The work performed so far has followed the time line proposed in the original grant vproposal. This has led to the following main results, presented in 4 different papers.
1/ The paper "Equilibrium Data Mining and Data Abundance", accepted for publication in the Journal of Finance and corresponding to Work Package 1 in the ERC proposal,provides a theory of data mining by quant funds. It predicts that as new datasets become available, the dispersion of quant funds' performance increases and the capital allocated to quant funds eventually decreases.
2/ The paper "Displaced by Big Data: Evidence from Active Fund Managers", corresponding to Work Package 2 in the ERC proposal, tests one implication of the theory developed in "Work Package 1. Namely, this theory implies that the introduction of new alternative data should make stock prices more informative about future cash-flows and therefore reduces the performance of asset managers who lack the skills to use this data (because their investment style relies more on qualitative analysis and judgement). Consistent with this prediction, we show that the introduction of new alternative data (from satellite images) covering retailers in the U.S. has a negative effect on the performance of funds holding these stocks and especially so when funds rely on traditional sources of expertise (e.g. geographical location or industry expertise).
3/ In the paper "Does alternative data improve financial forecasting? The horizon effect", accepted for publication in the Journal of Finance and corresponding to Work Package 3 in the ERC proposal, we show empirically that the rise of alternative data (e.g. social media data, geolocation data, or satellite imagery data) has triggered an improvement in the quality of security analysts' short-term earnings' forecasts and a decline in the quality of their long-term earnings' forecasts. The paper also proposes an economic mechanism (based on the optimal allocation of efforts between the tasks of forecasting short-term and long-term outcomes) that explains this observation.
4/ In the paper "The horizon of investors’ information and corporate investment", corresponding to Work Package 4 in the ERC proposal, we show empirically that the dynamics of security analysts' forecasts found in Work Package 3, can lead to a decline in the share of long-term corporate investment in the economy. Indeed, we show empirically, that firms with long-term investment projects reduce their investment when the quality of security analysts' long term earnings' forecasts declines. We also show that firms allocate relatively less capital to divisions investing in long-term projects when the quality of security analysts' long-term forecasts declines. These observations are consistent with a theory in which the information produced by the stock market about firms' cash-flows at different horizons influences managers' investment decisions.
