993
Thailand 121 No Thailand Securities and Exchange Commission Securities and Exchange Act 1992
Philippines 54 Yes Bangko Sentral ng Pilipinas Monetary Board Resolution No. 26 2011
Indonesia 20 No Financial Services Authority Capital Markets Law No. 8 of 1995. 2011


Although the absence of an explicit fiduciary duty relationship between investment advisors and clients do not mean that clients are not protected, the requirements are less stringent. For example, in Singapore, the Financial Advisers Act does not impose a fiduciary duty on financial advisers. It only requires that investment advice be made on a “reasonable basis”. This means that legally, financial advisers only have the duty to represent their firm’s interests, not necessarily that of clients. Investors seeking investment advice from these advisers should be wary of how the advisers are compensated and their incentives for giving a certain type of advice.

Identifying a licensed financial adviser may also be difficult. In some countries, they are not required to disclose their registration status. The burden lies with investors to find out. For example, Singapore reserves the term “financial adviser” only for individuals who are registered and regulated under the Financial Advisers Act. However, the use of the terms “financial planner”, “financial analyst”, or “financial consultants” are not reserved and can be used by anyone.

Given the inherent conflict of interests in the financial adviser industry, since there seems to be a regulatory gap in Asia, the burden falls upon investors to understand the investment management industry. Unsurprisingly, most investors prefer to use simpler assets as store of wealth, such as bank deposits, certificates of deposit, or even real estate.

[1] This refers to the original enactment, ignoring revisions. Typically, revisions are implemented to make the regulation more stringent. The fiduciary duty requirement column reflects the current regulatory framework .