As a result of poor asset allocation decisions by 401(k) participants, 72% of all plans now offer target date funds, and participants heavily invest in them. Here, we study the characteristics and performance of TDFs, providing a unique view by employing data on TDFs holdings. We show that additional expenses charged by TDFs are largely offset by the low-cost share classes they hold, not normally open to their investors. Additionally, TDFs are very active in their allocation decisions and increasingly bet on nonstandard asset classes. However, TDFs do not earn alpha from timing or their selection of individual assets. (JEL G11. G23.)

We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, based on the cross-sectional average first-order autocorrelation coefficient of hedge fund returns, and show that it has strong and robust in- and out-of-sample forecasting power for 72 portfolios of international equities, U.S. corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables. We rationalize these findings using a simple equilibrium model, in which hedge funds provide liquidity in asset markets.

We study an environment with short-sale constraints and heterogeneous beliefs among outsiders and between insiders and outsiders. Firm insiders choose between equity, debt, and convertible debt to raise external financing. We analyze two settings: one in which heterogeneous beliefs is the only market imperfection and another in which there are significant security issue and financial distress costs. Our model generates a pecking order of external financing different from asymmetric information models, and new predictions for capital structure, sequential tranching of securities, the price impact of security issues, and long-run stock returns. We also provide a new rationale for convertible debt issuance.

This paper is a critical review of and a reader's guide to a collection of papers by Robert E. Lucas, Jr. about fruitful ways of using general equilibrium theories to understand measured economic aggregates. These beautifully written and wisely argued papers integrated macroeconomics, microeconomics, finance, and econometrics in ways that restructured big parts of macroeconomic research. (JEL A31, E00, E13, E50)

This essay revisits the argument that the removal of worldwide immigration restrictions would induce a very large increase in world GDP. The recent books Exodus: How Migration is Changing Our World by Paul Collier and The Price of Rights: Regulating International Labor Migration by Martin Ruhs raise a number of questions about the underlying economic model. The essay shows how these concerns can greatly attenuate the predicted gains. (JEL F22, F66, J11, J18, J61)

During the 2008 global financial crisis, financial institutions in the United States experienced big losses, and some firms failed. These failures occurred despite the external and internal regulatory mechanisms imposed upon the financial sector aimed at ensuring confidence and stability in the financial system. This study analyzes the impact of macroeconomic and financial stress on the profitability of financial firms. We utilize data from 1980 to 2010 to model firm profitability and stock returns using a panel regression, fixed-effect methodology. Our results show that the profitability of all firms is negatively affected by increases in macroeconomic and financial stress, measured by the National Financial Conditions Index (NFCI) and the Adjusted National Financial Conditions Index (ANFCI), respectively; however financial sector firms have exhibited an increased marginal sensitivity to both stress indexes that began in the 1990s and continued through the financial crisis of 2008. In a further analysis of the financial sector and banks, we show that depository institutions are relatively robust to macroeconomic and financial stress, and financial sector instability is driven by non-depository finance, investment, and real estate firms. Additionally, the largest 33 percent of financial firms and banks exhibit increased sensitivity to macroeconomic stress in the most recent sample. Our results coincide with the risks associated with recent trends in the financial services industry, such as deregulation, global market integration, financial product innovation, and the increasing predominance of non-depository intermediation.

We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm׳s risk premium is a function of both the firm׳s exposure to a common risk factor and idiosyncratic characteristics of the firm׳s information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factor-based asset pricing tests cannot rule out that a particular risk is priced.

This paper examines a firm's dividend reduction timing relative to other dividend reductions in the same industry. A model is proposed where the timing of dividend cuts signals true firm value. It is suggested that during periods of lower availability of external financing, firms with greater investment opportunities are among the first to make necessary dividend reductions to take advantage of such opportunities. When external financing is more available, firms with superior investment opportunities are able to access capital markets in lieu of dividend-reducing internal financing, indicating relatively higher firm values for earlier dividend reductions during periods of costly external financing, and significantly lower relative firm values for early reductions when financing is more easily obtained.