We combine self-collected historical data from 1867 to 1907 with CRSP data from 1926 to 2012, to examine over 140 years of risk and return of one of the most popular mechanical trading strategies—momentum. We find that the momentum strategy has earned abnormally high risk-adjusted returns—a...

We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While...

How does the trading behaviour of institutional money managers affect stock prices? In this paper we document a robust relationship between the net trade patterns of institutional money managers and long term equity returns. Examining quarterly data on US institutional holdings from 1983 to...

Rational investors perceive correctly the value of financial information. Investment in information is therefore rewarded with a higher Sharpe ratio. Overconfident investors overstate the quality of their own information, and thus attain a lower Sharpe ratio. We contrast the implications of the...

We develop a model of the gambler's fallacy -- the mistaken belief that random sequences should exhibit systematic reversals. We show that an individual who holds this belief and observes a sequence of signals can exaggerate the magnitude of changes in an underlying state but underestimate their...

This paper documents a dramatic post-Lehman slowdown in the rate of growth of US banking credit and in net new bond issues in spite of a huge accumulation of banks’ reserves at the Fed. Appealing to results in a theoretical background paper the credit arrest in the immediate aftermath of...

Theoretically, corporate debt is economically equivalent to safe debt minus a put option on the firm’s assets. We empirically show that indeed portfolios of long Treasuries and short traded put options ("pseudo bonds") closely match the properties of traded corporate bonds. Pseudo bonds...

This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the...

We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default risk. Looking at the past performance, investors update beliefs on...

We analyze the relationship between asset prices and current account positions estimating a Bayesian VAR for a broad set of 42 industrialized and emerging market countries. To derive model-based identifying restrictions, we model asset price shocks as news shocks about future productivity in a...