The Journal of Finance

Decision Frequency and Synchronization Across Agents: Implications for Aggregate Consumption and Equity Return

Published: 09/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb04076.x

ANTHONY W. LYNCH

This article examines a model in which decisions are made at fixed intervals and are unsynchronized across agents. Agents choose nondurable consumption and portfolio composition, and either or both can be chosen infrequently. A small utility cost is associated with both decisions being made infrequently. Calibrating returns to the U.S. economy, less frequent and unsynchronized decision‐making delivers the low volatility of aggregate consumption growth and its low correlation with equity return found in U.S. data. Allowing portfolio rebalancing to occur every period has a negligible impact on the joint behavior of aggregate consumption and returns.

Predictability and Transaction Costs: The Impact on Rebalancing Rules and Behavior

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00287

Anthony W. Lynch, Pierluigi Balduzzi

Recent papers show that predictability calibrated to U.S. data has a large effect on the rebalancing behavior of a multiperiod investor. We find that this continues to be true in the presence of realistic transaction costs. In particular, predictability causes the no‐trade region for the risky‐asset holding to become state dependent and, on average, wider and higher. Predictability also motivates the investor to spend considerably more on rebalancing and to rebalance more often. In other results, we find that introducing costly liquidation of the risky asset for consumption lowers the average allocation to the risky asset, though only marginally early in life. Our experiments also vary the nature of the return predictability and introduce return heteroskedasticity.

Explaining the Magnitude of Liquidity Premia: The Roles of Return Predictability, Wealth Shocks, and State‐Dependent Transaction Costs

Published: 07/19/2011   |   DOI: 10.1111/j.1540-6261.2011.01662.x

ANTHONY W. LYNCH, SINAN TAN

Constantinides (1986) documents how the impact of transaction costs on per‐annum liquidity premia in the standard dynamic allocation problem with i.i.d. returns is an order of magnitude smaller than the cost rate itself. Recent papers form portfolios sorted on liquidity measures and find spreads in expected per‐annum return that are the same order of magnitude as the transaction cost spread. When we allow returns to be predictable and introduce wealth shocks calibrated to labor income, transaction costs are able to produce per‐annum liquidity premia that are the same order of magnitude as the transaction cost spread.

How Investors Interpret Past Fund Returns

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00596

Anthony W. Lynch, David K. Musto

The literature documents a convex relation between past returns and fund flows of mutual funds. We show this to be consistent with fund incentives, because funds discard exactly those strategies which underperform. Past returns tell less about the future performance of funds which discard, so flows are less sensitive to them when they are poor. Our model predicts that strategy changes only occur after bad performance, and that bad performers who change strategy have dollar flow and future performance that are less sensitive to current performance than those that do not. Empirical tests support both predictions.