We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the " expected market portfolio." We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.
{"title":"Active and Passive Investing: Understanding Samuelson’s Dictum","authors":"Nicolae Gârleanu, Lasse Heje Pedersen","doi":"10.1093/rapstu/raab020","DOIUrl":"https://doi.org/10.1093/rapstu/raab020","url":null,"abstract":"We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the \" expected market portfolio.\" We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"11 3","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512327","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We introduce a covariance and spread (i.e., exchange rate forward discount) adjusted carry factor that prices the cross-section of FX market returns, where many other single- and multifactor models fail. Both the covariance matrix of exchange rate growths and forward discounts contain important information for pricing that is not captured by well-known factors. The time-varying conditional covariance matrix and forward discounts forecast future realized currency returns. (JEL F31, F37, G12, G15, G17)
{"title":"Pricing Implications of Covariances and Spreads in Currency Markets","authors":"Maurer T, Tô T, Tran N, et al.","doi":"10.1093/rapstu/raab019","DOIUrl":"https://doi.org/10.1093/rapstu/raab019","url":null,"abstract":"<span><div>Abstract</div>We introduce a covariance and spread (i.e., exchange rate forward discount) adjusted carry factor that prices the cross-section of FX market returns, where many other single- and multifactor models fail. Both the covariance matrix of exchange rate growths and forward discounts contain important information for pricing that is not captured by well-known factors. The time-varying conditional covariance matrix and forward discounts forecast future realized currency returns. (<span style=\"font-style:italic;\">JEL</span> F31, F37, G12, G15, G17)</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"12 3","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512360","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. Market and volatility risks are not priced in unconditional models, but, consistent with theory, their factor loadings, conditional on VOV, are priced. The pricing impact of VOV strengthens during market crashes, suggesting that VOV is particularly relevant during market turmoil, when investors demand increased compensation for VOV risk. (JEL G11, G12, G13)
{"title":"Volatility-of-Volatility Risk in Asset Pricing","authors":"Chen T, Chordia T, Chung S, et al.","doi":"10.1093/rapstu/raab018","DOIUrl":"https://doi.org/10.1093/rapstu/raab018","url":null,"abstract":"<span><div>Abstract</div>This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (<span style=\"font-style:italic;\">VOV</span>) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and <span style=\"font-style:italic;\">VOV</span> as factors, the risk premium on <span style=\"font-style:italic;\">VOV</span> is statistically and economically significant and robust. Market and volatility risks are not priced in unconditional models, but, consistent with theory, their factor loadings, conditional on <span style=\"font-style:italic;\">VOV</span>, are priced. The pricing impact of <span style=\"font-style:italic;\">VOV</span> strengthens during market crashes, suggesting that <span style=\"font-style:italic;\">VOV</span> is particularly relevant during market turmoil, when investors demand increased compensation for <span style=\"font-style:italic;\">VOV</span> risk. (<span style=\"font-style:italic;\">JEL</span> G11, G12, G13)</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"12 6","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512358","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We document persistent superior trading performance among a subset of individual investors. Investors classified in the top performance decile in the first half of our sample subsequently earn risk-adjusted returns of about 6% per year. These returns are not confined to stocks in which the investors are likely to have inside information, nor are they driven by illiquid stocks. Our results suggest that skilled individual investors exploit market inefficiencies (or perhaps conditional risk premiums) to earn abnormal profits, above and beyond any profits available from well-known strategies based on size, value, momentum, or earnings announcements. (JEL G11, G14, G40, G51) Received: October 11, 2020 Editorial decision: January 4, 2021 Editor: Jeffrey Pontiff
{"title":"Can Individual Investors Beat the Market?","authors":"Joshua D Coval, David Hirshleifer, Tyler Shumway","doi":"10.1093/rapstu/raab017","DOIUrl":"https://doi.org/10.1093/rapstu/raab017","url":null,"abstract":"We document persistent superior trading performance among a subset of individual investors. Investors classified in the top performance decile in the first half of our sample subsequently earn risk-adjusted returns of about 6% per year. These returns are not confined to stocks in which the investors are likely to have inside information, nor are they driven by illiquid stocks. Our results suggest that skilled individual investors exploit market inefficiencies (or perhaps conditional risk premiums) to earn abnormal profits, above and beyond any profits available from well-known strategies based on size, value, momentum, or earnings announcements. (JEL G11, G14, G40, G51) Received: October 11, 2020 Editorial decision: January 4, 2021 Editor: Jeffrey Pontiff","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"8 3","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-06-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512332","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I compare the direct issuance costs of inflation-linked debt (the liquidity premium) with nominal government debt (the inflation risk premium) in developed countries. On average, it is cheaper to issue nominal debt at medium maturities (5–10 years) and inflation-linked debt at long maturities (20 or more years), although results vary somewhat based on whether survey-based or statistical inflation expectations are used. Issuance costs exhibit pronounced time and cross-country variation. Lower inflation-linked debt issuance costs are associated with more countercyclical inflation and higher proportions of inflation-linked debt. International inflation-linked zero-coupon yields are available as an Internet Appendix to this paper. (JEL E31, E43, G12, G15, H30, H63) Received November 22, 2018; editorial decision March 9, 2021 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"When and Where Is It Cheaper to Issue Inflation-Linked Debt?","authors":"Andrey Ermolov","doi":"10.1093/rapstu/raab016","DOIUrl":"https://doi.org/10.1093/rapstu/raab016","url":null,"abstract":"I compare the direct issuance costs of inflation-linked debt (the liquidity premium) with nominal government debt (the inflation risk premium) in developed countries. On average, it is cheaper to issue nominal debt at medium maturities (5–10 years) and inflation-linked debt at long maturities (20 or more years), although results vary somewhat based on whether survey-based or statistical inflation expectations are used. Issuance costs exhibit pronounced time and cross-country variation. Lower inflation-linked debt issuance costs are associated with more countercyclical inflation and higher proportions of inflation-linked debt. International inflation-linked zero-coupon yields are available as an Internet Appendix to this paper. (JEL E31, E43, G12, G15, H30, H63) Received November 22, 2018; editorial decision March 9, 2021 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"2 3","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-06-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512345","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Society for Financial Society (SFS) is a global, nonprofit academic society in finance. It owns and runs three academic journals: (1) the Review of Asset Pricing Studies, (2) the Review of Corporate Finance Studies, and (3) the Review of Financial Studies. It also organizes two annual academic conferences: (1) the SFS Cavalcade Asia-Pacific and (2) the SFS Cavalcade North America. It also runs several smaller, specialized conferences and financially supports and co-sponsors other independent conferences. Its governing board is the SFS Council.
{"title":"The Annual Report of the Society for Financial Studies for 2019–2020","authors":"Chan K, Ellul A, Goldstein I, et al.","doi":"10.1093/rapstu/raab001","DOIUrl":"https://doi.org/10.1093/rapstu/raab001","url":null,"abstract":"<span>The Society for Financial Society (SFS) is a global, nonprofit academic society in finance. It owns and runs three academic journals: (1) the <span style=\"font-style:italic;\">Review of Asset Pricing Studies</span>, (2) <span style=\"font-style:italic;\">the Review of Corporate Finance Studies</span>, and (3) <span style=\"font-style:italic;\">the Review of Financial Studies</span>. It also organizes two annual academic conferences: (1) the SFS Cavalcade Asia-Pacific and (2) the SFS Cavalcade North America. It also runs several smaller, specialized conferences and financially supports and co-sponsors other independent conferences. Its governing board is the SFS Council.</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"6 3","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512337","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large and increases with maturity. We introduce default risk in an otherwise standard affine model; we show that the volatility of the permanent component of the SDFs must be different across emerging markets in order to match these stylized facts. (JEL F31, F34, G15) Received September 9, 2019; editorial decision March 25, 2021 by Editor: Nikolai Roussanov. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Global Risk in Long-Term Sovereign Debt","authors":"Nicola Borri, Kirill Shakhnov","doi":"10.1093/rapstu/raab015","DOIUrl":"https://doi.org/10.1093/rapstu/raab015","url":null,"abstract":"This paper focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large and increases with maturity. We introduce default risk in an otherwise standard affine model; we show that the volatility of the permanent component of the SDFs must be different across emerging markets in order to match these stylized facts. (JEL F31, F34, G15) Received September 9, 2019; editorial decision March 25, 2021 by Editor: Nikolai Roussanov. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"10 4","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512328","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We contribute to identifying proxies for the information set of investors in financial markets. We show that the marketwide price-dividend ratio highly correlates with inflation and labor market variables that also forecast consumption, dividend, and GDP growth, but not with aggregate consumption or GDP growth. Our model with learning from inflation and wage earnings rationalizes the moments of consumption and dividend growth, market return, the price-dividend ratio, real and nominal term structures, the low predictive power of the price-dividend ratio for consumption and dividends, and the dynamics of the price-dividend ratio, unlike a nested model with learning from consumption alone. (JEL E3, G12, G14)
{"title":"What Information Drives Asset Prices?","authors":"Anisha Ghosh, George M Constantinides","doi":"10.1093/rapstu/raab012","DOIUrl":"https://doi.org/10.1093/rapstu/raab012","url":null,"abstract":"We contribute to identifying proxies for the information set of investors in financial markets. We show that the marketwide price-dividend ratio highly correlates with inflation and labor market variables that also forecast consumption, dividend, and GDP growth, but not with aggregate consumption or GDP growth. Our model with learning from inflation and wage earnings rationalizes the moments of consumption and dividend growth, market return, the price-dividend ratio, real and nominal term structures, the low predictive power of the price-dividend ratio for consumption and dividends, and the dynamics of the price-dividend ratio, unlike a nested model with learning from consumption alone. (JEL E3, G12, G14)","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"13 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-05-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512357","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We are deeply saddened by the passing of our colleague and friend, Craig Holden. Craig was the Gregg T. and Judith A. Summerville Chair of Finance at the Kelley School of Business at Indiana University and the current Department Chair. He was a prolific scholar and advisor to many students. In his role as SFS Secretary/Treasurer, which he began in 2012, Craig was a tremendous contributor to the SFS and its journals. He was a champion of international research collaboration, online publication, and was instrumental in improvements that changed how we interact with papers online. Most recently, when the 2020 Cavalcade was going to be canceled due to COVID-19, Craig volunteered to host the entire event virtually with the Kelley School. With only a few weeks of lead time, he managed to design an online conference format that was a great success and serves as a model for many other conferences. Craig was a wonderful colleague who cared greatly for his coworkers, his students, and for the profession. He spoke fondly of his family, of the Kelley School of Business, and of UCLA, where he earned his PhD. The SFS is better for his involvement these past nine years, and we will miss him greatly.
我们对同事和朋友克雷格·霍尔顿的逝世深感悲痛。Craig曾担任印第安纳大学凯利商学院的Gregg T. and Judith A. Summerville金融学主席，现任系主任。他是一位多产的学者，也是许多学生的导师。Craig于2012年开始担任SFS秘书/财务主管，他对SFS及其期刊做出了巨大贡献。他是国际研究合作和在线出版的倡导者，在改变我们与在线论文互动的方式方面发挥了重要作用。最近，当2020年的Cavalcade由于COVID-19而被取消时，克雷格自愿与凯利学校一起主持整个活动。在短短几周的筹备时间内，他设法设计了一种在线会议形式，取得了巨大的成功，并成为许多其他会议的典范。克雷格是一位非常出色的同事，他非常关心他的同事、学生和整个行业。他深情地谈到了他的家庭、凯利商学院(Kelley School of Business)和他获得博士学位的加州大学洛杉矶分校(UCLA)。因为他的参与，这九年我们的工作更出色了，我们会非常想念他。
{"title":"In Memoriam: Craig W. Holden","authors":"","doi":"10.1093/rapstu/raab014","DOIUrl":"https://doi.org/10.1093/rapstu/raab014","url":null,"abstract":"Abstract We are deeply saddened by the passing of our colleague and friend, Craig Holden. Craig was the Gregg T. and Judith A. Summerville Chair of Finance at the Kelley School of Business at Indiana University and the current Department Chair. He was a prolific scholar and advisor to many students. In his role as SFS Secretary/Treasurer, which he began in 2012, Craig was a tremendous contributor to the SFS and its journals. He was a champion of international research collaboration, online publication, and was instrumental in improvements that changed how we interact with papers online. Most recently, when the 2020 Cavalcade was going to be canceled due to COVID-19, Craig volunteered to host the entire event virtually with the Kelley School. With only a few weeks of lead time, he managed to design an online conference format that was a great success and serves as a model for many other conferences. Craig was a wonderful colleague who cared greatly for his coworkers, his students, and for the profession. He spoke fondly of his family, of the Kelley School of Business, and of UCLA, where he earned his PhD. The SFS is better for his involvement these past nine years, and we will miss him greatly.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"1 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-05-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/rapstu/raab014","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48750443","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity of fundamental investors. We find that hedge funds exhibit skill in opening positions, but that they close their positions too early, thereby forgoing about one-third of the trades’ potential profitability. We explain this behavior with the limits of arbitrage: hedge funds close positions early in order to reallocate their capital to more profitable investments and/or to accommodate tightened financial constraints. Consistent with this view, we document that hedge funds leave more money on the table after opening new positions, negative returns, or increases in funding constraints and volatility. (JEL G11, G12, G14, G15)
{"title":"Fundamental Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data","authors":"von Beschwitz B, Lunghi S, Schmidt D, et al.","doi":"10.1093/rapstu/raab013","DOIUrl":"https://doi.org/10.1093/rapstu/raab013","url":null,"abstract":"<span><div>Abstract</div>We exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity of fundamental investors. We find that hedge funds exhibit skill in opening positions, but that they close their positions too early, thereby forgoing about one-third of the trades’ potential profitability. We explain this behavior with the limits of arbitrage: hedge funds close positions early in order to reallocate their capital to more profitable investments and/or to accommodate tightened financial constraints. Consistent with this view, we document that hedge funds leave more money on the table after opening new positions, negative returns, or increases in funding constraints and volatility. (<span style=\"font-style:italic;\">JEL</span> G11, G12, G14, G15)</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"12 2","pages":""},"PeriodicalIF":13.1,"publicationDate":"2021-05-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512369","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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