Paul C. Tetlock
Papers

Research Papers:

• Tetlock, Paul C., 2007, Giving Content to Investor Sentiment: The Role of Media in the Stock Market, Journal of Finance 62, 1139-1168.
  
  [featured in the Economics Focus column of the Economist magazine]
  [and in the Best of Business section of US News & World Report online and in print]
  
  Abstract: I quantitatively measure the nature of the media's interactions with the stock market using daily content from a popular Wall Street Journal column. I find that high media pessimism predicts downward pressure on market prices followed by a reversion to fundamentals, and unusually high or low pessimism predicts high market trading volume. These results and others are consistent with theoretical models of noise and liquidity traders. However, the evidence is inconsistent with theories of media content as a proxy for new information about fundamental asset values, as a proxy for market volatility, or as a sideshow with no relationship to asset markets.

• Tetlock, Paul C., Maytal Saar-Tsechansky, and Sofus Macskassy, 2007, More Than Words: Quantifying Language to Measure Firms' Fundamentals, Journal of Finance, forthcoming.
  
  Abstract: We examine whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns. Our three main findings are: (1) the fraction of negative words in firm-specific news stories forecasts low firm earnings; (2) for a brief period of time, firms' stock prices underreact to the information embedded in negative words; and (3) the earnings and return predictability from negative words is largest for the stories that focus on firms' fundamentals. Together these findings suggest that linguistic media content captures otherwise hard-to-quantify aspects of firms' fundamentals, which investors quickly incorporate in stock prices.

• Does Liquidity Affect Securities Market Efficiency?
  
  [to be presented at the 2008 American Economics Association meetings]
  
  Abstract: I investigate the impact of liquidity on market efficiency using data from short-horizon binary outcome securities traded on an online exchange. I show that the most liquid securities markets exhibit significant pricing anomalies, such as overpricing low probability events and underpricing high probability events, whereas less liquid markets do not exhibit these anomalies. I also find that the prices of illiquid securities converge more quickly toward their terminal cash flows. These results are consistent with the idea that liquidity is a proxy for non-informational or noise trading, which can impede market efficiency; but they are inconsistent with models in which increases in liquidity have no impact or a favorable impact on efficiency.

• Optimal Liquidity Provision for Decision Makers
  
  (joint with Robert Hahn)
  
  Abstract: Although the prices in financial markets play an important role in improving allocative efficiency in the real economy, few models of securities markets explicitly incorporate resource allocation decisions. In this paper, we study the equilibrium in a securities market when the market price provides valuable information that can improve allocative efficiency. We show that a decision maker will subsidize liquidity in an illiquid securities market to gather valuable information about her decision payoffs. We also show that a decision maker’s liquidity subsidy improves expected social welfare by enhancing allocative efficiency, but does not induce the socially optimal level of information acquisition. Finally, we demonstrate that the mere act of linking the allocation decision to the market price will typically enhance liquidity in the securities market. Overall, our results highlight the potential of using securities markets for information to improve decisions.

• How Efficient Are Information Markets? Evidence from an Online Exchange
  
  Abstract: Do observed inefficiencies in betting markets generalize to real financial markets? Evidence from an online exchange with characteristics of both types of markets suggests they do not. This study replicates some known anomalies in sports wagering markets on the online exchange, such as overreaction to news. The observed inefficiencies do not generalize to other wagering markets, such as financial markets, even though both markets have similar liquidity, volume and contractual structure. These results suggest researchers should proceed with caution before drawing analogies between sports wagering markets and real financial markets. They also show that financial markets can be efficient despite numerous obstacles to arbitrage.

Policy Papers:

• Statement on Prediction Markets
  
  (Robert W. Hahn and Paul C. Tetlock co-authored with four economics Nobel laureates and other leading academics)
  [Bob Hahn and I discuss the statement in a Wall Street Journal Op-Ed column]
  
  Abstract: We argue that U.S. regulators should lower barriers to the creation and design of prediction markets by creating a safe harbor for certain types of small stakes markets. We believe our proposed change has the potential to stimulate innovation in the design and use of prediction markets throughout the economy, and in the process to provide information that will benefit the private sector and government alike.

• Hahn, Robert W. and Paul C. Tetlock, 2006, “A New Approach for Regulating Information Markets,” Journal of Regulatory Economics 29(3): 265-281.


[we make a related argument in a New York Times Op-Ed column]


• Hahn, Robert W., Paul C. Tetlock and Jason K. Burnett, 2000, “Should You Be Allowed To Use Your Cellular Phone While Driving?” Regulation 23(3): 46-55.

Research in Progress:

• How Valuable Are Free Stock Tips?
  
  (joint work with Bin Gu, Prabhudev Konana, Alex Liu, Balaji Rajagopalan, and Joydeep Ghosh)
  
  We explore whether and why freely available advice can predict stock returns.

Policy Books:

• Hahn, Robert W. and Paul C. Tetlock eds., 2006, “Information Markets: A New Way of Making Decisions,” AEI-Brookings Press.
  
  [mentioned in our New York Times Op-Ed column]
  
  Information markets are markets for contracts that yield payments based on the outcome of an uncertain future event. They are used to predict a wide range of events, from presidential elections to printer sales. These markets frequently outperform both experts and opinion polls, and many scholars believe they have the potential to revolutionize policymaking. At the same time, they present a number of challenges.
  
  This collection of essays provides a state-of-the-art analysis of the potential impact of information markets on public policy and private decision-making. The authors assess what we really know about information markets, examine the potential of information markets to improve policy, lay out a research agenda to help improve our understanding of information markets, and explain how we might systematically improve the design of such markets.





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