Knowledge that Transforms

We document that persistent aggregate capital flows to hedge and mutual funds predict monthly factor returns with an out-of-sample R2 reaching 6.6%. Transient flows display no such power despite being more predictable. We show—both empirically and theoretically—that persistent flows’ predictive power stems from active fund managers’ capital constraints. As a result, managers invest persistent, but not transient, capital flows into factor trading strategies, leading to factor-return predictability and factor momentum, yet greater price efficiency. Our key insight is that capital-constrained managers account for both current and anticipated future flows in the arbitrage sector, thereby incorporating the dynamics of capital into their strategies.

We develop a continuous-time general equilibrium model with intermediaries at the heart of international financial markets. Global intermediaries bargain with households and extract rents from providing access to foreign claims. By tilting state prices, intermediaries’ market power breaks monetary neutrality and makes international risk-sharing inefficient. Despite having zero net positions, markups charged by intermediaries significantly distort international asset prices, affecting exchange rate dynamics and their response to shocks. Our model can reproduce patterns consistent with several well-known exchange rate puzzles, such as deviations from uncovered and covered interest parity. All equilibrium quantities are derived in closed form, allowing us to pin down the underlying economic mechanisms explicitly.

We present a model rationalizing the economic value of digital tokens for launching peer-to-peer platforms. By using the blockchain to transparently distribute tokens before the platform launches, a token sale overcomes later coordination failures between the platform’s users. This result follows from forward induction reasoning, under which the costly and observable action of token acquisition credibly communicates the intent to participate on the platform. Our framework demonstrates the applications of digital tokens to entrepreneurship, and offers guidance for both practitioners and regulators.

Under standard assumptions, individuals and the government are indifferent between traditional tax-deferred retirement accounts and “front-loaded” (Roth) accounts. Adding investment fees to this benchmark, individuals are still indifferent, but the government is not. We show that under weak conditions firms charge equal percent fees under both systems, yielding higher dollar fees under Traditional. We estimate that tax deferral increases demand for asset management services by $3.8 trillion, costing the government $23.4 billion in annual fees. In a general equilibrium differentiated-product model, tax deferral produces a larger asset management industry, higher taxes, and lower social welfare.

Information production by shareholders is essential for proxy voting to produce efficient outcomes. We propose a stock return-based measure to capture informed voting. Our measure, the vote alpha, quantifies the extent to which a shareholder votes in the direction that the market perceives as value increasing. Using data on mutual funds’ proxy voting records, we find that the vote alpha exhibits persistence. Our main result shows that the voting pattern of high vote alpha funds positively predicts long-run abnormal stock returns following contentious votes, suggesting that these funds possess information about the shareholder value implication of contentious governance proposals.

We decompose corporate bond and equity index returns into duration-matched government bond returns and the excess returns over this duration-matched counterfactual, which we term duration-adjusted returns. Compared with previously used excess return definitions (ie, returns in excess of Treasury bills), our decomposition leads to markedly different return patterns and asset pricing implications. In particular, we find that investment-grade bonds earn a small credit risk premium, comparable in magnitude to the convenience yield, and that duration adjustment resolves the CAPM’s failure to price corporate bonds. These findings highlight the importance of adjusting for nonstationary interest rate environments in asset pricing tests.

This paper proposes a top-down linear option pricing model that unifies the pricing of different option contracts not by assuming common dynamics but by imposing common pricing on each risk source in proportion to decentralized risk estimates. The model generates significantly better pricing performance than existing bottom-up models. Its high-dimensional risk structure effectively explains the options return variation, allowing for the seamless integration of option pricing with risk management. The market price of risk estimate from the model strongly predicts the future excess return of the corresponding risk-targeting option portfolio, an important dimension of attribute completely absent from prior literature.

Single women invest less in risky assets than do single men. This paper analyzes the determinants of the “gender investment gap” based on a structural life-cycle framework. The model can rationalize the gender investment gap without gender heterogeneity in preferences. Rather, lower deterministic income and larger household sizes shift the composition of single women toward poorer households that invest less risky (composition effect). Additionally, future outcomes of both variables (which cannot easily be controlled for in regressions) make single women more vulnerable to financial shocks and decrease their optimal equity share even conditional on state variables (policy effect).

We show that the infrastructure of decentralized exchanges subjects liquidity providers (LPs) to a “tragedy of the commons.” Liquidity providers lack incentives to exit liquidity pools to prevent arbitrage losses, as these are collectively shared, while withdrawal costs are borne individually. Arbitrage rents primarily flow to validators as infrastructure fees, with the median arbitrageur transferring 96% of profits. Proposed solutions—speed technology, alternative sequencing rules, and flexible pricing curves—fail to reduce these rents. Leveraging the Silicon Valley Bank crisis as a natural experiment, we show that LPs defensively adopt more convex pricing curves to mitigate adverse selection risks.

This paper documents a striking fact: a narrow window around Fed meetings captures the entire secular decline in U.S. Treasury yields. Yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. Long-term bond yields decline when the Fed cuts the short rate and when the Fed lowers its long-run forecast of the federal funds rate (the “dot plot”). These results are consistent with the view that Fed announcements provide guidance about the long-run path of interest rates.