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Taking the Next (Academic) Step
Bauer Finance Doctoral Student Published in Top Finance Journal, Accepts Assistant Professor Position
Published on May 5, 2021
Department of Finance Doctoral Student Mohammad Ghaderi (left) with Cullen Distinguished Chair and Dean Paul A. Pavlou (right) at the 2020 Bauer Doctoral Poster Awards.
A May 2021 graduate of the Department of Finance doctoral program at C. T. Bauer College of Business has published a research paper in one of the top three journals in the field and accepted a position as Assistant Professor of Finance at the highly regarded University of Kansas.
Mohammad Ghaderi explained the genesis of the research, “Learning, Slowly Unfolding Disasters, and Asset Prices,” forthcoming in the Journal of Financial Economics.
“One main question in finance is why stocks earn higher returns compared to government bonds. If someone invests their savings in a broad index of the U.S. stock market, after a relatively long period, it almost surely outperforms investing in government bonds. Why don’t people invest more in stocks, increase their price, and lower their expected returns as a result? This is more puzzling because if we look at the last 70 years of data, households’ consumption does not seem to be subject to a lot of unexpected shocks. Instead, it has smoothly increased over time,” said Ghaderi, whose co-authors are Mete Kilic of the University of Southern California and Sang Byung Seo of the University of Wisconsin-Madison (he formerly was Assistant Professor of Finance at Bauer).
While a “rare disaster,” model typically was used to explain the anomaly, Ghaderi and co-authors have proposed a new financial model that generates slowly unfolding disasters, not only in the macroeconomy, but also in financial markets.
In the new model, which earlier was presented at the Macro-Finance Society Workshop, American Finance Association and elsewhere, investors cannot exactly distinguish whether the economy is experiencing a mild/temporary downturn or is on the verge of a severe/prolonged disaster. Due to imperfect information, disaster periods are not fully identified by investors.
“The ‘rare disaster’ mechanism assumes a small probability of a massive one-shot decline in aggregate consumption to address these questions,” Ghaderi said. “But since these disastrous economic events are very rare — the last time they happened was during the Great Depression — we do not find them in our recent experience of the U.S. data. There are problems with this explanation. One is that it is not realistic to assume such large declines in household consumption happening instantaneously. Another is that it is not consistent with what we see in the options market.
“The point that we make in our paper is that the way these disasters happen is very important to explain different aspects of the asset returns data. In our paper, disasters are not happening instantaneously. Instead, they gradually unfold in the economy and financial markets,” he said. “This idea makes everything more realistic and explains the data better. But what is it that makes disasters unfold slowly? We propose that investors’ incomplete information or uncertainty about the future path of the economy, could justify the existence of these slowly unfolding disasters.”
“Many investors last year around February and March were worried that the outbreak of the COVID would result in another Great Depression in the economy (a drop of more than 10% in household consumption, long-lasting unemployment, etc.) Because of government policy and the development of a vaccine, what actually happened for the next 12 months was not as bad economically. However, investors did not know this. We think that this uncertainty about the future path of the economy and investor’s gradual learning about it (when do economic disasters happen, how much they last, or how deep the recession would go) is what can explain the patterns in the data. For example, we might see huge swings in the stock market as investors’ beliefs about the severity of the crisis evolve.”
Ghaderi said the research topics of Bauer College Finance professors looked interesting to him when he was considering what doctoral program to attend. His wife started a program in Economics at Rice University at approximately the same time. Ghaderi’s dissertation co-chairs were Bauer Finance Professor Kris Jacobs and former Bauer Assistant Professor Sang Seo. His research has a primary focus on empirical asset pricing, macro-finance, and financial econometrics. Another research paper was recently awarded the Eastern Finance Association Best Doctoral Paper Award in Investments, and Ghaderi was the winner of the Best Poster in the 2020 Bauer Doctoral Poster Session.
He received an MBA with a major in financial management in 2015 from the Graduate School of Management and Economics, Sharif University of Technology, Iran. He also holds a B.S. in Electrical Engineering from Sharif University of Technology and worked in the banking industry in Iran.
