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 currently an associate editor at the Review of Financial Studies, the Journal of Economic Theory, and Mathematics and Financial Economics. Previously, she served on the board of directors of the American Finance Association. She has been a Research Associate of the National Bureau of Economic Research since 2008.  Her research interests include asset pricing models that incorporate rare events, models of portfolio allocation, and financial econometrics.

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  • 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.  

  • Mete Kilic and Jessica Wachter (2018), Risk, unemployment, and the stock market: A rare-event-based explanation of labor market volatility, Review of Financial Studies, 31 (12), pp. 4762-4814.

    Abstract: What is the driving force behind the cyclical behavior of unemployment and vacancies? What is the relation between job-creation incentives of firms and stock market valuations? We answer these questions in a model with  time-varying risk, modeled as a small and variable probability of an economic disaster. A high probability implies greater risk and lower future growth, lowering the incentives of firms to invest in hiring.  During periods of high risk, stock market valuations are low and  unemployment rises.  The model thus explains volatility in equity and labor markets, and the relation between the two.  

  • Sang Byung Seo and Jessica Wachter (2018), Do rare events explain CDX tranche spreads?, Journal of Finance, 73 (5), pp. 2343-2383.


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.


    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 Disaster Risk Is Priced into the Stock Market

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.

Knowledge @ Wharton - 2015/06/29
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