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  Issue 28 | Archive August 2016

Prof. Liu Hong of Washington University in St. Louis Talks at RMI

In the month of June Prof. Liu Hong, Professor of Finance at Washington University in St. Louis (WUSTL) conducted two research seminars at RMI for an audience that consisted of researchers and industry professionals.

The first seminar titled, ¡°A Portfolio Rebalancing Theory of Disposition Effect¡± was held on 3 June 2016. In this seminar Prof. Liu discussed the disposition effect, which is the tendency of investors to sell winners while holding on to losers. He mentioned that although this effect has been extensively documented, mostly behavioral explanations of the disposition effect dominate the literature. Given this his joint work with Prof. Min Dai of National University of Singapore and Dr. Jing Xu of Renmin University of China, develops a portfolio rebalancing model with transaction costs to explain the disposition effect. He summarized that their findings indicate that almost all of the effect¡¯s patterns found in existing literature are consistent with the optimal trading strategies implied by their model. And the results reflected were with or without capital gains. ¡°Selling winners that tend to subsequently outperform held losers can be optimal,¡± concluded Prof. Liu, who has been Academic Director of the Master of Science in Finance Program at WUSTL since 2008.

On 10 June 2016, Prof. Liu held the second research seminar at RMI titled, ¡°Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets.¡± This seminar was based on Prof. Liu¡¯s joint work with Dr. Yajun Wang from University of Maryland, in which they study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets. In this scenario, they find the market makers have substantial authority. Their research findings show that with or without information asymmetry, short-sale constraints decrease bid, bid depth and trading volume, but increase bid-ask spread and its volatility. If market makers are risk averse, short-sale constraints also increase and decrease ask depth. Furthermore, the impact of short-sale constraints can rise with market transparency.

Prof. Liu¡¯s research areas include optimal consumption and investment with frictions, asset pricing, and market microstructure. He has published in Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Economic Theory, and other leading academic journals. He is the recipient of Management Science Distinguished Service Award (2013), TCFA Best Paper in Investment (2013), and TCW Best Paper Award (2011), among others. Prof. Liu has also been on the editorial board of top international journals, including Review of Finance and Management Science.

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Editor: Shivani Nakhare (rminsr@nus.edu.sg)