Jingrui (Victoria) Li

Jingrui (Victoria) Li

Tenure-track Assistant Professor in FinTech

Publications

Persistence of Jump-Induced Tail Risk and Limits to Arbitrage

Published in Quantitative Finance (Forthcoming), 2022

We present a novel methodology to calculate the jump-induced tail risk premium for individual stocks and examine its effect on the following-month’s returns. The existence of a premium for bearing negative jump-induced tail risk is significantly associated with negative one-month future returns. In contrast, the existence of a positive premium for bearing jump-induced tail risk has no such significant predictive power. Further, we find that the larger is the magnitude of the premium for negative jump-induced tail risk, the greater and longer-lasting is its impact on expected returns. Lastly, the observed ten-day lag taken to fully incorporate negative jump tail information into price is consistent with limits to arbitrage in the underlying stocks.

Recommended citation: Your Name, You. (2009). "Paper Title Number 1." Journal 1. 1(1).

COVID-19, volatility dynamics, and sentiment trading

Published in Journal of Banking and Finance, 2021

In this paper, we study how different categories of crucial COVID-19 information influence price dynamics in stock and option markets during the period from 01/21/20 to 01/31/21. We present a theoretical model in which the behavioral traders make perceptual errors based on the intensity of sentiment arising from different types of news. In addition to the magnitude and direction of the news and its payoffrelevance to security prices, other factors such as fear, emotion, and social media can influence the sentiment level. Using Google search data, we construct novel proxies for the sentiment levels induced by five categories of news, COVID, Market, Lockdown, Banking, and Government relief efforts. If the relative presence of behavioral traders in the stock market exceeds that in the option market, different predictions obtain for the effect of sentiment indices on jump volatility of the VIX index, the S&P 500 index, and the S&P 500 Banks index. We find that the jump component in the VIX index is increasing significantly with COVID index, Market index, Lockdown index, and Banking index. However, only COVID index and Market index increase the jump component of realized volatility of the stock indices (S&P 500 index and S&P 500 Banks index). The Government relief efforts index decreases this jump component. Banking and Lockdown index reduce jump volatility in the S&P 500 index and S&P 500 Banks index, but only with a delay of 5 days. These results are consistent with the predictions of our model.

Recommended citation: John, K. and Li, J., 2021. COVID-19, volatility dynamics, and sentiment trading. Journal of Banking & Finance, 133, p.106162. https://www.sciencedirect.com/science/article/pii/S0378426621001217?via%3Dihub

Decomposing the VIX: Implications for the predictability of stock returns

Published in Financial Review, 2020

The VIX index is not only a volatility index but also a polynomial combination of all possible higher moments in market return distribution under the risk-neutral measure. This paper formulates the VIX as a linear decomposition of four fundamentally different elements: the realized variance (RV), the variance risk premium (VRP), the realized tail (RT), and the tail risk premium (TRP), respectively. Using an innovative and nonparametric tail risk measure, we find that approximately one-third of the VIX’s formation is attributed to the TRP. In addition to VRP, RT and TRP are crucial components for predicting future returns on equity portfolios.

Recommended citation: Chow, K.V., Jiang, W., Li, B. and Li, J., 2020. Decomposing the VIX: Implications for the predictability of stock returns. Financial Review, 55(4), pp.645-668. [http://academicpages.github.io/files/paper3.pdf](https://onlinelibrary.wiley.com/doi/abs/10.1111/fire.12245)