Job Market Paper

The Economic Consequences of Lower Retail Trading Costs with Ming-Jen Lin

Abstract: Brokerage commissions have declined substantially over recent decades worldwide. This paper studies how lower trading costs affect retail investors and the market through increased speculation. We leverage a 2017 reform in Taiwan that reduced the transaction tax specifically for day trading. Using detailed account-level transaction data, we find that even though investors should mechanically benefit from lower trading costs, they respond in ways that ultimately reduce their portfolio returns. First, day trading volume increases significantly but this increase is driven disproportionately by less sophisticated investors who tend to lose money on each trade. Second, and surprisingly, day traders’ gross returns per dollar traded worsen, eroding the mechanical tax-cut benefit. Consistent with the view that transaction costs serve a disciplinary role, we trace this performance deterioration to less attentive decision-making. Together, these responses result in losses concentrated among investors with smaller holdings, whereas large investors benefit. Despite individual-level losses, market quality improves: intraday liquidity increases and volatility decreases. Overall, our findings highlight a policy-relevant trade-off: increased retail speculation from lower trading costs can benefit markets while harming individual investors.

Publications

Debt Moratoria: Evidence from Student Loan Forbearance
with Michael Dinerstein and Constantine Yannelis
American Economic Review: Insights, June 2024

Abstract: We evaluate the effects of the 2020 student debt moratorium. Using administrative credit panel data, we compare borrowers whose loans were frozen to borrowers whose loans were not frozen based on whether the government owned the loans. We estimate that borrowers used the new liquidity to increase borrowing on mortgages, auto loans, and credit cards rather than avoid delinquencies. The effects are concentrated among borrowers without delinquencies, who saw no change in credit scores. The results highlight an important complementarity between liquidity and credit, as liquidity increases the demand for credit even as the supply of credit is fixed.

Working Papers

Predictable Innovations in Subjective Risk Premia and Currency Returns

Abstract: Using survey data on exchange rate and interest rate expectations, this paper investigates the source of predictable currency returns by interest rate differentials. With a present value decomposition of exchange rates, I highlight that the predictable innovation in subjective currency risk premia plays a crucial role in explaining the ex-post predictability of exchange rate forecast errors, which results in predictable currency returns widely-documented in the literature. This is a novel channel of predictability not emphasized in exchange rate models featuring rational expectations or assuming investors make predictable errors for interest rates. As an illustration, I propose a reduced-form model with time-varying subjective perceptions of risk that generates predictable innovation in subjective risk premia. I further present empirical evidence that is consistent with a key property of the model—a positive relationship between subjective perceptions of risk and subjective return expectations.

Work in Progress

Casinos and Local Financial Outcomes
with Ari Anisfeld and Jordan Rosenthal-Kay