Jessica Wachter

Jessica Wachter
  • Dr. Bruce I. Jacobs Professor in Quantitative Finance, Professor of Finance

Contact Information

  • office Address:

    2459 Steinberg-Dietrich Hall
    3620 Locust Walk
    Philadelphia, PA 19104

Research Interests: asset pricing, behavioral finance

Links: Personal Website, CV

Overview

Education

Phd, Harvard University, 2000; AB, Harvard College, 1996

Academic Positions Held

Wharton: 2003-present. Previous appointments: Stern School of Business, New York University

Jessica A. Wachter is the Dr. Bruce I. Jacobs Professor in Quantitative Finance at the Wharton School of the University of Pennsylvania. From May 2021 to January 2025, she served as Chief Economist and Director of the Division of Economic and Risk Analysis (DERA) at the U.S. Securities and Exchange Commission. In that role, she led a 190-person division responsible for economic analysis in support of Commission rulemaking, enforcement, and market oversight. During her tenure, DERA contributed to over 100 rule proposals and adoptions, including initiatives aimed at improving the resiliency and transparency of U.S. financial markets.

Dr. Wachter is currently Editor of the Review of Financial Studies. She has served on the boards of the American Finance Association and the Western Finance Association, and as Associate Editor at journals including the Journal of Economic Theory, the Review of Financial Studies, and Quantitative Economics.

Her research focuses on asset pricing, particularly models incorporating rare events and investor memory. Her work has been published in leading academic journals including the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, and the Quarterly Journal of Economics. She holds an A.B. in Mathematics and a Ph.D. in Business Economics, both from Harvard University.

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Research

  • Max Miller, James Paron, Jessica Wachter, Sovereign default and the decline in interest rates. Abstract
    Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk.  We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth.  Calibrations of the model post-Covid suggest that sovereign default risk may have returned.

     

  • Hongye Guo and Jessica Wachter, Correlation neglect in asset prices. Abstract

    The U.S. stock market’s return during the first month of a quarter positively predicts the second month’s return, which then negatively predicts the first month’s return of the next quarter. The pattern arises from a model in which investors do not fully recognize that earnings announced in the second month of a quarter are inherently similar to those announced in the first month, thereby overreacting to such predictably repetitive earnings. The same pattern exists in the cross-section and time series of industry returns. Evidence from survey data lends support to the mechanism of correlation neglect.

  • Jessica Wachter and Yicheng Zhu (2025), Learning with rare disasters, Quantitative Economics, Forthcoming, (). Abstract

    Financial crises appear to have long-lasting effects, even after the
    crisis itself has past. This paper offers a simple explanation
    through Bayesian learning from rare events. Agents face a latent and time-varying
    probability of economic disaster. When a disaster occurs, learning
    results in greater effects on asset prices because agents update their
    probability of future disasters. Moreover, agents’ belief that the
    disaster risk is high can rationally persist for years, even when it
    is in fact low. We generalize the model to allow for a noisy signal of
    the disaster probability. This generalized model explains excess
    stock market volatility together with negative skewness, effects that
    previous models in the literature struggle to explain.

  • Tai Lo Yeung, Rong Liu, Jessica Wachter, Michael Kahana, Yongjie Zhang, Navigating through fear and greed: The experience-driven disposition effect. Abstract

    Previous research has shown that trading experience of individual investors can mitigate the disposition effect—the tendency to sell winning investments prematurely while holding onto losing ones. Using transaction-level data from a major Chinese brokerage firm, covering an exceptional market period that includes distinct bull and bear phases, we propose a novel approach to quantifying investor experience. Our findings reveal a striking asymmetry: investors significantly reduce their disposition effect following experiences of realized gains, whereas encountering substantial losses actually intensifies this behavioral bias. Our study underscores the critical and asymmetric influence of investment experiences on behavioral biases in financial decision-making.

  • Jules van Binsbergen, Sophia Hua, Jonas Peeters, Jessica Wachter (2025), Is the United States a lucky survivor? A hierarchical Bayesian approach, Journal of Finance, 80 (4), pp. 2355-2388. Abstract

    Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, finding that it explains about one-third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the United States by cross-learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in-sample and to shocks to valuations resulting from learning about the probability.

    Related
    Links
  • Hongye Guo and Jessica Wachter (2025), “Superstitious” Investors, Review of Asset Pricing Studies, 15 (1), pp. 1-45. Related
    Links
  • James Paron, Michael Kahana, Jessica Wachter, Associative Learning and Representativeness. Abstract

    The representativeness heuristic constitutes a striking departure from Bayesian
    updating. According to a strong form of the heuristic, agents reverse
    a conditioning argument: for example inferring that a patient is more
    likely than not to have a rare disease, conditional on a
    positive test result. The correct inference is that a positive test
    result is more likely than not, conditional on
    disease. Recent research implicates representativeness
    in a wide range of financial market anomalies, with potential consequences for
    the real economy. However,
    the cognitive foundations of the representativeness heuristic (RH) remain
    unknown. Here, we show that the RH emerges from a theory of
    associative memory and recognition, leading to a cognitive foundation for the RH, and
    a means of integrating the RH into economic models involving
    decision-making under uncertainty.

  • Ulrike Malmendier and Jessica Wachter, “Memory of Past Experiences and Economic Decisions”. In Oxford Handbook of Human Memory, edited by Michael Kahana Anthony Wagner, (Oxford University Press, 2024) Abstract

    In traditional economic models, memories of past experiences affect choices only to the extent that they represent information. We review recent advances in economic research that have introduced a role for long-lasting effects of personal past experiences and the memory thereof into economics. We first document the empirical evidence on long-lasting experience effects in finance and economics. We then discuss the main approaches the literature has taken in incorporating psychological theories of long-lasting memories into economics. Our treatment suggests a role for models of memory in accounting not only for micro-level phenomena, but for anomalies within asset pricing and macroeconomics more broadly.

    Related
    Links
  • Mehran Ebrahimian and Jessica Wachter (2024), Risks to Human Capital, Management Science, 71 (3), pp. 2583-2622. Abstract

    Do financing constraints deepen recessions? To help answer this question, we build a model with inalienable human capital, in which investors finance individuals who can potentially become skilled. Though investment in skill is always optimal, it does not take place in some states of the world, due to moral hazard. In intermediate states of the world, individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem, combined with risk aversion of individuals and outside investors, amplifies the equity premium, lowers the riskfree rate, and leads to disaster states that fall especially heavily on some agents but not on others. We show that the possibility of disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium.

    Related
    Links
  • Jessica Wachter and Michael Kahana (2024), A retrieved-context theory of financial decisions, Quarterly Journal of Economics, 139 (2), pp. 1095-1147. Abstract

    Studies of human memory indicate that features of an event
    evoke memories of prior associated contextual states, which in turn
    become associated with the current event’s features. This
    retrieved-context mechanism allows the remote past to influence the present, even as agents
    gradually update their beliefs about their environment. We apply a
    version of retrieved context theory, drawn from the literature on
    human memory, to explain three types of evidence in the financial
    economics literature: the role  of early life experience in shaping investment choices, occurrence of financial crises, and the impact of fear on asset allocation. These applications suggest a
    recasting of neoclassical rational expectations in terms of beliefs as
    governed by principles of human memory.

    Related
    Links
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Teaching

Past Courses

  • FNCE1000 - Corporate Finance

    This course provides an introduction to the theory, the methods, and the concerns of corporate finance. The concepts developed in FNCE 1000 form the foundation for all elective finance courses. The main topics include: 1) the time value of money and capital budgeting techniques; 2) uncertainty and the trade-off between risk and return; 3) security market efficiency; 4) optimal capital structure, and 5) dividend policy decisions. ACCT 1010 + STAT 1010 may be taken concurrently.

  • FNCE2380 - Capital Markets

    The objective of this course is to give you a broad understanding of the framework and evolution of U.S. capital markets, the instruments that are traded, the mechanisms that facilitate their trading and issuance, and the motivations of issuers and investors across different asset classes. The course will highlight the problems that capital market participants are seeking to solve, which you can use in your post-Wharton careers to evaluate future market innovations. We will consider design, issuance, and pricing of financial instruments, the arbitrage strategies which keep their prices in-line with one another and the associated economic and financial stability issues. We will draw from events in the aftermath of the recent financial crisis, which illustrate financing innovations and associated risks, as well as policy responses that can change the nature of these markets. In addition to course prerequisites, FNCE 1010 is recommended.

  • FNCE2570 - Foundation Asset Pricing

    This course will cover methods and topics that form the foundations of modern asset pricing. These include: investment decisions under uncertainty, mean-variance theory, capital market equilibrium, arbitrage pricing theory, state prices, dynamic programming, and risk-neutral valuation as applied to option prices and fixed-income securities. Upon completion of this course, students should acquire a clear understanding of the major principles concerning individuals' portfolio decisions under uncertainty and the valuations of financial securities. In addition to the prerequisites one of the following courses is recommended FNCE 2050; BEPP 2500; MATH 3600; STAT 4330

  • FNCE7380 - Capital Markets

    The objective of this course is to give you a broad understanding of the instruments traded in modern financial markets, the mechanisms that facilitate their trading and issuance, as well as, the motivations of issuers and investors across different asset classes. The course will balance functional and institutional perspectives by highlighting the problems capital markets participants are seeking to solve, as well as, the existing assets and markets which have arisen to accomplish these goals. We will consider design, issuance, and pricing of financial instruments, the arbitrage strategies which keep their prices in-line with one another, and the associated economic and financial stability issues. The course is taught in lecture format, and illustrates key concepts by drawing on a collection of case studies and visits from industry experts. FNCE 6130 is recommended but not required.

  • FNCE7570 - Foundations of Asset Pricing

    This course will cover methods and topics that form the foundations of modern asset pricing. These include: investment decisions under uncertainty, mean-variance theory, capital market equilibrium, arbitrage pricing theory, state prices, dynamic programming, and risk-neutral valuation as applied to option prices and fixed-income securities. Upon completion of this course, students should acquire a clear understanding of the major principles concerning individuals' portfolio decisions under uncertainty and the valuations of financial securities. FNCE 7050 is recommended but not required.

  • FNCE8990 - Independent Study

    Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. Applications for FNCE 8990 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. ISP's must be supervised by a Standing Faculty member of the Finance Department.

  • FNCE9110 - Financial Economics

    The objective of this course is to undertake a rigorous study of the theoretical foundations of modern financial economics. The course will cover the central themes of modern finance including individual investment decisions under uncertainty, stochastic dominance, mean variance theory, capital market equilibrium and asset valuation, arbitrage pricing theory, option pricing, and incomplete markets, and the potential application of these themes. Upon completion of this course, students should acquire a clear understanding of the major theoretical results concerning individuals' consumption and portfolio decisions under uncertainty and their implications for the valuation of securities.

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