Various theories have been proposed to explain momentum in stock returns. We test the gradual‐information‐diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm‐specific information, especially negative information, diffuses only gradually across the investing public.

We analyze competition among informed traders in the continuous‐time Kyle(1985) model, as Foster and Viswanathan (1996) do in discrete time. We explicitly describe the unique linear equilibrium when signals are imperfectly correlated and confirm the conjecture of Holden and Subrahmanyam (1992) that there is no linear equilibrium when signals are perfectly correlated. One result is that at some date, and at all dates thereafter, the market would have been more informationally efficient had there been a monopolist informed trader instead of competing traders. The relatively large amount of private information remaining near the end of trading causes the market to approach complete illiquidity.

Aggregation Bias in the Factor Content of Trade: Evidence from U.S. Manufacturing by Robert C. Feenstra and Gordon H. Hanson. Published in volume 90, issue 2, pages 155-160 of American Economic Review, May 2000

Bioprospecting has been touted as a source of finance for biodiversity conservation. Recent work has suggested that the bioprospecting value of the “marginal unit” of genetic resources is likely to be vanishingly small, creating essentially no conservation incentive. This result is shown to flow specifically from a stylized description of the research process as one of brute‐force testing, unaided by an organizing scientific framework. Scientific models channel research effort toward leads for which the expected productivity of discoveries is highest. Leads of unusual promise then command information rents, associated with their role in reducing the costs of search. When genetic materials are abundant, information rents are virtually unaffected by increases in the profitability of product discovery and decline as technology improvements lower search costs. Numerical simulation results suggest that, under plausible conditions, the bioprospecting value of certain genetic resources could be large enough to support market‐based conservation of biodiversity.

In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path. (JEL G2, E4, L5)

We study a Lucas asset-pricing model that is standard in all respects, except that the representative agent's subjective beliefs about endowment growth are distorted. Using constant relative risk-aversion (CRRA) utility, with a CRRA coefficient below 10; fluctuating beliefs that exhibit, on average, excessive pessimism over expansions; and excessive optimism over contractions (both ending more quickly than the data suggest), our model is able to match the first and second moments of the equity premium and risk-free rate, as well as the persistence and predictability of excess returns found in the data. (JEL E44, G12)