We apply the method of constrained asset share estimation (CASE) to test the mean-variance efficiency (MVE) of the stock market. This method allows conditional expected returns to vary in relatively unrestricted ways. The data estimate reasonably the price of risk, and, in some cases, the MVE...

We document that value-to-price, the ratio of Residual-Income-Model-based valuation to market price, subsumes the power of book-to-market ratio and many other value or quality measures in predicting stock returns. Long-short value-to-price portfolios hedge against momentum, revitalize the...

We study sources and implications of undiversified portfolios in a production-based asset pricing model with financial frictions. Households take concentrated positions in a single firm exposed to idiosyncratic shocks because managerial effort requires equity stakes, and because investors gain...

We develop a new class of tree-based models (P-Tree) for analyzing (unbalanced) panel data utilizing global (instead of local) split criteria that incorporate economic guidance to guard against overfitting while preserving interpretability. We grow a P-Tree top-down to split the cross section of...

We survey the nascent literature on machine learning in the study of financial markets. We highlight the best examples of what this line of research has to offer and recommend promising directions for future research. This survey is designed for both financial economists interested in grasping...

Portfolio optimization focuses on risk and return prediction, yet implementation costs critically matter. Predicting trading costs is challenging because costs depend on trade size and trader identity, thus impeding a generic solution. We focus on a component of trading costs that applies...

A war-related factor model derived from textual analysis of media news reports explains the cross section of expected asset returns. Using a semi-supervised topic model to extract discourse topics from 7,000,000 New York Times stories spanning 160 years, the war factor predicts the cross section...

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...

Optimal portfolios differ according to the length of time they are held without being rebalanced. For the case in which asset returns are identically and independently distributed, it has been shown that optimal portfolios become less diversified as the holding period lengthens.We show that the...