Ran Shi

Assistant Professor of Finance, University of Colorado Boulder


Research Interest: Asset Pricing, International Finance, Financial Economics

Curriculum Vitae

Working Papers

Forecasting Crashes with a Smile (with Ian Martin)
We introduce a framework that uses option prices to deliver upper and lower bounds on the probability of crash in an individual stock, and argue based on a priori considerations that the lower bound should be close to the true crash probability. Empirical tests support this prediction in and out of sample. We horse-race the lower bound against a range of characteristics proposed by the prior literature. The lower bound is highly statistically significant, with a t-statistic above five, and is an order of magnitude more economically significant than any of the characteristics, in the sense that a one standard deviation increase in the lower bound raises the predicted probability of a crash by 3 percentage points, whereas a one standard deviation change in the next most important predictor (a measure of short interest) moves the predicted probability of a crash by only 0.3 percentage points.

Model Uncertainty in the Cross Section (with Jiantao Huang)
We develop a transparent Bayesian framework to quantify uncertainty in linear stochastic discount factor (SDF) models. In our framework, model probabilities increase with in-sample Sharpe ratios and decrease with model dimensions. The entropy of model probabilities represents model uncertainty. We provide theoretical guarantees to ensure consistent interpretation of our model uncertainty measure, even for misspecified models with omitted factors. Empirically, surging model uncertainty coincides with major market events. Combining SDF models improves mean-variance efficiency only during periods of high model uncertainty. Positive shocks to model uncertainty predict persistent outflows from US equity funds and inflows to treasury funds.

A Quantitative Model of Limited Arbitrage in Currency Markets: Theory and Estimation
I develop and estimate a limits-to-arbitrage model to quantify the effects of financial constraints, arbitrage capital, and hedging demands on asset prices and their deviations from frictionless benchmarks. Using foreign exchange derivatives price and quantity data, I find that varying financial constraints and hedging demands contribute to 46 and 35 percent variation in the deviations from covered interest parity of one-year maturities. While arbitrage capital fluctuation explains the remaining 19 percent of variation on average, it periodically stabilizes prices when the other two forces exert disproportionately large impacts. The model features a general form of financial constraints and produces a nonparametric arbitrage profit function. I unveil shapes and dynamics of financial constraints from estimates of this function.


The Spread of COVID-19 in London: Network Effects and Optimal Lockdowns (with Christian Julliard and Kathy Yuan) Journal of Econometrics (2023), 235:2:2125-2154
We generalise a stochastic version of the workhorse SIR (Susceptible-Infectious-Removed) epidemiological model to account for spatial dynamics generated by network interactions. Using the London metropolitan area as a salient case study, we show that commuter network externalities account for about 42% of the propagation of COVID-19. We find that the UK lockdown measure reduced total propagation by 44%, with more than one third of the effect coming from the reduction in network externalities. Counterfactual analyses suggest that: the lockdown was somehow late, but further delay would have had more extreme consequences; a targeted lockdown of a small number of highly connected geographic regions would have been equally effective, arguably with significantly lower economic costs; targeted lockdowns based on threshold number of cases are not effective, since they fail to account for network externalities.


FNCE 3030 - Investment and Portfolio Management (Spring 2023, Fall 2023)