Knowledge that Transforms

[This article explores the optimal trading and pricing of taxable securities with asymmetric capital gains taxes and transaction costs. In the long-term region, investors realize all gains below some critical cutoff level, which we derive analytically. In the short-term region, investors defer all gains and, depending upon the time remaining in the short-term region, may also defer small losses. Contrary to common intuition, deferral of short-term losses can be optimal even without transaction costs. The value of tax timing is considerably higher under the optimal trading strategy than under alternative strategies previously analyzed. The impact of offset rules is also explored.]

[Mortgage originators offer borrowers various combinations of "points"--loan fees--and coupon: high points and low coupon or low points and high coupon. In this article points are interpreted as a device serving to separate borrowers with high prepayment probabilities from those with low prepayment probabilities. Borrowers and lenders are treated symmetrically: both are risk neutral and both have complete and frictionless access to credit markets (implying that borrowers can finance points if they wish), except that borrowers' prepayment speeds are private knowledge. Equilibria are derived, both when borrowers cannot prepay voluntarily and when they can.]

[Within the past few years several articles have suggested that returns on large equity portfolios may contain a significant predictable component at horizons 3 to 6 years. Subsequently, the tests used in these analyses have been criticized (appropriately) for having widely misunderstood size and power, rendering the conclusions inappropriate. This criticism however has not focused on the data, it addressed the properties of the tests. In this article we adopt a subjectivist analysis--treating the data as fixed--to ascertain whether the data have anything to say about the permanent/temporary decomposition. The data speak clearly and they tell us that for all intents and purposes, stock prices follow a random walk.]