Do Hot Hands Exist among Hedge Fund Managers? An Empirical Evaluation

In measuring performance persistence, we use hedge fund style benchmarks. This allows us to identify managers with valuable skills, and also to control for option-like features inherent in returns from hedge fund strategies. We take into account the possibility that reported asset values may be based on stale prices. We develop a statistical model that relates a hedge fund's performance to its decision to liquidate or close in order to infer the performance of a hedge fund that left the database. Although we find significant performance persistence among superior funds, we find little evidence of persistence among inferior funds.     

Financially Constrained Stock Returns

We study the effect of financial constraints on risk and expected returns by extending the investment-based asset pricing framework to incorporate retained earnings, debt, costly equity, and collateral constraints on debt capacity. Quantitative results show that more financially constrained firms are riskier and earn higher expected stock returns than less financially constrained firms. Intuitively, by preventing firms from financing all desired investments, collateral constraints restrict the flexibility of firms in smoothing dividend streams in the face of aggregate shocks. The inflexibility mechanism also gives rise to a convex relation between market leverage and expected stock returns.     

Tournaments of Weakly Heterogeneous Players

We consider three prominent tournament formats—contests, binary elimination tournaments, and round-robin tournaments—in the case when players are heterogeneous in their abilities but the heterogeneity is, in a well-defined sense, weak. Using linear approximation, we characterize equilibrium strategies and payoffs in the three tournament games and compare them to the benchmark symmetric case of identical players. We describe small deviations from the symmetric equilibria by elasticities of a player's equilibrium effort with respect to her own ability and the abilities of her rivals. Our results only require general symmetry and smoothness assumptions but not specific functional forms for the probabilities of winning in tournaments. We show that, in equilibrium: (i) a player's effort and payoff depend on her rivals' abilities in a model-independent way, either through the average ability of the field (for static games), or through the properly discounted average ability of the field (for dynamic elimination tournaments); (ii) players respond stronger to changes in their own relative abilities than to changes in their rivals' relative abilities; (iii) aggregate effort (dissipated rent) does not change compared to the benchmark case; (iv) it is not possible to manipulate aggregate effort through seeding in binary elimination tournaments, although optimal seeding schemes for other purposes can be identified; and (v) balanced seeding and a uniform distribution of relative abilities cancel out the dependence of a player's effort on her rivals' abilities in binary elimination tournaments.     

Oil Futures Prices in a Production Economy with Investment Constraints

We document a new stylized fact, that the relationship between the volatility of oil futures prices and the slope of the forward curve is nonmonotone and has a V-shape. This pattern cannot be generated by standard models that emphasize storage. We develop an equilibrium model of oil production in which investment is irreversible and capacity constrained. Investment constraints affect firms' investment decisions and imply that the supply elasticity changes over time. Since demand shocks must be absorbed by changes in prices or changes in supply, time-varying supply elasticity results in time-varying volatility of futures prices. Estimating this model, we show it is quantitatively consistent with the V-shape relationship between the volatility of futures prices and the slope of the forward curve.     

Relationship Trading in Over-the-Counter Markets

We examine the network of trading relationships between insurers and dealers in the over-the-counter (OTC) corporate bond market. Regulatory data show that one-third of insurers use a single dealer, whereas other insurers have large dealer networks. Execution prices are nonmonotone in network size, initially declining with more dealers but increasing once networks exceed 20 dealers. A model of decentralized trade in which insurers trade off the benefits of repeat business and faster execution quantitatively fits the distribution of insurers' network size and explains the price–network size relationship. Counterfactual analysis shows that regulations to unbundle trade and nontrade services can decrease welfare.     

HOW DOES THE INTERNET INFLUENCE PRICE DISPERSION? EVIDENCE FROM THE AIRLINE INDUSTRY*

I estimate the Internet's effect on the level and dispersion of airline fares on a given route within and across firms. The results suggest that increases in Internet penetration reduce average price and lead to higher intrafirm price dispersion, while increases in Internet penetration do not affect interfirm price dispersion on a given route. Internet penetration affects average fares most in competitive markets. These results suggest that the Internet has significantly but subtlely influenced domestic airline competition. The effect of the Internet on prices and price dispersion is larger on direct flights.     

Sizing Up Repo

To understand which short‐term debt markets experienced “runs” during the financial crisis, we analyze a novel data set of repurchase agreements (repo), that is, loans between nonbank cash lenders and dealer banks collateralized with securities. Consistent with a run, repo volume backed by private asset‐backed securities falls to near zero in the crisis. However, the reduction is only $182 billion, which is small relative to the stock of private asset‐backed securities as well as the contraction in asset‐backed commercial paper. While the repo contraction is small in aggregate, it disproportionately affected a few dealer banks.     

Strategic Asset Allocation in Money Management

This paper analyzes the dynamic portfolio choice implications of strategic interaction among money managers who compete for fund flows. We study such interaction between two risk‐averse managers in continuous time, characterizing analytically their unique equilibrium investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performance is close. We also examine multiple and mixed‐strategy equilibria. Equilibrium policy of each manager crucially depends on the opponent's risk attitude. Hence, client investors concerned about how a strategic manager may trade on their behalf should also learn competitors' characteristics.