This paper studies the link between population age structure, net outflows (dividends plus repurchases less net issues) from the stock market, and stock market returns in an overlapping generations framework. I find support for the traditional lifecycle models—the outflows from the stock market are positively correlated with the changes in the fraction of old people (65 and over) and negatively correlated with the changes in the fraction of middle-aged people (45 to 64). Changes in population age structure also add significant explanatory power to equity premium regressions. The population structure adds to the predictive power of regressions involving the investment/savings rate for the U.S. economy. Finally, international demographic changes have some power in explaining international capital flows.

We study the cross-section of stock option returns by sorting stocks on the difference between historical realized volatility and at-the-money implied volatility. We find that a zero-cost trading strategy that is long (short) in the portfolio with a large positive (negative) difference between these two volatility measures produces an economically and statistically significant average monthly return. The results are robust to different market conditions, to stock risks-characteristics, to various industry groupings, to option liquidity characteristics, and are not explained by usual risk factor models.

In the United States, momentum portfolios formed from 12 to 7 months prior to the current month deliver higher future returns than momentum portfolios formed from 6 to 2 months prior, suggesting an “echo” in returns. In 37 countries excluding the United States, there is no robust evidence of such an echo. In portfolios that combine securities in developed and emerging markets, or across three major geographic regions (Americas excluding United States, Asia, and Europe), there is also no evidence of an echo. Any echo in the United States appears to be driven largely by a carryover of short-term reversals from month − 2.

We compare the performance of time-series (TS) and cross-sectional (CS) strategies based on past returns. While CS strategies are zero-net investment long/short strategies, TS strategies take on a time-varying net long investment in risky assets. For individual stocks, the difference between the performances of TS and CS strategies is largely due to this time-varying net long investment. With multiple international asset classes with heterogeneous return distributions, scaled CS strategies significantly outperform similarly scaled TS strategies. Received December 7, 2016; editorial decision October 5, 2017 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Although momentum exists in many markets throughout the world, explanations for momentum have largely been tested using US data. We investigate the extent to which US-based momentum explanations extend to the international context, using regression-based and portfolio approaches. Among the several hypotheses we consider, we find reliable support for the hypothesis that due to limited attention, investors underreact to information arriving in small bits rather than in large chunks, which results in momentum. We also find secondary support for the overconfidence hypothesis for momentum. Finally, we find that momentum is stronger in up-markets and less-volatile markets in the international context just as in the USA. This finding also accords with the investor overconfidence hypothesis, under the proviso that investors are more confident in rising, low-volatility markets.

ABSTRACT We examine the selection and termination of investment management firms by 3,400 plan sponsors between 1994 and 2003. Plan sponsors hire investment managers after large positive excess returns but this return‐chasing behavior does not deliver positive excess returns thereafter. Investment managers are terminated for a variety of reasons, including but not limited to underperformance. Excess returns after terminations are typically indistinguishable from zero but in some cases positive. In a sample of round‐trip firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be no different from those delivered by newly hired managers. We uncover significant variation in pre‐ and post‐hiring and firing returns that is related to plan sponsor characteristics.

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.

We show that demand pressure from retail investors makes options on low-price stocks relatively expensive—delta-hedged options on low-price stocks underperform those on high-price stocks by 0.63% per week for calls and 0.36% for puts. Natural experiments corroborate this finding: options become more expensive following stock splits, options on mini indices are more expensive than those on main indices, and mini contract options are more expensive than standard options. We attribute our findings to retail investors’ preference for skewness and divergence of opinion. Limits to arbitrage and strategic quote setting by market makers contribute to, but do not fully explain, this effect. (JEL G13, G14)

Models that examine investors’ motivations to trade often make opposite predictions about the relation between trading decisions and past returns. We find that, in the aggregate, both buyer- and seller-initiated trades increase with past returns. The difference between buyer- and seller-initiated trades is negatively related to short horizon returns but positively related to returns over longer horizons. Tax-loss-related seller-initiated trades in December and January are accompanied by increased buyer-initiated trades. Past returns significantly affect trading decisions, and these findings are consistent with a number of different models of trading behavior.