We propose a rational theory of momentum and reversal based on delegated portfolio management. Flows between investment funds are triggered by changes in fund managers' e±ciency, which investors either observe directly or infer from past performance. Momentum arises if fund °ows exhibit...

We analyze how asymmetric information and imperfect competition affect liquidity and asset prices. Our model has three periods: Agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We show that asymmetric information in 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...

We survey theoretical developments in the literature on the limits of arbitrage. This literature investigates how costs faced by arbitrageurs can prevent them from eliminating mispricings and providing liquidity to other investors. Research in this area is currently evolving into a broader...

We propose a clientele-based model of the yield curve and optimal maturity structure of government debt. Clienteles are generations of agents at different lifecycle stages in an overlapping-generations economy. An optimal maturity structure exists in the absence of distortionary taxes and...

We develop a search-based model of asset trading, in which investors of different horizons can invest in two identical assets. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show that there exists a "clientele" equilibrium where one...

We propose a model of organizational decision making, in which information processing is decentralized. Our model incorporates two features of many actual organizations: aggregation entails a loss of useful information, and the decision problems of different agents interact. We assume that an...

We study market efficiency in an infinite-horizon model with a monopolistic insider. The insider can trade with a competitive market maker and noise traders, and observes privately the expected growth rate of asset dividends. In the absence of the insider, this information would be reflected in...

We propose a dynamic equilibrium model of a multi-asset market with stochastic volatility and transaction costs. Our key assumption is that investors are fund managers, subject to withdrawals when fund performance falls below a threshold. This generates a preference for liquidity that is...