Professor of Finance
Paul Gao first joined the University of Notre Dame in 2007, where he is currently the Viola D. Hank Associate Professor of Finance at the University of Notre Dame. He was an associate professor of finance at the Hong Kong University of Science and Technology (HKUST) Business School, and a visiting senior economist at the Shanghai Stock Exchange (SHSE). He has published in the Journal of Finance, the Review of Financial Studies, and the Journal of Financial Economics. He is the past winner of the prestigious Fama-DFA Prize, Cowen Memorial Prize, CQA Research Award, and Q-Group Research Award. He serves as the associate editors for the Pacific Basin Finance Journal, and Financial Management. He earned his doctoral degree in Financial Economics from Kellogg School of Management, Northwestern University in 2007.
“Do Hedge Funds Exploit Rare Disaster Concerns?” with George P. Gao and Zhaogang Song, Review of Financial Studies 2018.
We find hedge funds that have higher return covariation with a disaster concern index, which we develop through out-of-the-money puts on various economic sector indices, earn significantly higher returns in the cross-section. We provide evidence that these funds’ managers are more skilled at exploiting the market’s ex ante rare disaster concerns (SEDs), which may not be associated with disaster risk. In particular, high-SED funds, on average, outperform low-SED funds by 0.96% per month, but have less exposure to disaster risk. They continue to deliver superior future performance when SEDs are estimated using the disaster concern index purged of disaster risk premiums and have leverage-managing and extreme market-timing abilities.
“Global Relation Between Financial Distress and Equity Returns” with Christopher A. Parsons and Jianfeng Shen, Review of Financial Studies 2018.
This study explores the distress risk anomaly—the tendency for stocks with high credit risk to perform poorly—among 38 countries over two decades. We find a strongly negative relationship between default probabilities and equity returns concentrated among low-capitalization stocks in developed countries in North America and Europe. Although risk-based explanations provide a poor account of these patterns, several pieces of evidence point to a behavioral interpretation, suggesting that stocks of firms in financial distress are temporarily overpriced.