[This article presents evidence on persistence in the relative investment performance of large, institutional equity managers. Similar to existing evidence for mutual funds, we find persistent performance concentrated in the managers with poor prior-period performance measures. A conditional approach, using time-varying measures of risk and abnormal performance, is better able to detect this persistence and to predict the future performance of the funds than are traditional methods.]
[This article presents a one-tick dynamic model of a limit order market. Agents choose to submit a limit order or a market order depending on the state of the limit order book. Each trader knows that her order will affect the order placement strategies of those who follow and the execution probability of her limit order is endogenous. All traders take this into account which, in equilibrium, generates systematic patterns in transaction prices and order placement strategies even with no asymmetric information.]
[This article proposes to price an American option by approximating its early exercise boundary as a multipiece exponential function. Closed form formulas are obtained in terms of the bases and exponents of the multipiece exponential function. It is demonstrated that a three-point extrapolation scheme has the accuracy of an 800-time-step binomial tree, but is about 130 times faster. An intuitive argument is given to indicate why this seemingly crude approximation works so well. Our method is very simple and easy to implement. Comparisons with other leading competing methods are also included.]
[We examine the predictive power of equilibrium dominance in experimental markets where firms with investment opportunities have an informational advantage over potential investors and are permitted to purchase a money-burning signal. Equilibrium dominance often fails to predict well when a Pareto-superior sequential equilibrium is also available. Instead, equilibrium selection appears to be related to the potential earnings of a more valuable firm that can signal its type successfully by defecting from the sequential equilibrium. Potential investors formulate their bids for firm equity based primarily on expectations formed adaptively in response to signaling choices made by firms.]
[Existing time-varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix. In this article we compare the restrictions imposed by the four most popular multivariate GARCH models, and introduce a set of robust conditional moment tests to detect misspecification. We demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices (like estimating the optimal hedge ratio or deriving the risk minimizing portfolio). We therefore introduce a general model which nests these four models and their natural "asymmetric" extensions. The new model is applied to study the dynamic relation between large and small firm returns.]
[This article demonstrates that a potential acquirer with a toehold bids aggressively and possibly overpays in equilibrium. The aggressiveness of a bidder with a toehold increases further if he is able to renege on his winning bid. A bidder without a toehold, however, responds by shading his bids. The target firm can increase competition and the expected sale price if it only entertains nonretractable bids. This article provides testable implications on the probability of bidder success, stock price reactions on bid revisions and on resolution of the contest, and expected gains to bidders and the target firm.]
[By identifying the possibility of imposing a credible threat of liquidation as the key role of informed (bank) finance in a moral hazard context, we characterize the circumstances under which a mixture of informed and uninformed (market) finance is optimal, and explain why bank debt is typically secured, senior, and tightly held. We also show that the effectiveness of mixed finance may be impaired by the possibility of collusion between the firms and their informed lenders, and that in the optimal renegotiation-proof contract informed debt capacity will be exhausted before appealing to supplementary uninformed finance.]
[This article presents a theory of outside equity based on the control rights and the maturity design of equity. I show that outside equity is a tacit agreement between investors and management supported by the equity-holders' right to dismiss management regardless of performance and by the lack of a prespecified expiration date on equity. As a tacit agreement outside equity is sustainable despite management's potential for manipulating the cash flows and regardless of how costly it is for equityholders to establish a case against managerial wrongdoing. I establish that the only outside equity that investors are willing to hold in equilibrium is that with unlimited life, the very outside equity that corporations issue. Consistent with empirical evidence, this model predicts that debt-equity ratios are higher (lower) in industries with low (high) cash flow variability.]
[Exchange-mandated discrete pricing restrictions create a wedge between the underlying equilibrium price and the observed price. This wedge permits a competitive market maker to realize economic profits that could help recoup fixed costs. The optimal tick size that maximizes the expected profits of the market maker can be equal to $1/8 for reasonable parameter values. The optimal tick size is decreasing in the degree of adverse selection. Discreteness per se can cause time-varying bid-ask spreads, asymmetric commissions, and market breakdowns. Discreteness, which imposes additional transaction costs, reduces the value of private information. Liquidity traders can benefit under certain conditions.]
[A number of empirical studies have reached the conclusion that stock price volatility cannot be fully explained within the standard dividend discount model. This article proposes a resolution based upon a model that contains both a random supply of risky assets and finitely lived agents who trade in a multiple security environment. As the analysis shows there exist 2^K equilibria when K securities trade. The low volatility equilibria have properties analogous to those found in the infinitely lived agent models of Campbell and Kyle (1991) and Wang (1993, 1994). In contrast, the high-volatility equilibria have very different characteristics. Within the high-volatility equilibria very large price variances can be generated with very small supply shocks. Adding securities to the economy further reduces the required supply shocks. Using previously established empirical results the model can reconcile the data with supply shocks that are less than 10% as large as observed return shocks. These results are shown to hold even when the dividend process is mean reverting.]