Two sets of academics were named co-winners of the $100,000 AQR Insight Award, sponsored by AQR Capital Management, for their papers on the ability of contrast effects to distort market pricesand on size discovery as a way to improve trading efficiency.
Samuel M. Hartzmark, assistant professor of finance, and Kelly Shue, associate professor of finance, both at the University of Chicago Booth School of Business, were recognized for their research paper, “A Tough Act to Follow: Contrast Effects in Financial Markets.”
Darrell Duffie, Dean Witter distinguished professor of finance at the Graduate School of Business and professor by courtesy, Department of Economics, at Stanford University, and Haoxiang Zhu, assistant professor of finance, Sloan School of Management, Massachusetts Institute of Technology, were honored for their research paper, “Size Discovery.”
The four academics will share the prize money.
The winners were selected from entries of more than 200 papers, all unpublished before Dec. 15 as required for the competition.
The award, in its fifth year, recognizes the most significant and innovative academic research that offers practical applications for investors, said David Kabiller, founding principal at AQR Capital Management, in a news release.
Mr. Hartzmark and Ms. Shue describe a contrast effect as occurring “when the value of a previously observed signal inversely biases perception of the next signal,” according to the abstract to their paper. “We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday's earnings surprise was bad and less impressive if yesterday's surprise was good.”
Messrs. Duffie and Zhu call size discovery “the use of trade mechanisms by which large quantities of an asset can be exchanged at a price that does not respond to price pressure,” according to the abstract of their paper. “We show that augmenting a price-discovery mechanism with a size-discovery mechanism improves allocative efficiency.”
The other finalists, who receive honorable mentions in the award competition but no prize money, are:
- Stefano W. Giglio and Bryan T. Kelly, both associate professors of finance at the Booth school, for their paper, “Excess Volatility: Beyond Discount Rates”;
- Mikhail Chernov, professor of finance; Brett R. Dunn, Ph.D. candidate; and Francis A. Longstaff, the Allstate professor of insurance and finance; all of the Anderson School of Management, University of California, Los Angeles, for their paper, “Macroeconomic-driven prepayment risk and the valuation of mortgage-backed securities”; and
- Erik Stafford, the John A. Paulson professor of business administration; Harvard Business School, for his paper, “Replicating Private Equity with Value Investing, Homemade Leverage and Hold-to-Maturity Accounting.”
An AQR committee made up of members of the firm selected the winners.
The recognized papers are posted on AQR's website.