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Model Ambiguity versus Model Misspecification in Dynamic Portfolio Choice

Pascal J. Maenhout; Hao Xing; Anne Balter
Journal of Finance 2026 81(3), 1741-1795 open access
We study aversion to model ambiguity and misspecification in dynamic portfolio choice. Risk‐averse investors (relative risk aversion ) fear return persistence, while risk‐tolerant investors () fear mean reversion, when confronting model misspecification concerns of identically and independently distributed (IID) returns. The intuition is that risk‐averse investors, who want to hedge intertemporally, endogenously fear return persistence, which precludes hedging. A log investor is myopic and unaffected by model misspecification, therefore only worrying about model ambiguity. Our model can generate belief scarring, nonparticipation in equity markets, and extrapolative return expectations. Extending beyond IID returns, we study model misspecification for a mean‐reverting Sharpe ratio.

Investing with Purpose: Evidence from Private Foundations

Matteo Binfarè; KYLE E. ZIMMERSCHIED
Journal of Finance 2026 81(4), 2419-2468
We study the asset allocation and investment performance of U.S. private foundations that support the charitable sector. Large foundations generated positive risk‐adjusted returns before 2008, driven by early access to private equity and venture capital funds, but have underperformed since. The median foundation underperforms by more than 100 bps. Foundations with concentrated stock holdings achieve higher returns but assume more risk. Due to the constraints imposed by the 5% minimum spending rule and accommodating monetary policy, foundations increase risk‐taking and reach for yield. Over time, a conservative asset allocation decreases real wealth, reducing charitable giving.

Leader‐Follower Dynamics in Shareholder Activism

Doruk Cetemen; Gonzalo Cisternas; Aaron Kolb; S. Viswanathan
Journal of Finance 2026 81(3), 1377-1435 open access
We propose a theory of coordination and influence among blockholders. Privately informed activists time their trades in sequence to lower acquisition costs, prompting a strategic use of order flows: leader activists create trading gains for their followers, ultimately influencing their willingness to bear greater value‐enhancing intervention costs. Through this channel, informed trades can exhibit predictability, in sharp contrast with Kyle (1985, Econometrica 53, 1315–1335). We explain how this novel predictability shapes free‐rider problems affecting governance, and how it produces price abnormalities analogous to those documented empirically. We also uncover how private information interdependence can be a key catalyst for the mechanism studied.

The Equilibrium Effects of Eviction Policies

Boaz Abramson
Journal of Finance 2026
I propose a dynamic equilibrium model of rental markets that endogenously gives rise to defaults on rents and evictions. In the model, eviction protections make it harder to evict delinquent renters, but higher default costs to landlords increase equilibrium rents. I quantify the model using micro data on evictions, rents, and homelessness. I find that stronger eviction protections exacerbate housing insecurity and lower welfare. The key empirical driver of this result is the persistent nature of risk underlying rent delinquencies. Rental assistance reduces housing insecurity and improves welfare because it lowers the likelihood that renters default ex ante.

Size, Returns, and Value: Do Private Equity Firms Allocate Capital According to Manager Skill?

Reiner Braun; Nils Dorau; Tim Jenkinson; Daniel Urban
Journal of Finance 2026 81(3), 1661-1700 open access
Using a novel data set linking private equity (PE) deals to individual managers, we document evidence of manager skill in terms of generating net present value (NPV), a performance measure that captures both scale and returns. PE firms have strong economic incentives to raise larger funds and execute larger deals. While relative returns decline with scale, NPV persists and even increases. Skilled managers are entrusted with more capital and achieve better career outcomes, and approximately 40% of NPV is attributable to internal capital allocation decisions. These findings highlight the role of PE firms in creating value through performance‐based capital deployment.