The paper models the process of quote setting and price formation in a non-intermediated order driven market where trading is driven by (1) differences in valuation among investors and (2) the arrival of new information. We show that a positive spread exists in an order driven market even in the...

This paper assesses the value of order timing in equity trading, with particular focus on the working of quot;not heldquot; orders by floor brokers. To this end, we examine trades on the American Stock Exchange (Amex) using October 1996 proprietary trade and quote data for 838 stocks....

This paper provides evidence on the economic significance of U.S. stock return predictability within an asset allocation framework in a real-time context. We examine the performance of a Bayesian, risk averse investor (the mutual fund investor) who relies on conditioning information (e.g.,...

The paper analyzes the rationale for and profitably of limit order trading. Although limit orders are essential to the functioning of order driven markets, their use has received relatively little attention in the literature. Trading via limit order is, in fact, sub-optimal when transaction...

Model selection, i.e., the choice of an asset pricing model to the exclusion of competing models, is an inherently misguided strategy when the true model is unavailable to the researcher. This paper illustrates the advantages of a model pooling approach in characterizing the cross section of...

This study explores optimal portfolio management contracts in the context of ‘opaque' portfolios invested in illiquid or privately held assets. We identify shortcomings of linear contracts in this context and demonstrate that the second-best optimal contract features a convex component. The...

The evaluation of hedge fund performance is challenging given the flexible nature of hedge funds' strategies and their lack of operational transparency. As a result inference about skill is inevitably contaminated by the error in the benchmark model. To address this concern, we propose a model...

This paper re-examines the tests of the Sharpe-Lintner Capital Asset Pricing Model (CAPM). The null that the CAPM intercepts are zero is tested for ten size-based stock portfolios and for twenty five book-to-market sorted portfolios using five-year, ten-year and longer sub-periods during...

Motivated by the theoretical results on strategic asset allocation, we examine the gains in portfolio performance when investors diversify into different asset classes, with particular focus on the timeliness of such gains. Although the various asset classes we analyze yield significant gains in...

We analyze the implications of the tournament-like competition in the mutual fund industry for shareholder welfare using a framework that addresses both (a) the risk taking incentives, and (b) the effort incentives facing fund managers. We compare the ex ante shareholder utility under two...