Mutual Fund Performance and the Incentive to Generate Alpha

To rationalize the well‐known underperformance of the average actively managed mutual fund, we exploit the fact that retail funds in different market segments compete for different types of investors. Within the segment of funds marketed directly to retail investors, we show that flows chase risk‐adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct‐sold segment, we find no evidence that actively managed funds underperform index funds. In contrast, we show that actively managed funds sold through brokers face a weaker incentive to generate alpha and significantly underperform index funds.     

Conscientiousness,Financial Literacy,and Asset Accumulation of Young Adults

This study utilizes the 1997 National Longitudinal Survey of Youth to examine the relationship between financial literacy, conscientiousness, and asset accumulation among young adults. Findings indicate that both conscientiousness and financial literacy are consistent predictors of asset accumulation among young Americans. A one‐standard‐deviation increase in conscientiousness is correlated with a 40% increase in net worth, a 53% increase in illiquid asset holdings, and a 33% increase in liquid asset holdings. A one‐standard‐deviation increase in financial literacy is correlated with a 60% increase in illiquid asset holdings and a 30% increase in liquid asset holdings. Financial literacy moderates the effect of conscientiousness on net worth. These findings suggest that conscientiousness and financial literacy are important factors and that policies and programming with a dual emphasis on increasing conscientiousness and financial literacy are likely to have a positive impact on consumer savings and asset‐building.     

Rational Actor Theory in Politics: A Critical Review of John Quiggin*

John Quiggin's paper attacks public-choice theory. among other things, for its us? of the assumption of ‘rational egoism’. The object of our response is twofold. First. to distinguish egoism from rationality, and to indicate that rationality postulates, when faithfully applied, provide reasons for believing that political behaviour and market behaviour will be systematically different, and specifically that the former will be less egoistic than the latter. Second, to indicate that comparative static propasitions in public-choice theory (and in economics more generally) can be sustained on rather weaker behavioural assumptions than homo economicus embodies, and that consequently some of the public-choice orthodoxy would survive any attack on the egoism assumption.     

An Examination of UK Unit Trust Performance within the Arbitrage Pricing Theory Framework

This paper examines the performance of a sample of 101 United Kingdom unit trusts within an Arbitrage Pricing Theory framework and considers the relationship between performance and the investment objective, size and expenses of the trusts. Also, portfolio strategies using past trust performances to rank the trusts fails to generate significant abnormal returns relative to two different benchmark portfolios.     

Volume, Opinion Divergence, and Returns: A Study of Post–Earnings Announcement Drift

This paper examines the relationship between post–earnings announcement returns and different measures of volume at the earnings date. We find that post‐event returns are strictly increasing in the component of volume that is unexplained by prior trading activity. We interpret unexplained volume as an indicator of opinion divergence among investors and conclude that post‐event returns are increasing in ex ante opinion divergence. Our evidence is consistent with Varian [1985] , who suggests that opinion divergence may be treated as an additional risk factor affecting asset prices.     

Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?

Prior research has documented that arbitrage activity significantly reduces or eliminates stock market anomalies. However, if anomalies arise due to unsophisticated investors’ behavioral biases, then these same biases can also apply to unsophisticated arbitrageurs and thereby disrupt the arbitrage process. Consistent with a disruption in the arbitrage process for the post‐earnings announcement drift anomaly, I document that the historically positive autocorrelation in firms’ earnings announcement news has become significantly negative for firms with active exchange‐traded options. For these easy‐to‐arbitrage firms, the firms in the highest decile of prior earnings announcement abnormal return (prior earnings surprise), on average, underperform the firms in the lowest decile by 1.59% (1.43%) at their next earnings announcement. Additional analyses are consistent with investors learning about the post‐earnings announcement drift anomaly and overcompensating. This study suggests that unsophisticated attempts to profit from a well‐known anomaly can significantly reverse a previously documented stock return pattern.     

Uncertainty,Inflation, and Welfare

This paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk, in a microfounded search‐theoretical monetary model. We calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness. We show that in the presence of imperfect insurance the estimated long‐run welfare costs of inflation are on average 40% to 55% smaller compared to a complete markets, representative agent economy, and that inflation induces important redistributive effects across households.     

Inventory Dynamics and Business Cycles: What Has Changed?

To what extent can information-technology led improvements in inventory management account for the apparent moderation of economic fluctuations in the United States since the mid-1980s? We argue that changes in inventory dynamics played a reinforcing—rather than a leading—role in the reduction of output volatility. Since the mid-1980s, inventory dynamics have changed in a manner consistent with a faster resolution of inventory imbalances. However, these changes appear to be a consequence of changes in the response of industry-level sales and aggregate economic activity to monetary policy shocks. Our results suggest that it is the interaction between the changes in inventory behavior at the industry level and the macroeconomic environment—where the latter likely includes changes in the conduct of monetary policy and the responses of the economy to policy disturbances—rather than any single factor, that has contributed importantly to the observed decline in economic volatility.