A number of delta-hedged equity option strategies exhibit very large average returns. We show that much of the profitability of these strategies can be explained by an IPCA factor model. The economic magnitude of the return-adjustment produced by IPCA is impressive: even before transaction costs, the average IPCA alpha of 46 long-short trading strategies constructed on previously discovered signals, is close to zero and contrasts with average realized returns of over 80 basis points per month. Our IPCA model can be used as a benchmark for assessing the performance of other option portfolios.

Closing auctions account for about 10% of daily trading volume and offer a potentially attractive alternative to trading in the continuous market. We find that the price impact is lower in closing auctions than in the continuous market for all stocks except Nasdaq microcaps. Opening auctions are illiquid. We compute trading costs for anomalies based strategies by strategically placing orders in the lower cost mechanism. The annualized trading costs for long/short portfolios based on financial ratios such as profitability and investment range from 17 to 41 basis points (bps). Excluding microcaps, these costs fall to 9–21 bps in closing auctions.

We examine active retail mutual funds and institutional products with a mandate to invest in global equity markets. We find little reliable evidence of alphas in the aggregate or on average. The right tail of the distribution contains some large alphas. Decomposing stock selection from country selection, we find some evidence of superior stock picking abilities in the extreme right tail. However, simulations suggest that they are produced just as likely by luck as by skill. Persistence tests show little evidence of continuation in superior performance.

We use information from over 2 million trading strategies randomly generated using real data and from strategies that survive the publication process to infer the statistical properties of the set of strategies that could have been studied by researchers. Using this set, we compute t-statistic thresholds that control for multiple hypothesis testing, when searching for anomalies, at 3.8 and 3.4 for time-series and cross-sectional regressions, respectively. We estimate the expected proportion of false rejections that researchers would produce if they failed to account for multiple hypothesis testing to be about 45%.

Investment managers connected to plans sponsors are more likely to be hired than not-connected managers. The magnitude of the selection effect is comparable to that of prior performance. Ex post, connections do not result in higher post-hiring returns. Relationships are thus conducive to asset gathering by investment managers but do not generate commensurate pecuniary benefits for plan sponsors.

We present a simulation-based method for solving discrete-time portfolio choice problems involving non-standard preferences, a large number of assets with arbitrary return distribution, and, most importantly, a large number of state variables with potentially path-dependent or non-stationary dynamics. The method is flexible enough to accommodate intermediate consumption, portfolio constraints, parameter and model uncertainty, and learning. We first establish the properties of the method for the portfolio choice between a stock index and cash when the stock returns are either iid or predictable by the dividend yield. We then explore the problem of an investor who takes into account the predictability of returns but is uncertain about the parameters of the data generating process. The investor chooses the portfolio anticipating that future data realizations will contain useful information to learn about the true parameter values. Copyright 2005, Oxford University Press.

This paper takes a new look at the predictability of stock market returns with risk measures. We find a significant positive relation between average stock variance (largely idiosyncratic) and the return on the market. In contrast, the variance of the market has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market. The evidence is consistent with models of time‐varying risk premia based on background risk and investor heterogeneity. Alternatively, our findings can be justified by the option value of equity in the capital structure of the firms.

Short sellers are widely known to be informed, which would typically suggest that they demand liquidity. We obtain comprehensive transaction-level data to decompose daily short volume into liquidity-demanding and liquidity-supplying components. Contrary to conventional wisdom, we show that the most informed short sellers are actually liquidity suppliers, not liquidity demanders. They are particularly informative about future returns on news days and trade on prominent cross-sectional return anomalies. Our analysis suggests that market making and opportunistic risk-bearing are unlikely to explain these findings. Instead, our results align with recent market microstructure theory, pointing to strategic liquidity provision by informed traders.

We document that implied volatility (IV) curves of short-term equity options frequently become concave prior to earnings announcements day (EAD), typically reflecting a bimodal risk-neutral distribution for the underlying stock price. Firms with concave IV curves exhibit significantly higher absolute stock returns on EAD and higher realized volatility after the announcement, rendering concavity an ex-ante signal for event risk. Returns on delta-neutral straddles, delta-neutral strangles, and delta- and vega-neutral calendar straddles are negative and significantly lower in the presence of concave IV curves, showing that investors pay a substantial premium to hedge against the gamma risk arising from this event.

We document the causal effects of single-name options trading on the absolute level of information content of prices (stock price informativeness) by exploiting the Penny Pilot Program as an exogenous shock to options trading volume. We find that options trading increases underlying stock price informativeness and information acquisition by both option and stock investors, consistent with the framework of Goldstein and Yang (2015). The findings are driven by firms for which options are more important sources of information and firms with more efficiently priced options. Options market introduction in a sample of 25 other economies also leads to higher price informativeness.