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Investing in the Future

Dr. Xuewu Wang

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Dr. Xuewu Wang works with a student at a Bloomberg terminal.

The financial service industries have become more and more widespread and virtually reach both ordinary investors and sophisticated financial advisors and professional money managers. Dr. Xuewu Wang of the economics and finance department has been researching how to add value to the enormous and pervasive money management profession. He has already made a few important moves toward this goal by studying the options market.

Understanding Options 101

Let’s understand what an option is and what buying options involves in layman’s terms. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price on or before a certain date. Let’s say that Apple stock price is 440. I think the price of Apple is going up. Another person thinks it is going down or staying flat. He sells me a call option that says I can buy the share of Apple for 480; I give him a small amount of money. If Apple goes above 480, then I exercise the option, buy the stock at 480, and immediately sell the stock at the higher market price for a profit. If it doesn’t, I’m just out of the small amount of money that I gave up front.

Applying Research

What Dr. Wang has done is written computer programs that analyze the trading activities in the options market and spit out trading signals that can be used to guide buy/sell trades in the equity market. While much of the work seems to be programming, there exists a solid economic foundation for why trading strategies might work. Traders who are informed about the underlying stock price movement will choose to utilize their private information and trade options in many cases for various reasons. Dr. Wang aims to identify the abnormal trading activities and analyze the economic factors that pertain to the behavior of the informed option traders. His computer codes focus on extracting trading signals and back-testing the profitability of the designed trading strategies. On paper his trading strategies have proven to be quite profitable. His research has yielded an accuracy rate of 59% for long signals and an accuracy rate of 65% for short signals. Dr. Wang further explores how to refine his program codes and extract more accurate signals.

In other research he has investigated “insider trading before scheduled versus unscheduled corporate announcements to explore how corporate insiders utilize their private information in response to the time-varying liquidity trading.” This research suggests “that insiders time their trades around scheduled and unscheduled announcements to exploit the varying extent of liquidity trading.”1

Dr. Wang’s academic goal is to turn ivory tower research into tangible results, more specifically, into profits. His research has already caught the attention from the profession. For instance, he periodically receives emails from financial professionals asking for more information about his work. A former student recently contacted him informing him that his work is being discussed at Bloomberg, the world premier data, software, and market media company that delivers world economic news, stock futures and stock quotes.

Student Engagement and Teaching

Dr. Wang serves as the coordinator for the Alperin Financial Center. The Alperin Financial Center and three classrooms in Brennan Hall house 12 Bloomberg terminals. The terminals allow students to train with the financial software and hardware that they will use daily in their finance careers. Dr. Wang emphasizes that the financial world “lives and dies by Bloomberg.” He also moderates the Student Bloomberg Club. The Student Bloomberg Club manages training sessions for all club members and helps them pass the Bloomberg certification exam. This type of training, knowledge and opportunity for certification gives “students a significant advantage in the job market.”

The University has sent teams to compete in the CFA Investment Research Challenge. In this challenge “students work in teams to research and analyze a publicly traded stock — sometimes even meeting face-to-face with company management. Each team produces a research report on their assigned stock and come up with a buy, sell, or hold recommendation. The top four teams from the greater Philadelphia region may be asked to present their reports before a panel of industry veterans.”2 The last four years, University teams have placed in the final four of their competition’s division, competing against teams from Wharton, Villanova, Temple and more.

Dr. Wang and Dr. Murli Rajan team teach a Fixed Income Securities and Market class. This demanding class is open to students by invitation only. The class is divided in thirds utilizing Dr. Rajan’s expertise, Wang’s expertise, and introducing students to market experts. Speakers from J.P. Morgan, Morgan Stanley and other financial institutions come to campus and lecture on the topics of the day. This third part of the class allows students to hear from the experts in their fields. Students have the opportunity to meet potential employers, and interact with the speakers socially which develops their professional skills that can be used in career building situations. The class presents students with knowledge and experience far beyond the textbook.

Dr. Xuewu Wang’s research focuses on strengthening the understanding of the market which will allow shareholders to receive the full potential of their investment. His teaching is designed to prepare his students by strengthening their skills and understanding and preparing them for a career in the world of finance.

1 Wang, Xuewu and Lei, Qin. “Time-Varying Liquidity Trading, Private Information and Insider Trading.” European Financial Management forthcoming

2 CFA Insitute.org

Author

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Dr. Xuewu Wang, Ph.D.
Economics/Finance Department
xuewu.wang@scranton.edu
570.941.4048