The goal of this paper is to assess, for the first time, the empirical impact of "Kaynes' beauty contest", or "higher order belief", on asset price volatility. The paper shows that heterogeneous expectations induce higher order beliefs and that heterogeneous expectation asset pricing models...

As early as 1934 Graham and Dodd conjectured that excess returns from value investment originate from a tendency of markets to converge towards fundamental values. This paper confirms their insights theoretically within the evolutionary finance model of Evstigneev, Hens, and Schenk-Hopp (2006)...

Extreme adverse selection arises when private information has unboundedsupport, and market breakdown occurs when no trade is the only equilibriumoutcome. We study extreme adverse selection via the limit behavior of afinancial market as the support of private information converges to an...

We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under natural conditions, prices are lower and illiquidity discounts higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners...

Performance fees for portfolio managers are designed to align the managers' goals withthose of the investors and to motivate managers to aquire "superior" information and tomake better investment decisions. A part of the literature analyzes performance fees on thebasis of market valuation. In...

This paper argues that book-to-market and size attributes represent sensitivities of firm returns to several risk factors, and in so doing they subsume the information in other attributes.

The estimation of expected security returns is one of the major tasks for the practical implementationof the Markowitz portfolio optimization. Against this background, in 1992 Black and Littermandeveloped an approach based on (theoretically established) expected equilibrium returns whichaccounts...

In this paper the relation between aggregate mutual fund flows and stock market returns isanalysed with respect to three issues. First, we study the relation between fund flows andlong-term realized returns (past, current and future). Second, we find out that fund flows arenot driven by...

Using a new data set on investor sentiment we show that institutional and individualsentiment proxy for smart money and noise trader risk, respectively. First, usingbias-adjusted long-horizon regressions, we document that institutional sentiment forecastsstock market returns at intermediate...

The puzzling evidence of seemingly high momentum returns is related to an understanding ofrisk as a simple covariance. If we consider, however, risk in higher-order statistical moments,momentum returns appear less advantageous.