In this paper we consider the equilibrium effects of an institutional investor whose performance is benchmarked to an index. In a partial equilibrium setting, the objective of the institutional investor is modeled as the maximization of expected utility (an increasing and concave function, in...

We propose new spanning tests that assess if the initial and additional assets share the economically meaningful cost and mean representing portfolios. We prove their asymptotic equivalence to existing tests under local alternatives. We also show that unlike two-step or iterated procedures,...

In this paper, we propose a new empirical version of the Fama and French Model based on the Hausman (1978) specification test and aimed at discarding measurement errors in the variables. The proposed empirical framework is general enough to be used for correcting other financial and accounting...

Past research has shown that the level of operating accruals is a negative cross-sectional predictor of stock returns. This paper examines whether the accrual anomaly extends to the aggregate stock market. In contrast with cross-sectional findings, there is no indication that aggregate operating...

This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investors' information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the...

Capital Asset Pricing Model (CAPM) predicts that expected returns on securities are a positive linear function of their market betas and market beta alone is adequate to describe the cross section of expected returns. However there is a controversy regarding the empirical validity of CAPM. The...

Most central banks effect changes to their target or policy rate in discrete increments (e.g., multiples of 0.25%) following public announcements on scheduled dates. Still, for most applications, researchers rely on the assumption that the policy rate changes linearly with economic conditions...

Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty...

This article examines trading behavior in the options market conditioned on mispricing in the underlying stock. We investigate the price equilibrium between the observed equity asset and the options-implied synthetic share as well as the relative divergence between the two prices. We find a...