Bryan Kelly is Professor of Finance at the Yale School of Management, a Research Fellow at the National Bureau of Economic Research, Associate Director of SOM’s International Center for Finance, and is the head of machine learning at AQR Capital Management, LLC. Professor Kelly’s primary research fields are asset pricing and financial econometrics. He is interested in issues related to financial machine learning; volatility, tail risk, and correlation modeling in financial markets; banking sector systemic risk; financial intermediation; and financial networks. His papers in these areas have been published in the American Economic Review, the Quarterly Journal of Economics, the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies, among others. He is co-editor of the Journal of Financial Econometrics and associate editor of the Journal of Finance and the Journal of Financial Economics. Before joining Yale, Kelly was a tenured professor of finance at the University of Chicago Booth School of Business. He earned a bachelor’s degree in economics from the University of Chicago, a master’s degree in economics from University of California San Diego, and a PhD in finance from New York University’s Stern School of Business. Kelly worked in investment banking at Morgan Stanley prior to pursuing his PhD.
(with L. Bybee, A. Manela, and D. Xiu)
We propose an approach to measuring the state of the economy via textual analysis of business news. From the full text content of 800,000 Wall Street Journal articles for 1984–2017, we estimate a topic model that summarizes business news as easily interpretable topical themes and quantifies the proportion of news attention allocated to each theme at each point in time. We then use our news attention estimates as inputs into statistical models of numerical economic time series. We demonstrate that these text-based inputs accurately track a wide range of economic activity measures and that they have incremental forecasting power for macroeconomic outcomes, above and beyond standard numerical predictors. Finally, we use our model to retrieve the news-based narratives that underly “shocks” in numerical economic data.
(with Z. Ke and D. Xiu)
We introduce a new text-mining methodology that extracts sentiment information from news articles to predict asset returns. Unlike more common sentiment scores used for stock return prediction (e.g., those sold by commercial vendors or built with dictionary-based methods), our supervised learning framework constructs a sentiment score that is specifically adapted to the problem of return prediction. Our method proceeds in three steps: 1) isolating a list of sentiment terms via predictive screening, 2) assigning sentiment weights to these words via topic modeling, and 3) aggregating terms into an article-level sentiment score via penalized likelihood. We derive theoretical guarantees on the accuracy of estimates from our model with minimal assumptions. In our empirical analysis, we text-mine one of the most actively monitored streams of news articles in the financial system—the Dow Jones Newswires—and show that our supervised sentiment model excels at extracting return-predictive signals in this context.
(with D. Papanikolaou, A. Seru and M. Taddy)
We use textual analysis to create new indicators of patent quality, which are available for the entire universe of patents issued by the USPTO over the 1840 to 2010 period. Our measure of patent quality is predictive of future citations and correlates strongly with measures of market value.
(with B. Herskovic, H. Lustig and S. Van Nieuwerburgh)
The firm size distribution and firm volatility distribution are intimately linked. When the size distribution becomes more dispersed, economic activity is concentrated among a smaller number of large firms, and the typical firm becomes less diversified. This effect is stronger for small firms since they have fewer customers to diversify shocks to begin with. As a result, firm-level volatility possesses an approximate factor structure in which the concentration of the economy-wide firm size distribution serves as the factor. We document a range of new empirical facts regarding firm size and firm volatility.
(with R. Israelov)
Uncertainty about the future option return has two sources: Changes in the position and shape of the implied volatility surface that shift option values (holding moneyness and maturity fixed), and changes in the underlying price which alter an option's location on the surface and thus its value (holding the surface fixed). We estimate a joint time series model of the spot price and volatility surface and use this to construct an ex ante characterization of the option return distribution via bootstrap. Our ''ORB'' (option return bootstrap) model accurately forecasts means, variances, and extreme quantiles of S&P 500 index conditional option return distributions across a wide range of strikes and maturities.
(with I. Dew-Becker and S. Giglio)
This paper studies the pricing of shocks to implied and realized volatility using options in 19 different markets, covering financials, metals, energies, and agricultural products. The markets are directly related to the state of the macroeconomy and financial markets, and investors can use the options to separately hedge shocks to real uncertainty and to the realization of volatility. Historically, realized volatility has earned a robustly negative risk premium, indicating that high macroeconomic volatility is associated with high marginal utility.
(with A. Manela and A. Moreira)
Text data is inherently ultra-high dimensional, which makes machine learning techniques indispensable for textual analysis. Text also tends to be a highly selected outcome—journalists, speechwriters, and others carefully craft messages to target the limited attention of their audi- ences. We develop an economically motivated high dimensional selection model that improves machine learning from text (and from sparse counts data more generally). Our model is especially useful in cases where the cover/no-cover choice is separate or more interesting than the coverage quantity choice.