ABSTRACT Many models use noise trader risk and corresponding violations of the Law of One Price to explain pricing anomalies, but include a storage technology in perfectly elastic supply or unlimited asset liability. Storage allows aggregate consumption risk to differ from exogenous fundamental risk, but using aggregate consumption as a factor for asset returns can make noise trader risk superfluous. Using (i) limited asset liability and limited storage withdrawals, or (ii) an endogenous locally riskless interest rate eliminates violations of the Law of One Price. Our main results use only budget equations and market clearing, and require virtually no assumptions about behavior.

ABSTRACT We present a method to estimate the gains from trade in limit‐order markets and provide empirical evidence that the limit‐order market is a good market design. Using observations on order submissions and execution and cancellation histories, we estimate both the distribution of traders' unobserved valuations for the stock and latent trader arrival rates. We use the resulting estimates to compute the current gains from trade, the gains from trade in a perfectly liquid market, and the gains from trade with a monopoly liquidity supplier. The current gains are 90% of the maximum gains and 150% of the monopolist gains.

ABSTRACT We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measure that predicts future performance better than standard measures do. Bayesian alphas based on the Capital Asset Pricing Model (CAPM) are particularly useful for predicting future standard CAPM alphas. Over our sample period, priors consistent with moderate to diffuse beliefs in managerial skill dominate more skeptical prior beliefs, a result that is consistent with investor cash flows.

ABSTRACT Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long‐run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long‐run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long‐run limit.

ABSTRACT We analyze an entrepreneur/manager's choice between private and public ownership. The manager needs decision‐making autonomy to optimally manage the firm and thus trades off an endogenized control preference against the higher cost of capital accompanying greater managerial autonomy. Investors need liquid ownership stakes. Public capital markets provide liquidity, but stipulate corporate governance that imposes generic exogenous controls, so the manager may not attain the desired trade‐off between autonomy and the cost of capital. In contrast, private ownership provides the desired trade‐off through precisely calibrated contracting, but creates illiquid ownership. Exploring this tension generates new predictions.