ONE OF THE FUNDAMENTAL ISSUES in finance is what the factors are that affect expected return on assets, the sensitivity of expected return to those factors, and the reward for bearing this sensitivity.There is a long history of testing in this area, and it is clearly one of the most investigated areas in finance.Almost all of the testing I am aware of involves using realized returns as a proxy for expected returns.The use of average realized returns as a proxy for expected returns relies on a belief that information surprises tend to cancel out over the period of a study and realized returns are therefore an unbiased estimate of expected returns.However, I believe that there is ample evidence that this belief is misplaced.There are periods longer than 10 years during which stock market realized returns are on average less than the risk-free rate ~1973 to 1984!.There are periods longer than 50 years in which risky long-term bonds on average underperform the risk free rate ~1927 to 1981!. 1 Having a risky asset with an expected return above the riskless rate is an extremely weak condition for realized returns to be an appropriate proxy for expected returns, and 11 and 50 years is an awfully long time for such a weak condition not to be satisfied.In the recent past, the United States has had stock market returns of higher than 30 percent per year while Asian markets have had negative returns.Does anyone honestly believe that this is because this was the riskiest period in history for the United States and the safest for Asia?Furthermore, there is a large body of evidence we find anomalous.This includes the effect of inf lation on asset pricing and the failure of the generalized expectation theory to explain term premiums.Changing risk premiums and conditional asset pricing theories may be a way of "explaining" some of the anomalous results; however, this does not explain returns on risky assets that are less than the riskless rate for the long periods when it has occurred.It seems to me that the more logical explanation for these anomalous results is that realized returns are a very poor measure of expected returns and that information surprises highly inf luence a number of factors in our

This paper documents a strong and prevalent momentum effect in industry components of stock returns which accounts for much of the individual stock momentum anomaly. Specifically, momentum investment strategies, which buy past winning stocks and sell past losing stocks, are significantly less profitable once we control for industry momentum. By contrast, industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, appear highly profitable, even after controlling for size, book‐to‐market equity, individual stock momentum, the cross‐sectional dispersion in mean returns, and potential microstructure influences.

The arrival of public information in the U.S. Treasury market sets off a two‐stage adjustment process for prices, trading volume, and bid‐ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.

The strong bias in favor of domestic securities is a well‐documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well‐documented asset pricing anomalies.

Are nominal bonds appropriately discounted for taxes? Empirical estimates of the response of nominal interest rates to changes in inflation, the Fisher effect, have failed to produce a definitive answer. Four reasons have been put forward as possible explanations: (i) Tobin effects, (ii) fiscal illusion, (iii) peso problems, and (iv) different estimators. Utilizing data on taxable and tax‐exempt bond interest rates and several different estimators, we find that the Fisher effect estimates are always larger for the taxable bond relative to the tax‐exempt bond, suggesting that fiscal illusion and different estimators cannot account for the previous results.

The strong bias in favor of domestic securities is a well‐documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well‐documented asset pricing anomalies.

This paper documents a strong and prevalent momentum effect in industry components of stock returns which accounts for much of the individual stock momentum anomaly. Specifically, momentum investment strategies, which buy past winning stocks and sell past losing stocks, are significantly less profitable once we control for industry momentum. By contrast, industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, appear highly profitable, even after controlling for size, book‐to‐market equity, individual stock momentum, the cross‐sectional dispersion in mean returns, and potential microstructure influences.

We study the causes and effects of the competition for order flow by U.S. regional stock exchanges. We trace the origins of competition for order flow to a change in the role of regional exchanges from being venues for listing local securities to being more direct competitors for the order flow of NYSE listings. We study the way regionals competed for order flow, concentrating on a series of stock‐exchange mergers that occurred in the midst of this transition of the regional exchanges. The merging exchanges attracted market share and experienced narrower bid‐ask spreads.

The arrival of public information in the U.S. Treasury market sets off a two‐stage adjustment process for prices, trading volume, and bid‐ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.