Knowledge that Transforms

[Relative to their weights in a value-weighted index, a number of stocks in Japan's Nikkei 225 stock index are overweighted by a factor of 10 or more. I document a strong positive relation between overweighting and the comovement of a stock with other stocks in the Nikkei index, and a negative relationship between index overweighting and comovement with stocks outside of the index. The cross-sectional approach resolves endogeneity problems associated with event study demonstrations of excess comovement. A trading strategy that bets on the reversion of stock prices of overweighted stocks generates economic profits, confirming that the observed comovement patterns are excessive, and providing further evidence that comovement of stock returns can be a consequence of commonality in trading behavior.]

[We develop a model with incomplete markets and heterogeneous agents that generates a large equity premium, while simultaneously matching stock market participation and individual asset holdings. The high risk-premium is driven by incomplete risk sharing among stockholders, which results from the combination of aggregate uncertainty, borrowing constraints, and a (realistically) calibrated life-cycle earnings profile subject to idiosyncratic shocks. We show that it is challenging to simultaneously match asset pricing moments and individual portfolio decisions, while limited participation has a negligible impact on the risk-premium, contrary to the results of models where it is imposed exogenously.]

[We provide evidence of two variants of a dating game that entails picking a grant date ex post, that is, after the board's compensation decision is made: back-dating (picking a date before the board decision date), and forward-dating (waiting after the board decision date to observe the stock price behavior). Consistent with back-dating, we find stock return behavior around the grant date to be positively related to reporting lag. In the promptly reported sample, we find stock return behavior and the pattern of reporting lags consistent with forward-dating. Our calculations show that managers can obtain economically significant benefits by playing the dating game.]

[The bulk of corporate governance theory examines the agency problems that arise from two extreme ownership structures: 100% small shareholders or one large, controlling owner combined with small shareholders. In this paper, we question the empirical validity of this dichotomy. In fact, one-third of publicly listed firms in Europe have multiple large owners, and the market value of firms with multiple blockholders differs from firms with a single large owner and from widely held firms. Moreover, the relationship between corporate valuations and the distribution of cash-flow rights across multiple large owners is consistent with the predictions of recent theoretical models.]

[Bubbles are a topic of great importance and great controversy. This paper discusses alternative perspectives on the economic meaning and origin of bubbles. Drawing on historical approaches to bubbles, this article sets out a taxonomy of approaches used to explain the nature of bubbles. The paper also considers issues connected with the scientific thinking surrounding bubbles.]

[Recent corporate governance reforms focus on the board's independence and encourage equity ownership by directors. We analyze the efficacy of these reforms in a model in which both adverse selection and moral hazard exist at the level of the firm's management. Delegating governance to the board improves monitoring but creates another agency problem because directors themselves avoid effort and are dependent on the CEO. We show that as directors become less dependent on the CEO, their monitoring efficiency may decrease even as they improve the incentive efficiency of executive compensation contracts. Therefore, a board composed of directors that are more independent may actually perform worse. Moreover, higher equity incentives for the board may increase equity-based compensation awards to management.]

[Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.]

[When the market is incomplete, a new non-redundant derivative security cannot be priced by no-arbitrage arguments alone. Moreover, there will be a multiplicity of stochastic discount factors and each of them may give a different price for the new derivative security. This paper develops an approach to the selection of a stochastic discount factor for pricing a new derivative security. The approach is based on the idea that the price of a derivative security should not vary too much when the payoff of the primitive security is slightly perturbed, i.e., the price of the derivative should be robust to model misspecification. The paper develops two metrics of robustness. The first is based on robustness in expectation. The second is based on robustness in probability and draws on tools from the theory of large deviations. We show that in a stochastic volatility model, the two metrics yield analytically tractable bounds for the derivative price, as the underlying stochastic volatility model is perturbed. The bounds can be readily used for numerical examination of the sensitivity of the price of the derivative to model misspecification.]

[Recent winners have temporarily higher loadings than recent losers on the growth rate of industrial production. The loading spread derives mostly from the positive loadings of winners. The growth rate of industrial production is a priced risk factor in standard asset pricing tests. In many specifications, this macroeconomic risk factor explains more than half of momentum profits. We conclude that risk plays an important role in driving momentum profits.]

[We examine intrafirm competition in the mutual-fund industry. We test the hypothesis that fund managers within mutual-fund families compete with each other in a tournament. Our empirical study of the US equity mutual-fund market shows that they adjust the risk they take depending on the relative position within their fund family. The direction of the adjustment depends on the competitive situation in that family. Risk adjustments are particularly pronounced among managers of funds with high expense ratios, which are managed by a single manager and which belong to large families.]