Finance professor honored for outstanding stock market research

Baolian Wang, Bank of America Associate Professor of Finance, is the second prize recipient of the Roger F. Murray prize.

Every year, the Institute for Quantitative Research in Finance, or Q Group, awards three prizes to individuals who present outstanding financial research at the Q Group’s seminars. For the originality, usefulness and excellence of his work, as well as his presentation skills, Wang was honored with second place.

“I am excited and extremely honored to receive this award,” Wang said. “This is a very prestigious award in finance. The past awardees include many of the greatest names in finance academia.”

Wang’s award-winning paper, “Prospect Theory and Stock Market Anomalies,” has been published in the Journal of Finance, one of the world’s top journals in finance. The paper addresses stock market anomalies, using prospect theory to evaluate risk and make quantitative predictions of an asset’s average return.

“In this paper, we present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 stock market anomalies,” Wang explained. “The model makes quantitative predictions about an asset’s average return based on empirical estimates of the asset’s return volatility, return skewness and past capital gain. We find that the model can help explain a majority of the 23 anomalies.”

Many traditional finance theories are unable to explain the anomalies, or patterns and characteristics, that predict stock return. Wang’s paper fills the gap, applying prospect theory, a theory that assumes individuals will make decisions based on perceived gains rather than perceived losses, to explain these anomalies. Through his detailed analysis, he has proved his theory as a useful tool in confronting the stock market.

“In summary, our paper accomplishes three things,” Wang said. “First, by way of a new model of the cross-section, it answers the long-standing question, ‘What does prospect theory predict for stock market anomalies?’ Second, by helping to explain a majority of 23 prominent anomalies, it offers a psychological account of multiple stock market puzzles.

“Finally, to our knowledge, our paper marks the first time a ‘behavioral’ model of either beliefs or preferences has been used to make quantitative predictions about a wide range of anomalies.”

Wang joined the University of Florida in 2018 as the Bank of America Associate Professor of Finance. His areas of research are empirical asset pricing, behavioral finance, investor behavior, fintech and the Chinese economy. His research has been published in leading academic journals, including Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Management Science, Review of Finance, Critical Finance Review and Strategic Management Journal. Prior to joining UF, he was an assistant professor at Fordham University from 2014 to 2018. Wang received his bachelor’s and master’s degrees from the School of Economics and Management at Tsinghua University before receiving his Ph.D. from the Hong Kong University of Science and Technology.