Top Forty Hits

Finance prof Xiaoyan Zhang records numerous research honors

Xiaoyan Zhang likes to think of research as putting together a puzzle. For Zhang, who was named one of the 40 best business school professors in the world under 40 by the website Poets and Quants, those puzzle pieces involve many aspects of finance, including portfolio management, short selling and international finance. But all of her award-winning work boils down to one question — what is making money?

Zhang, associate professor of finance, won the William F. Sharpe Award for the best paper published in the Journal of Financial and Quantitative Analysis for her article on volatility. Zhang’s team used a global approach to study stock market volatility in 23 countries, including the U.S., through the scope of market development, cash flow and risk.

Xiaoyan Zhang

Krannert's Xiaoyan Zhang was named one of the top biz school professors under 40 by the website Poets and Quants. (Photo by Mark Simons)

“It is one of those papers nobody has done before,” Zhang says. “We found that the volatility levels of individual firms were driven by their country’s development and also related to firm-level financial ratios.”

In addition to this paper, Zhang has done a series of papers on volatilities. For instance, Zhang and her team examined the relationship between the returns and volatilities of individual firms in the U.S. and other major countries. Their surprising discovery — those with high firm-level uncertainties or volatilities produced low returns.

“Most people would think the opposite were true, that higher-risk firms would produce higher returns for investors,” Zhang says. “Now we are trying to figure out why it happens. That’s what nobody knows yet.”

The paper advised risk-takers that going after a volatile stock may not produce the great return on investment they are expecting. Although researchers do not have the answer to why it happens, Zhang says one thing was very clear from their research — the high volatility-low return relationship is seen in all developed countries after overall market components are taken out of the equation.

Along with studying volatility, Zhang also researches and writes about financial regulations and policy changes, particularly those related to short selling. Short sellers are investors who borrow shares from a broker and then sell them to another buyer. The first investor must then buy those shares back at some point and return them to the lender.

Although economists mostly consider short sellers to be the “good guys,” unearthing overvalued companies and contributing to efficient stock prices, they are often the scapegoats when share prices fall sharply. Zhang’s award-winning research into short sellers examined the effects on the market when U.S. regulators imposed temporary tight new regulations on short sellers in 2008 when the financial crisis worsened.

“Our research found that this approach may not have been the best one to help the overall market,” Zhang says. “It is not clear that regulators achieved their goals of stabilizing the market, but it is clear that market quality was severely compromised. The benefits would need to be very large to offset the high costs that traders experienced because of large transaction costs and elevated volatility.”

Zhang says she particularly enjoys research in these areas because she can share her findings with Krannert students to help them better understand the many factors that affect the financial markets. That research/teaching interaction has paid off; Zhang is one of just a handful of Krannert faculty members to achieve a perfect 10.0 out of 10.0 on a multi-part student evaluation.

“It is great because I have been teaching finance for years, but I am also in the market through my research,” Zhang says. “I want to help people understand how to make money with investments, the risk they will encounter in the process, how the markets really work and examine how governments and investors should interact in the marketplace.”