2459 Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
Research Interests: asset pricing, behavioral finance
Links: Personal Website, CV
Phd, Harvard University, 2000; AB, Harvard College, 1996
Wharton: 2003-present. Previous appointments: Stern School of Business, New York University
Jessica A. Wachter is the Dr. Bruce I. Jacobs Professor in Quantitative Finance at the Wharton School of Business of the University of Pennsylvania. She is currently on leave at the Securities and Exchange Commission where she serves as Chief Economist and Director of the Division of Economic and Risk Analysis. She holds a PhD in Business Economics and an undergraduate degree in Mathematics from Harvard University. She currently serves on the board of the Western Finance Assocation, and as an associate editor of Quantitative Economics. Previously, she served as associate editor at the Review of Financial Studies and the Journal of Economic Theory and as a board member of the American Finance Association. Her research interests include asset pricing models that incorporate rare events and behavioral finance. She has published numerous papers in the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, and other journals.
Jessica Wachter and Michael Kahana, Associative Learning and Representativeness.
Jessica Wachter and Michael Kahana (Working), A retrieved-context theory of financial decisions.
Abstract: Studies of human memory indicate that features of an event evoke memories of prior associated contextual states, which in turn become associated with the current event's features. This mechanism allows the remote past to influence the present, even as agents gradually update their beliefs about their environment. We apply the context framework from the memory literature to four problems in asset pricing and portfolio choice: over-persistence of beliefs, providence of financial crises, price momentum, and the impact of fear on asset allocation. These examples suggest a recasting of neoclassical rational expectations in terms of beliefs as governed by principles of human memory.
Mehran Ebrahimian and Jessica Wachter (Working), Risks to Human Capital.
Abstract: Do financing constraints deepen recessions? To help answer this question, we build a model with inalienable human capital, in which investors finance individuals who can potentially become skilled. Though investment in skill is always optimal, it does not take place in some states of the world, due to moral hazard. In intermediate states of the world, individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem, combined with risk aversion of individuals and outside investors, amplifies the equity premium, lowers the riskfree rate, and leads to disaster states that fall especially heavily on some agents but not on others. We show that the possibility of disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium.
Maxwell Miller, James Paron, Jessica Wachter (Working), Sovereign default and the decline in interest rates.
Abstract: Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk, which we argue is more consistent with the long-run nature of the interest rate decline. We show that a model with investment, inventory storage, and sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the recent reduction in investment and output growth coinciding with the binding zero lower bound.
Jessica Wachter and Yicheng Zhu (2022), A Model of Two Days: Discrete News and Asset Prices, Review of Financial Studies, 35 (5), pp. 2246-2307.
Abstract: Empirical studies demonstrate striking patterns in stock returns related to scheduled macroeconomic announcements. A large proportion of the total equity premium is realized on days with macroeconomic announcements. The relation between market betas and expected returns is far stronger on announcement days as compared with nonannouncement days. Finally, these results hold for fixed-income investments as well as for stocks. We present a model in which agents learn the probability of an adverse economic state on announcement days. We show that the model quantitatively accounts for the empirical findings. Evidence from options data provides support for the model’s mechanism.
Sangmin Oh and Jessica Wachter (2022), Cross-sectional Skewness, Review of Asset Pricing Studies, 12 (1), pp. 155-198.
Ulrike Malmendier and Jessica Wachter, “Memory of Past Experiences and Economic Decisions”. In Oxford Handbook of Human Memory, edited by Michael Kahana Anthony Wagner, (2022)
Abstract: In traditional economic models, memories of past experiences affect choices only to the extent that they represent information. We review recent advances in economic research that have introduced a role for long-lasting effects of personal past experiences and the memory thereof into economics. We first document the empirical evidence on long-lasting experience effects in finance and economics. We then discuss the main approaches the literature has taken in incorporating psychological theories of long-lasting memories into economics. Our treatment suggests a role for models of memory in accounting not only for micro-level phenomena, but for anomalies within asset pricing and macroeconomics more broadly.
Hongye Guo and Jessica Wachter (Working), “Superstitious” Investors.
Jessica Wachter and Yicheng Zhu (Work In Progress), Learning with rare disasters.
Abstract: Financial crises appear to have long-lasting effects, even after the crisis itself has past. This paper offers a simple explanation through Bayesian learning from rare events. Agents face a latent and time-varying probability of economic disaster. When a disaster occurs, learning results in greater effects on asset prices because agents update their probability of future disasters. Moreover, agents' belief that the disaster risk is high can rationally persist for years, even when it is in fact low. We generalize the model to allow for a noisy signal of the disaster probability. This generalized model explains excess stock market volatility together with negative skewness, effects that previous models in the literature struggle to explain.
Joao F. Gomes, Marco Grotteria, Jessica Wachter (Working), Foreseen Risks.
Abstract: Financial crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value varies over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of recent unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.
This course provides an introduction to the theory, the methods, and the concerns of corporate finance. The concepts developed in FNCE 1000 form the foundation for all elective finance courses. The main topics include: 1) the time value of money and capital budgeting techniques; 2) uncertainty and the trade-off between risk and return; 3) security market efficiency; 4) optimal capital structure, and 5) dividend policy decisions. ACCT 1010 + STAT 1010 may be taken concurrently.
This course will cover methods and topics that form the foundations of modern asset pricing. These include: investment decisions under uncertainty, mean-variance theory, capital market equilibrium, arbitrage pricing theory, state prices, dynamic programming, and risk-neutral valuation as applied to option prices and fixed-income securities. Upon completion of this course, students should acquire a clear understanding of the major principles concerning individuals' portfolio decisions under uncertainty and the valuations of financial securities. In addition to the prerequisites one of the following courses is recommended FNCE 205; BEPP 250; MATH 360; STAT 433
This course will cover methods and topics that form the foundations of modern asset pricing. These include: investment decisions under uncertainty, mean-variance theory, capital market equilibrium, arbitrage pricing theory, state prices, dynamic programming, and risk-neutral valuation as applied to option prices and fixed-income securities. Upon completion of this course, students should acquire a clear understanding of the major principles concerning individuals' portfolio decisions under uncertainty and the valuations of financial securities. FNCE 7050 is recommended but not required.
Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. Applications for FNCE 8990 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. ISP's must be supervised by a Standing Faculty member of the Finance Department.
The objective of this course is to undertake a rigorous study of the theoretical foundations of modern financial economics. The course will cover the central themes of modern finance including individual investment decisions under uncertainty, stochastic dominance, mean variance theory, capital market equilibrium and asset valuation, arbitrage pricing theory, option pricing, and incomplete markets, and the potential application of these themes. Upon completion of this course, students should acquire a clear understanding of the major theoretical results concerning individuals' consumption and portfolio decisions under uncertainty and their implications for the valuation of securities.
In normal years, investing in equities can reap extremely healthy returns. But not all of that ROI is based on what you'd think. Some of it is rooted in the fear that everything could go terribly, unexpectedly wrong, Wharton's Jessica Wachter says. …Read MoreKnowledge at Wharton - 6/29/2015
If you’re a superstitious person, it can be easy to understand how superstitions would creep into your business practices. Does this apply to investing, though, when experts believe that dividend growth is predictable? Wharton Finance Prof. Jessica Wachter has done research in attempting to answer this question. She spoke to…Wharton Stories - 12/30/2019