Knowledge that Transforms

We document two distinct mutual fund strategies: “Swinging for the Fences” (SF), in which managers hold stocks with extreme style-adjusted returns on either tail of the return distribution, and “Batting for Average” (BA), in which managers seek stocks with consistently moderate performance. We provide evidence that these strategies are persistent and deliberate. Existing measures of active management and known asset-pricing factors do not explain the strategies. SF attracts more flow, particularly when funds mention specific stock holdings in shareholder reports. SF funds charge higher fees and hold riskier portfolios; yet, they fail to deliver higher risk-adjusted returns. In falsification tests, SF strategies are not present in passive funds, supporting our conclusion that SF and BA are intentional strategies.

Applying a rich model of individuals’ life-cycle utility maximization, I comprehensively evaluate retirement saving plans. Across a range of individual characteristics, access to basic plans with constant expected payouts and no or full annuitization leads to individual utility gains of up to 5.07% of initial wealth and lifetime income ($43,800 in present value terms), and almost all individuals prefer full annuitization and a target-date fund investment strategy. With flexible plans allowing for partial annuitization and non-constant expected payouts, utility gains go up to 5.81%, and most individuals prefer a high degree of annuitization and expected payouts being increasing through retirement.

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I show that home ownership decisions across countries and individuals are shaped by a cultural heritage from agriculture. For centuries, dominant assets in preindustrial economies were either land or cattle. Consequently, the type of farming prevailing locally shaped preferences and beliefs about the relative value of immovable and movable assets. This cultural heritage had long-lasting consequences. Today, individuals originating from societies with a history of crop agriculture—where the dominant asset was land—are more likely to be homeowners. For identification, I rely both on home ownership decisions of second-generation immigrants in the United States and on an instrument.

China’s Belt and Road Initiative (BRI) aims to create economic corridors encompassing two-thirds of the world’s population and 40% of global GDP. Using the inauguration of a railway tunnel between Europe and Asia as a quasi-natural experiment, I demonstrate that countries gaining access to BRI’s freight routes issue significant amounts of high-yield debt. This debt is largely absorbed domestically, reallocating capital away from firms without translating into infrastructure investment. State-owned enterprises appear insulated from tightening financial conditions. I document mechanisms involving political alignment with China, exposure to trade policy uncertainty, and topographic fit based on historical Orient Express routes.

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Equity returns follow a pronounced V-shape pattern around the onset of recessions. They sharply drop into negative territory just before business cycle peaks and then strongly recover as the recession unfolds. Recessions are typically preceded by a flat yield curve. Probit models relying on the term spread as a predictor therefore time the beginning of recessions well. We show that model-implied recession probabilities based on the term spread strongly improve equity premium prediction in- and out-of-sample and outperform several benchmark predictors. Correcting for a structural break in the mean of the term spread in 1982 further strengthens the forecast performance.