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We survey the recent literature on learning in financial markets. Our main theme is that many financial market phenomena that appear puzzling at first sight are easier to understand once we recognize that parameters in financial models are uncertain and subject to learning. We discuss phenomena...
Persistent link: https://www.econbiz.de/10012464003
Persistent link: https://www.econbiz.de/10003837187
We present a new model of money management, in which investors delegate portfolio management to professionals based not only on performance, but also on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge higher fees...
Persistent link: https://www.econbiz.de/10012460486
We argue that active management's popularity is not puzzling despite the industry's poor track record. Our explanation features decreasing returns to scale: As the industry's size increases, every manager's ability to outperform passive benchmarks declines. The poor track record occurred before...
Persistent link: https://www.econbiz.de/10012463004
We derive equilibrium relations among active mutual funds' key characteristics: fund size, expense ratio, turnover, and portfolio liquidity. As our model predicts, funds with smaller size, higher expense ratios, and lower turnover hold less liquid portfolios. A portfolio's liquidity, a concept...
Persistent link: https://www.econbiz.de/10012455012
Implications of factor-based asset pricing models for estimation of expected returns and for portfolio selection are investigated. In the presence of model mispricing due to a missing risk factor, the mispricing and the residual covariance matrix are linked together. Imposing a strong form of...
Persistent link: https://www.econbiz.de/10012471625
This paper examines the hypothesis that the superior return to so-called value stocks is the result of expectational errors made by investors. We study stock price reactions around earnings announcements for value and glamour stocks over a 5 year period after portfolio formation. The...
Persistent link: https://www.econbiz.de/10012473559
We model optimal fund turnover in the presence of time-varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark-adjusted return. We find such a relation for equity mutual funds. This time-series relation between turnover...
Persistent link: https://www.econbiz.de/10012457966
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level: As the size of the active mutual fund industry increases, a fund's ability to outperform passive benchmarks declines. At the fund level,...
Persistent link: https://www.econbiz.de/10012458773
Our framework for evaluating and investing in mutual funds combines observed returns on funds and passive assets with prior beliefs that distinguish pricing-model inaccuracy from managerial skill. A fund's alpha' is defined using passive benchmarks. We show that returns on non-benchmark passive...
Persistent link: https://www.econbiz.de/10012470971