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Charles Cao

Smeal Chair Professor of Finance

Department of Finance
Smeal College of Business
338 Business Building
Pennsylvania State University
University Park, PA 16802, USA                           

 

Tel:         (814) 865 – 7891                Fax:     (814) 865 - 3362                        

E-Mail:    qxc2@psu.edu

Website:   http://www.personal.psu.edu/qxc2/cao.html

Google Scholar: Link to Charles Cao’s papers

SSRN author page for Charles Cao

Last updated:  1/15/2022

Charles Cao is The Smeal Chair Professor of Finance at the Department of Finance, the Smeal College of Business at the Pennsylvania State University. He received his Ph.D. in Finance from University of Chicago's Graduate School of Business in 1993, M.S. from University of Kentucky in 1988, and B.S. from Peking University in 1984. Professor Cao's research interests include hedge funds, mutual funds, derivative securities markets, market microstructure, and credit risk.  His research has been published in a wide range of academic journals, including the Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Management Science, Journal of Financial Markets, and Journal of Econometrics.

 

Professor Cao’s paper “Empirical Performance of Alternative Option Pricing Models” (co-authored with Gurdip Bakshi and Zhiwu Chen, Journal of Finance, 1997) is among the 50 top-cited articles of all time from the Journal of Finance. 

 

Another of his article “Price Discovery without Trading: Evidence from Nasdaq Pre-opening'' (co-authored with Eric Ghysels and Frank Hatheway, Journal of Finance, 2000) received the New York Stock Exchange Award for Best Paper on Equity Trading in 1999. 

 

Recently, his paper “Hedge Funds and Stock Price Formation” (co-authored with Yong Chen, William Goetzmann and Bing Liang, Financial Analysts Journal, 2018) received Graham and Dodd Award of Excellence in 2018.

 

Professor Cao won competitive research grants from the BNP Paribas Hedge Fund Center (2013), CFA Society (2013), the Real Estate Research Institute (2012), the Q-group (2010), the BNP Paribas Hedge Fund Center (2009), Federal Deposit Insurance Corporation-FDIC (2006-2007), and Morgan Stanley (2004).  He was also an elected Fellow of FDIC Center for Financial Research in 2006.  He serves as an editor/associate editor of Pacific-Basin Finance Journal, an associate editor of Journal of Financial Markets, Review of Derivatives Research, Review of Quantitative Finance and Accounting, and Annals of Economics and Finance.  He has taught M.B.A. and Ph.D. courses at the Smeal College of Business, Penn State University.  He also served as program chair of 2005 - 2008 China International Conference in Finance, sponsored by Tsinghua University and Sloan School of Management, MIT.

 

EDUCATION

 

PROFESSIONAL APPOINTMENTS

 

Pennsylvania State University, Smeal College of Business

 

 

EDITORSHIPS

 

HONORS, AWARDS AND GRANTS

·         The Graham and Dodd Award of Excellence, 2018

·         Best Paper Award on Capital Markets, CFA Society Toronto, NFA, 2013

·         Research Grant from the BNP Paribas Hedge Fund Center at SMU, 2013

·         Research Grant from the Real Estate Research Institute, 2012

·         Research Grant from the Q group, 2010

·         Research Grant from the BNP Paribas Hedge Fund Center at SMU, 2009

·         Fellow and Competitive Research Grant from FDIC Center for Financial Research, 2006-2007

·         Best Paper Award, The Third NTU International Conference on Economics, Finance and Accounting, 2005

·         Morgan Stanley Equity Market Microstructure Research Grant, 2004

·         New York Stock Exchange Award for Best Paper in Equity Markets, WFA, 1999

·         Competitive Paper Award in Financial Institutions, FMA, 1996

·         The University of Chicago Fellowship, 1988-1991

·         Center for Research in Security Price (CRSP) Research Award, University of Chicago, 1990

·         The University of Kentucky Fellowship, 1987-1988

 

PUBLICATIONS

 

1.      The Economics of Hedge Fund Startups: Theory and Empirical Evidence (with Grant Farnsworth and Hong Zhang), Journal of Finance, 76, 2021, 1427-1469  (PDF file)

 

2.      Information Choice, Uncertainty, and Expected Returns (with David Gempesaw and Tim Simin), Review of Financial Studies, 34, 2021, 5977-6031  (PDF file)

 

3.      Assessing Models of Individual Equity Option Prices (with Gurdip Bakshi and Ken Zhong), Review of Quantitative Finance and Accounting, 2021, 1-28  (PDF file)

 

4.      Predicting the Equity Premium with the Implied Volatility Spread (with Tim Simin and Han Xiao), Journal of Financial Markets, 2019, 1-17. (PDF file)

 

5.      Index Membership and Small Firm Financing (with Matthew Gustafson and Raisa Velthuis), Management Science, 8, 2018, 1-23. (PDF file)

 

6.      Hedge Funds and Stock Price Formation (with Yong Chen, William Goetzmann and Bing Liang, Financial Analysts Journal, 3, 2018, 54-68. (PDF file)

 

Winner of Graham and Dodd Award of Excellence, 2018

 

7.      The Decline of Informed Trading in the Equity and Options Markets (with David Gempesaw and Tim Simin), Journal of Alternative Investments, 2018, 16-29. (PDF file)

 

8.      Hedge Fund Holdings and Stock Market Efficiency (with Bing Liang, Andrew Lo and Lubomir Petrasek), Review of Asset Pricing Studies, 8, 2017, 77-116.  (PDF file)

 

9.      Return Smoothing, Liquidity Costs, and Investor Flows: Evidence from a Separate Account Platform (with Grant Farnsworth, Bing Liang and Andrew Lo), Management Science, 63, 2017, 2233-2250. (PDF file)

 

10.  Style Drift: Evidence from Small-Cap Mutual Funds (with Peter Iliev, and Raisa Velthuis), Journal of Banking and Finance, 78, 2017, 42-57.  (PDF file)

 

11.  What Is the Nature of Hedge Fund Manager Skills? Evidence from the Risk Arbitrage Strategy (with Bradley Goldie, Bing Liang and Lubomir Petrasek), Journal of Financial and Quantitative Analysis, 51, 2016, 929-957. (PDF file)

 

12.  Real Estate Risk and Hedge Fund Returns (with Brent Ambrose and Walter D’Lima), Journal of Real Estate, Finance and Economics, 52, 2016, 197-225. (PDF file)

 

13.  Liquidity Risk and Institutional Ownership (with Lubomir Petrasek), Journal of Financial Markets, 21, 2014, 76-97. (PDF file)

 

14.  Liquidity Risk in Stock Returns: An Event-study Perspective (with Lubomir Petrasek), Journal of Banking and Finance 45, 2014, 72-83. (PDF file)

 

15.  Can Hedge Funds Time Market Liquidity? (with Yong Chen, Bing Liang and Andrew Lo), Journal of Financial Economics 109, 2013, 493-516. (PDF file)

 

16.  Do Mutual Fund Managers Time Market Liquidity?, (with Tim Simin and Ying Wang), Journal of Financial Markets 16, 2013, 279-307. (PDF file)

 

17.  Pricing Credit Default Swaps with Option-Implied Volatility, (with Fan Yu and Ken Zhong), Financial Analysts Journal 67, 2011, 67-76. (PDF file)

 

18.  Derivatives do Affect Mutual Fund Returns:  Evidence from the Financial Crisis of 1998, (with Eric Ghysels and Frank Hatheway), Journal of Futures Markets 31, 2011, 629-658.  (PDF file)

 

19.  The Information Content of Option-Implied Volatility for Credit Default Swap Valuation, (with Fan Yu and Ken Zhong), Journal of Financial Markets 13, 2010, 321-343. (PDF file)

 

20.  Can Growth Options Explain the Trend in Idiosyncratic Risk? (with Tim Simin and Jing Zhao), Review of Financial Studies 21, 2008, 2599-2633. (PDF file)

 

21.  An Empirical Analysis of the Dynamic Relationship between Mutual Fund Flow and Market Return Volatility, (with Eric Chang and Ying Wang), Journal of Banking and Finance 32, 2008,  2111-2123.  (PDF file)

 

22.  The Information Content of an Open Limit Order Book, (with Oliver Hanscah and Xiaoxin Wang), Journal of Futures Markets 29, 2008, 16-41. (PDF file)

 

23.  Order Placement Strategies in a Pure Limit Order Book Market, (with Oliver Hansch and Xiaoxin Wang), Journal of Financial Research, Vol. XXXI, 2008, 113-140. (PDF file)

 

24.  Determinants of S&P 500 Index Option Returns, (with Jingzhi Huang), Review of Derivatives Research, 10, 2008, 1-38. (PDF file)

 

25.  Informational Content of Option Volume Prior to Takeovers, (with Zhiwu Chen and John Griffin), Journal of Business, 78, 2005, 1073-1109. (PDF file)

 

26.  Is Investor Misreaction Economically Significant?  Evidence from Short- and Long-term Index Options, (with Haitiao Li and Fan Yu), Journal of Futures Markets, 25, 2005, 717-752. (PDF file)

 

27.  Does Insider Trading Impair Market Liquidity: Evidence from IPO Lockup Expirations, (with Laura Field and Gordon Hanka), Journal of Financial and Quantitative Analysis 39, 2004, 25-46. (PDF file)

 

28.  Share Repurchase Tender Offers and Bid-Ask Spreads (with Heejoon Ahn and Hyuk Choe), Journal of Banking and Finance 25, 2001, 445-478. (PDF file)

 

29.  Price Discovery without Trading: Evidence from Nasdaq Pre-opening, (with Eric Ghysels and Frank Hatheway), Journal of Finance 56, 2000, 1339-1365.  (PDF file)

 

      Winner of the New York Stock Exchange Award for Best Paper in Equity Markets,     

          WFA, 1999
      Nominated for a Smith Breeden distinguished paper award, AFA, 2001.

 

30.  Do Call Prices and the Underlying Stock Always Move in the Same Direction? (with Gurdip Bakshi and  Zhiwu Chen), Review of Financial Studies 13, 2000, 549-584. (PDF file)

 

31.  Pricing and Hedging Long-Term Options,  (with Gurdip Bakshi and Zhiwu Chen), Journal of Econometrics 94, 2000, 277-318. (PDF file)

 

32.  Empirical Performance of Alternative Option Pricing Models (with Gurdip Bakshi and Zhiwu Chen), Journal of Finance 52, 1997, 2003-2049. (PDF file)

 

       On the list of the 50 top cited articles of all time from the Journal of Finance.

 

33.  Does the Specialist Matter? Differential Execution Costs and Inter-Security Subsidization on the NYSE (with Hyuk Choe and Frank Hatheway),  Journal of Finance 52,  1997, 1615-1640. (PDF file)

 

      Winner of the Competitive Paper Award in Financial Institutions, FMA, 1996.

 

34.   Decimalization and Competition Among Exchanges: Evidence from the Toronto Stock Exchange Cross-listed Securities, (with Heejoon Ahn and Hyuk Choe), Journal of Financial Markets, 1998, 51-87.  (PDF file)

 

35.  Evolution of Transitory Volatility over the Week (with Hyuk Choe), Annals of Economics and Finance, 1997, 49-78.

 

36.  What is Special about the Opening: Evidence from NASDAQ (with Hyuk Choe and Frank Hatheway, Seoul Journal of Business, 1997, 1-36.

 

37.  Tick Size, Spread and Volume, (with Heejoon Ahn and Hyuk Choe), Journal of Financial Intermediation 5, 1996, 2-22. (PDF file)

 

38.  Nonlinear Time Series Analysis of Stock Return Volatility, (with Ruey Tsay), Journal of Applied Econometrics 7, 1992, 165-185. (PDF file)

 

39.  Inequality Constraints in the Univariate GARCH Model, (with Daniel Nelson), Journal of Business & Economic Statistics 10, 1992, 229-235. (PDF file)

 

WORKING PAPERS

40.  Liquidity Characteristics of Market Anomalies and Institutional Trading (with Bing Liang, Tong Yao, and Andrew Zhang), 2022, 1-68

 

41.  Are Hedge Fund Capacity Constraints Binding?  Evidence on Scale and Competition (with Raisa Velthuis), 2021, 1-63

 

42.  Why does Hedge Fund Alpha Decrease over Time? (with Ken Zhong), 2021, 1-53

 

BOOK CHAPTERS

1. “Predicting the equity premium with the implied volatility spread” (with Tim Simin and Han Xiao) in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives, Published by World Scientific, 2022. 

 

2. “Option Pricing and Hedging Performance under Stochastic Volatility and Stochastic Interest Rates” (with Gurdip Bakshi and Zhiwu Chen), in Handbook of Financial Econometrics and Statistics, C.F. Lee, Editor, Springer Publishing, 2014.

 

3.  “Option Pricing and Hedging Performance under Stochastic Volatility and Stochastic Interest Rates” (with Gurdip Bakshi and Zhiwu Chen), in Handbook of Quantitative Finance and Risk Management, C.F. Lee, Editor, Springer Publishing, 2010.

 

4. "Liquidity Consequence of IPO Lockup Expiration" (with Laura Field and Gordon Hanka), in Focus on Financial Institutions and Services, Nova Science Publishers, Inc., 2004.

 

5.  "Empirical Performance of Alternative Option Pricing Models" (with Gurdip Bakshi and Zhiwu Chen), in Model Risk, Haymarket House, London, U.K., 2000.

 

6.  "Empirical Performance of Alternative Option Pricing Models" (with Gurdip Bakshi and Zhiwu Chen), in Options Markets, Edited by G.  Constantinides and A.  Malliaris, (Critical Writing in Financial Economics, Series Editor: Richard Roll), Edward Elgar Publishing Ltd. UK, 2000.

 

7. "Nonlinear Time Series Analysis of Stock Return Volatility", (with Ruey Tsay), in Nonlinear Dynamics, Chaos and Econometrics, John Wiley & Sons, Ltd., 1993.

 

8. "Decimalization and Competition among Exchanges: Evidence from the Toronto Stock Exchange Cross-listed Securities", (with Heejoon Ahn and Hyuk Choe), in Proceeding of NYSE Conference on Global Equity Issuance and Trading, 1997.
 

TEACHING EXPERIENCE

 

Penn State University (1993 – present)

·         Derivative Securities (Undergraduate)

·         Investments (Undergraduate)

·         Derivative Securities (MBA)

·         Theory of Financial Decisions (Ph.D.)

 

RESEARCH INTEREST

 

·         Hedge Funds, Mutual Funds, and Institutional Investment

·         Liquidity and Liquidity Risk

·         Derivative Securities

·         Market Microstructures

·         Cryptocurrencies and Blockchains

·         Credit Risk

 

PROFESSIONAL ACTIVITIES

 

Referee for the following journals:

Journal of Finance                                                       Review of Financial Studies

Journal of Financial and Quantitative Analysis          Journal of Business

Journal of Financial Markets                                      Journal of Financial Intermediation

Econometrica                                                              Journal of Econometrics

Management Science                                                  Journal of Banking and Finance

Journal of Business & Economic Statistics                Journal of Futures Markets

Journal of Empirical Finance                                      Pacific-Basin Finance Journal

Financial Management                                               Review of Derivatives Research

Review of Quantitative Finance and Accounting       Financial Review

International Economic Review                                 Canadian Journal of Economics        

Journal of International Money and Finance


Service:

 

·         Program Committee, Western Finance Association Annual Meetings, 2017-2022

·         Scientific Committee, Annual Hedge Fund and Private Equity Research Conference in Paris, 2015-2022

·         Hong Kong Research Grants Council, Social Science Panel Committee Member, 1998 – 2015

·         Program Chair, China International Conference in Finance (sponsored by MIT and Tsinghua University), 2005-2008

·         Program Committee, The Society for Financial Studies (SFS) Finance Cavalcade conference at University of Michigan, 2011

·         Program Committee, Conference on Financial Economics and Accounting at the University of Maryland, 2010

·         Graduate Council Committee, Penn State University, 2008-2010

·         Senate Committee on Research, Penn State University, 2008-2010

·         Finance Department Recruiting Committee, Penn State University, 2007-2019

·         Smeal Chair Professor Search Committee, Smeal College of Business, Penn State University, 2002-2004

·         William Elliott Chair Search Committee, Smeal College of Business, Penn State University, 2000-2004

·         Promotion and Tenure Committee, Smeal College of Business, Penn State University, 1995-1996, 2001-2002, 2016-2017, 2019-2020

·         Ph.D. Program Renewal Committee, Smeal College of Business, Penn State University, 2001

·         Program Committee, Financial Management Association, 1996, 2002, 2012, 2013

·         Competitive Paper Award Committee, Financial Management Association, 1996, 2014, 2015

·         Program Committee, New York Stock Exchange Conference on U.S. Equity Markets in Transition, 1999

Ph.D. Students Supervised (Chaired or Co-chaired):

Mike Piwowar            1996    Ph.D., Penn State University, Department of Finance

Initial employment:  Iowa State University

 

Heejoon Ahn               1996    Ph.D., Penn State University, Department of Finance

Initial employment:  City University of Hong Kong

 

Michale Chernov        2000    Ph.D., Penn State University, Department of Finance

Initial employment: Columbia University

 

Jennifer Juergens        2001    Ph.D., Penn State University, Department of Finance

Initial employment:  Arizona State University

 

Xiaoxin Beardsley      2002    Ph.D., Penn State University, Department of Finance

Initial employment:  Southern Illinois University

 

Ken Zhong                  2008    Ph.D., Penn State University, Department of Finance

Initial employment:  Rutgers University

 

Lubomir Petrasek        2011    Ph.D., Penn State University, Department of Finance

Initial employment:  Federal Reserve Board

 

Brad Goldie                2012    Ph.D., Penn State University, Department of Finance

Initial employment:  University of Kansas

 

Grant Farnsworth        2015    Ph.D., Penn State University, Department of Finance

Initial employment:  Texas Christian University

 

 Raisa Velthuis            2016    Ph.D., Penn State University, Department of Finance

Initial employment:  Villanova University

 

David Gempesaw        2019    Ph.D., Penn State University, Department of Finance

Initial employment:  Miami University

 

Stephen Owen             2021    Ph.D., Penn State University, Department of Finance

Initial employment: University of North Texas

 

Last updated:  1/15/2022