We derive a parsimonious rational model of active portfolio management that reproduces many regularities widely regarded as anomalous. Fund flows rationally respond to past performance in the model even though performance is not persistent and investments with active managers do not outperform passive benchmarks on average. The lack of persistence in returns does not imply that differential ability across managers is nonexistent or unrewarded or that gathering information about performance is socially wasteful. The model can quantitatively reproduce many salient features in the data. The flow-performance relationship is consistent with high average levels of skills and considerable heterogeneity across managers. One of the central mysteries facing financial economics is why financial intermediaries appear to be so highly rewarded, despite the apparent fierce competition between them and the uncertainty about whether

This paper examines intra-day trading data from the inter-dealer broker market for U.S. Treasury securities and measures the degree of price pressure in the off-the-run Treasury market. As is well known, securities that would appear to be very close substitutes, i.e., on-the-run and off-the-run Treasury bonds, behave as if there is some degree of market segmentation. This is the first systematic study of the off-the-run Treasury note and bond market focused entirely on a price pressure effect using intra-day data. The paper analyzes price pressure through matched pairs of securities that differ only in liquidity.

We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. The equally weighted abnormal announcement return is 1.1%, but acquiring-firm shareholders lose $25.2 million on average upon announcement. This disparity suggests the existence of a size effect in acquisition announcement returns. The announcement return for acquiring-firm shareholders is roughly two percentage points higher for small acquirers irrespective of the form of financing and whether the acquired firm is public or private. The size effect is robust to firm and deal characteristics, and it is not reversed over time.

We investigate whether security analysts exhibit persistence in their stock picking ability. We find that analysts whose recommendation revisions earned the most (least) excess returns in the past continue to outperform (underperform) in the future. Further, the market recognizes these performance differences in the five-day period surrounding the recommendation revision. This market reaction, however, is incomplete. Excess returns in the one and three trading months following the revision are significant and positively associated with analysts’ prior performance. However, a trading strategy taking long (short) positions in recommendation upgrades (downgrades) conditional on analysts’ prior performance is unprofitable.

The need to understand and measure the determinants of market maker bid/ask spreads is crucial in evaluating the merits of competing market structures and the fairness of market maker rents. This study develops a simple, parsimonious model for the market maker's spread that accounts for the effects of price discreteness induced by minimum tick size, order-processing costs, inventory-holding costs, adverse selection, and competition. The inventory-holding and adverse selection cost components of spread are modeled as an option with a stochastic time to expiration. This inventory-holding premium embedded in the spread represents compensation for the price risk borne by the market maker while the security is held in inventory. The premium is partitioned in such a way that the inventory-holding and adverse selection cost components, as well as the probability of an informed trade, are identified. The model is tested empirically using Nasdaq stocks in three distinct minimum tick size regimes and is shown to perform well both in an absolute sense and relative to competing specifications.

Improving Social Security's Progressivity and Solvency with Hybrid Indexing by Robert Pozen, Sylvester J. Schieber and John B. Shoven. Published in volume 94, issue 2, pages 187-191 of American Economic Review, May 2004

I show that among women likely to use welfare, movers move to higher‐benefit states. I also find that the probability likely welfare users will move at all is lower in higher‐benefit states. This effect is concentrated early in the life cycle, as theory predicts. I construct a theoretical framework to measure the impact of welfare migration on optimal state benefits. Simulation results suggest little impact in higher‐benefit states, but possibly a more substantial impact in other states. Finally, evidence suggests little reason for concern (due to welfare migration) in using cross‐state variation in welfare generosity to identify incentive effects of the welfare system on other outcome variables.

Taken from page 76 -- "The specter of a “liquidity trap,” originally proposed as a theoretical possibility by John Maynard Keynes (1936) but long considered to be of doubtful practical relevance, has recently created alarm among the world’s central banks. In Japan, the overnight rate has been essentially at zero for most of the time since February 1999, making further interest-rate cuts impossible. Yet until well into 2003, growth remained anemic while prices continued to fall, suggesting a need for further monetary stimulus. Since March 2001, the Bank of Japan has supplemented its “zero-interest-rate policy” with a policy of “quantitative easing,” under which additional bank reserves are supplied beyond those needed to keep overnight interest rates at zero. Yet an increase in base money of more than 50 percent failed to halt the deflation, suggesting a liquidity trap. More recently, other central banks, including the Fed, have come close enough to the zero bound to worry about how they would deal with a similar predicament. Here we first discuss whether monetary policy should actually become ineffective when the zero bound on interest rates is reached. We argue that open-market operations, even of “unconventional” types, will be ineffective if they do not change expectations about the future conduct of policy; in this sense, a liquidity trap is possible. Nonetheless, a credible commitment regarding future policy can largely mitigate the distortions created by the zero bound. We fully characterize the optimal commitment in a simple example."

Institutions and Democratic Invention in 19th-Century America: Evidence from "Great Inventors," 1790-1930 by Zorina Khan and Kenneth L. Sokoloff. Published in volume 94, issue 2, pages 395-401 of American Economic Review, May 2004

This paper examines determinants of Olympic success at the country level. Does the United States win its fair share of Olympic medals? Why does China win only 6% of the medals even though it has one-fifth of the world's population? We consider the role of population and economic resources in determining medal totals from 1960 to 1996. At the margin, population and income per capita have similar effects, suggesting that both a large population and high per capita GDP are needed to generate high medal totals. We also provide out-of-sample predictions for the 2000 Olympics in Sydney.