Jessica Wachter

Jessica Wachter
  • Richard B. Worley Professor of Financial Management, Professor of Finance

Contact Information

  • office Address:

    2459 Steinberg-Dietrich Hall
    3620 Locust Walk
    Philadelphia, PA 19104

Research Interests: asset pricing, financial econometrics, portfolio choice

Links: CV, Personal Website



Phd, Harvard University, 2000; AB, Harvard College, 1996

Academic Positions Held

Wharton: 2003-present. Previous appointments: Stern School of Business, New York University

Jessica Wachter is the Richard B. Worley Professor of Financial Management at the Wharton School of Business of the University of Pennsylvania. She holds a PhD in Business Economics and an undergraduate degree in Mathematics from Harvard University. She is 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.

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  • Mehran Ebrahimian and Jessica Wachter (Working), Risks to Human Capital.

    Abstract: What is the connection between financing constraints and the equity premium? To answer this question, we build a model with inalienable human capital, in which investors decide to 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 other states of the world, individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem and the resultant financing friction leads to a realistic equity premium, a low risk riskfree rate, and severe negative consequences for distribution of wealth and for welfare. When investment fails to take place, the economy enters an endogenous disaster state. We show that the possibility of these disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium.

  • Jessica Wachter, What is the risk of the debt tax shield?.

    Abstract: What is the risk of the debt tax shield? Berk and DeMarzo (2017) argue that it is the same as the risk of the assets of the firm, under the assumption of a constant debt-to-value ratio. Ross et al. (2016), on the other hand, state that its the same as the risk of the debt. The assumptions imply two different formulas for the relation between the unlevered cost of capital and the equity and debt on the levered firm. In this note, I provide a counterexample to the claim that the risk of the tax shield equals the risk of the firm when the debt-to-value ratio is constant. I give a class of examples in which the risk of the tax shield is strictly between the risk of the debt and the risk of the firm, and discuss conditions under which the formula of Berk and DeMarzo (2017) will be a good approximation.

  • 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 (2019), Cyclical Dispersion in Expected Defaults, Review of Financial Studies, 32 (4), pp. 1275-1308.

    Abstract: A growing literature shows that credit indicators forecast aggregate real outcomes. While the literature has proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes.

  • Jessica Wachter and Yicheng Zhu (Working), The macroeconomic announcement premium.

  • 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.

  • Sangmin Oh and Jessica Wachter (Working), Cross-sectional Skewness.

  • Hongye Guo and Jessica Wachter (Working), “Superstitious” Investors.

  • 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.

  • Sang Byung Seo and Jessica Wachter (2019), Option Prices in a Model with Stochastic Disaster Risk, Management Science.

    Abstract: Contrary to well-known asset pricing models, volatilities implied by equity index options exceed realized stock market volatility and exhibit a pattern known as the volatility skew.  We explain both facts using a model that can also account for the mean and volatility of  equity returns.   Our model assumes a small risk of economic disaster that is calibrated based on  international data on large consumption declines.   We allow the disaster probability to be stochastic, which turns out to be crucial to the model's ability both to match equity volatility and to reconcile option prices with macroeconomic data on disasters.  


Past Courses


    This course provides an introduction to the theory, the methods, and the concerns of corporate finance. The concepts developed in FNCE 100 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. During the Fall semester there are honors sections of FNCE 100 offered. The seats in the honors sections are awarded through an application process. Please go to: for additional information. Corporate Finance is a Core course and must be taken for a grade. ACCT 101 + STAT 101 may be taken concurrently.


    This course serves as an introduction to business finance (corporate financial management and investments) for both non-majors and majors preparing for upper-level course work. The primary objective is to provide the framework, concepts, and tools for analyzing financial decisions based on fundamental principles of modern financial theory. The approach is rigorous and analytical. Topics covered include discounted cash flow techniques; corporate capital budgeting and valuation; investment decisions under uncertainty; capital asset pricing; options; and market efficiency. The course will also analyze corporate financial policy, including capital structure, cost of capital, dividend policy, and related issues. Additional topics will differ according to individual instructors.


    This course is intended for students with prior knowledge of finance or with strong analytical backgrounds. Together with the pre-term preparation course (FNCE604) the foundation for subsequent courses in corporate finance, corporate valuation, investments, and financial derivatives. Its purpose is to develop a framework for analyzing a firm's investment and financial decisions. This course will start where FNCE604 ends. More precisely, it will provide an introduction to capital budgeting techniques under uncertainty, asset valuation, the operation and efficiency of capital markets, the optimal capital structure and dividend policy of the firm and options. In short, it will cover all the topics of a typical semester-long finance introductory class in six weeks. This course assumes that students are familiar with the material covered in FNCE 604. As a result, it is only available to those students who successfully passed the Finance Placement Exam at the end of the pre-term. This course is not suitable for students new to finance and with limited analytical backgrounds. This course is hard. The pace is fast and it requires a major investment of time and effort outside class. Only first year students can enroll in this class after Fall 2019.


    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.

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In the News

How Superstition Triggers Stock Price Volatility

Superstition-driven investment behavior is often responsible for the high volatility in stock prices, according to new Wharton research.

Knowledge @ Wharton - 2020/01/14
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