The Journal of Finance

Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?

Published: 12/1997,  Volume: 52,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1997.tb02751.x  |  Cited by: 425

ALBERT S. KYLE, F. ALBERT WANG

In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a two‐fund game is a Prisoner's Dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run.

Beliefs Aggregation and Return Predictability

Published: 12/27/2022,  Volume: 78,  Issue: 1  |  DOI: 10.1111/jofi.13195  |  Cited by: 8

ALBERT S. KYLE, ANNA A. OBIZHAEVA, YAJUN WANG

We study return predictability using a model of speculative trading among competitive traders who agree to disagree about the precision of private information. Although traders apply Bayes' Law consistently, returns are predictable. In addition to trading on long‐term fundamental value, traders also trade on perceived short‐term opportunities arising from foreseen future disagreement, as in a Keynesian beauty contest. Contradicting conventional wisdom, this short‐term speculation dampens price fluctuations and generates time‐series momentum. Model calibration shows quantitatively realistic patterns of return dynamics. Consistent with empirical evidence, our model predicts more pronounced momentum for stocks with higher trading volume.

The Real Product Market Impact of Mergers

Published: 11/10/2014,  Volume: 69,  Issue: 6  |  DOI: 10.1111/jofi.12200  |  Cited by: 95

ALBERT SHEEN

I document sources of value creation in mergers by analyzing novel data on the quality and price of goods sold by merging firms. When two competitors in a product market merge, their products converge in quality, and prices fall relative to the competition. These effects take two to three years to be fully realized and are stronger in mature industries. Prices do not fall, however, when the acquirer is diversifying into a new product market. This direct evidence of real changes induced by merger activity is consistent with consolidation by related merging firms to achieve operational efficiencies and lower costs.

VARIABLE ANNUITIES*

Published: 5/1956,  Volume: 11,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1956.tb00696.x  |  Cited by: 0

M. Albert Linton

Institutional Contributions to the Leading Finance Journals, 1975 through 1986: A Note

Published: 12/1987,  Volume: 42,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1987.tb04374.x  |  Cited by: 47

ALBERT W. NIEMI

REGULATION OF INTEREST ON DEPOSITS: AN HISTORICAL REVIEW

Published: 5/1967,  Volume: 22,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1967.tb00013.x  |  Cited by: 12

Albert H. Cox

Reply

Published: 9/1957,  Volume: 12,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1957.tb04146.x  |  Cited by: 0

M. Albert Linton

AN ANALYSIS OF FIXED ASSET ACCOUNTING AND ITS EFFECT UPON PROFIT DETERMINATION DURING PERIODS OF PRICE CHANGE*

Published: 3/1953,  Volume: 8,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1953.tb01138.x  |  Cited by: 0

Albert L. Bell

DISCUSSION

Published: 7/1985,  Volume: 40,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1985.tb05031.x  |  Cited by: 0

ALBERT S. KYLE

CHANGES IN THE QUALITY OF BUSINESS LOANS OF COMMERCIAL BANKS*

Published: 12/1962,  Volume: 17,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1962.tb04344.x  |  Cited by: 0

Albert M. Wojnilower

INTEREST RATE RISK AND SYSTEMATIC RISK: AN INTERPRETATION

Published: 5/1978,  Volume: 33,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1978.tb04872.x  |  Cited by: 0

Albert R. Eddy

INTEREST ON DEPOSITS OF COMMERCIAL BANKS IN THE UNITED STATES: A STUDY IN FINANCIAL REGULATION*

Published: 12/1965,  Volume: 20,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1965.tb02941.x  |  Cited by: 0

Albert H. Cox

THE TAXATION OF PROPERTY IN KANSAS 1855–1955*

Published: 3/1958,  Volume: 13,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1958.tb04178.x  |  Cited by: 0

Lawrence Albert Leonard

MONEY MARKET DEVELOPMENTS—FROM THE “ACCORD” TO MID–1952*

Published: 5/1955,  Volume: 10,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1955.tb01274.x  |  Cited by: 0

Albert R. Koch

MONEY AND EX ANTE INVESTMENT AS DETERMINANTS OF AGGREGATE DEMAND*

Published: 3/1967,  Volume: 22,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1967.tb01662.x  |  Cited by: 0

Albert I. A. Bookbinder

Competition for Order Flow and Smart Order Routing Systems

Published: 1/10/2008,  Volume: 63,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01312.x  |  Cited by: 243

THIERRY FOUCAULT, ALBERT J. MENKVELD

We study the rivalry between Euronext and the London Stock Exchange (LSE) in the Dutch stock market to test hypotheses about the effect of market fragmentation. As predicted by our theory, the consolidated limit order book is deeper after entry of the LSE. Moreover, cross‐sectionally, we find that a higher trade‐through rate in the entrant market coincides with less liquidity supply in this market. These findings imply that (i) fragmentation of order flow can enhance liquidity supply and (ii) protecting limit orders against trade‐throughs is important.

Information Revelation in Decentralized Markets

Published: 8/28/2019,  Volume: 74,  Issue: 6  |  DOI: 10.1111/jofi.12838  |  Cited by: 32

BJÖRN HAGSTRÖMER, ALBERT J. MENKVELD

How does information get revealed in decentralized markets? We test several hypotheses inspired by recent dealer‐network theory. To do so, we construct an empirical map of information revelation where two dealers are connected based on the synchronicity of their quote changes. The tests, based on the euro to Swiss franc spot rate (EUR/CHF) quote data including the 2015 crash, largely support theory: strongly connected (i.e., central) dealers are more informed. Connections are weaker when there is less to be learned. The crash serves to identify how a network forms when dealers are transitioned from no‐learning to learning, that is, from a fixed to a floating rate.

DISCUSSION

Published: 5/1963,  Volume: 18,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1963.tb00728.x  |  Cited by: 1

Albert Ando, Martin J. Bailey

Contagion as a Wealth Effect

Published: 8/2001,  Volume: 56,  Issue: 4  |  DOI: 10.1111/0022-1082.00373  |  Cited by: 700

Albert S. Kyle, Wei Xiong

Financial contagion is described as a wealth effect in a continuous‐time model with two risky assets and three types of traders. Noise traders trade randomly in one market. Long‐term investors provide liquidity using a linear rule based on fundamentals. Convergence traders with logarithmic utility trade optimally in both markets. Asset price dynamics are endogenously determined (numerically) as functions of endogenous wealth and exogenous noise. When convergence traders lose money, they liquidate positions in both markets. This creates contagion, in that returns become more volatile and more correlated. Contagion reduces benefits from portfolio diversification and raises issues for risk management.

OPEN MARKET OPERATIONS AND RESERVE SETTLEMENT PERIODS: A PROPOSED EXPERIMENT*

Published: 9/1964,  Volume: 19,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1964.tb02871.x  |  Cited by: 0

Albert H. Cox, Ralph F. Leach

DEFENSIVE OPEN MARKET OPERATIONS AND THE RESERVE SETTLEMENT PERIODS OF MEMBER BANKS*

Published: 3/1964,  Volume: 19,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1964.tb00746.x  |  Cited by: 1

Albert H. Cox, Ralph F. Leach

ASSET MANAGEMENT AND COMMERCIAL BANK PORTFOLIO BEHAVIOR: THEORY AND PRACTICE

Published: 5/1969,  Volume: 24,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1969.tb01675.x  |  Cited by: 7

Leonall C. Andersen, Albert E. Burger

Seasonality in the Risk‐Return Relationship: Some International Evidence

Published: 3/1987,  Volume: 42,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1987.tb02549.x  |  Cited by: 28

ALBERT CORHAY, GABRIEL HAWAWINI, PIERRE MICHEL

We report evidence of seasonality in the Fama and MacBeth estimate of the CAPM‐based risk premium in four stock exchanges: the NYSE and the London, Paris, and Brussels exchanges. Specifically, we found that, in Belgium and France, risk premia are positive in January and negative the rest of the year. There is no January seasonal in the U.K. risk premium. Instead, we observed in this country a positive April seasonal and a negative average risk premium over the rest of the year. In the U.S., the pattern of risk‐premium seasonality coincides with the pattern of stock‐return seasonality. Both are positive and significant only in January. We also found that the January risk premium in the U.S. is significantly larger than those observed in the European markets. Interestingly, the reported patterns of risk‐premium seasonality in European equity markets do not fully coincide with the observed patterns of stock‐return seasonality in these markets. For example, in the U.K., average stock returns are significant and positive in January and April, whereas the market risk premium is significantly positive only in April. A possible interpretation of this phenomenon is presented in the paper.

High‐Frequency Trading around Large Institutional Orders

Published: 3/21/2019,  Volume: 74,  Issue: 3  |  DOI: 10.1111/jofi.12759  |  Cited by: 203

VINCENT VAN KERVEL, ALBERT J. MENKVELD

Liquidity suppliers lean against the wind. We analyze whether high‐frequency traders (HFTs) lean against large institutional orders that execute through a series of child orders. The alternative is HFTs trading with the wind, that is, in the same direction. We find that HFTs initially lean against these orders but eventually change direction and take positions in the same direction for the most informed institutional orders. Our empirical findings are consistent with investors trading strategically on their information. When deciding trade intensity, they seem to trade off higher speculative profits against higher risk of being detected and preyed on by HFTs.

Barbarians at the Store? Private Equity, Products, and Consumers

Published: 4/25/2022,  Volume: 77,  Issue: 3  |  DOI: 10.1111/jofi.13134  |  Cited by: 91

CESARE FRACASSI, ALESSANDRO PREVITERO, ALBERT SHEEN

We investigate the effects of private equity firms on product markets using price and sales data for an extensive number of consumer products. Following a private equity deal, target firms increase retail sales of their products 50% more than matched control firms. Price increases—roughly 1% on existing products—do not drive this growth; the launch of new products and geographic expansion do. Competitors reduce their product offerings and marginally raise prices. Cross‐sectional results on target firms, private equity firms, the economic environment, and product categories suggest that private equity generates growth by easing financial constraints and providing managerial expertise.

Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount

Published: 1/10/2008,  Volume: 63,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01313.x  |  Cited by: 317

KALOK CHAN, ALBERT J. MENKVELD, ZHISHU YANG

We examine the effect of information asymmetry on equity prices in the local A‐ and foreign B‐share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross‐sectional variation in B‐share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid‐ask spread in the A‐ and B‐share markets explains 44% and 46% of the variation in B‐share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables.

Stock Market Volatility and Learning

Published: 1/14/2016,  Volume: 71,  Issue: 1  |  DOI: 10.1111/jofi.12364  |  Cited by: 225

KLAUS ADAM, ALBERT MARCET, JUAN PABLO NICOLINI

We show that consumption‐based asset pricing models with time‐separable preferences generate realistic amounts of stock price volatility if one allows for small deviations from rational expectations. Rational investors with subjective beliefs about price behavior optimally learn from past price observations. This imparts momentum and mean reversion into stock prices. The model quantitatively accounts for the volatility of returns, the volatility and persistence of the price‐dividend ratio, and the predictability of long‐horizon returns. It passes a formal statistical test for the overall fit of a set of moments provided one excludes the equity premium.

Does Algorithmic Trading Improve Liquidity?

Published: 1/6/2011,  Volume: 66,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2010.01624.x  |  Cited by: 1338

TERRENCE HENDERSHOTT, CHARLES M. JONES, ALBERT J. MENKVELD

Algorithmic trading (AT) has increased sharply over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade‐related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.

The Flash Crash: High‐Frequency Trading in an Electronic Market

Published: 4/21/2017,  Volume: 72,  Issue: 3  |  DOI: 10.1111/jofi.12498  |  Cited by: 702

ANDREI KIRILENKO, ALBERT S. KYLE, MEHRDAD SAMADI, TUGKAN TUZUN

We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event—the Flash Crash—where a large automated selling program was rapidly executed in the E‐mini S&P 500 stock index futures market. Using audit trail transaction‐level data for the E‐mini on May 6 and the previous three days, we find that the trading pattern of the most active nondesignated intraday intermediaries (classified as High‐Frequency Traders) did not change when prices fell during the Flash Crash.

Equilibrium Bitcoin Pricing

Published: 2/9/2023,  Volume: 78,  Issue: 2  |  DOI: 10.1111/jofi.13206  |  Cited by: 214

BRUNO BIAIS, CHRISTOPHE BISIÈRE, MATTHIEU BOUVARD, CATHERINE CASAMATTA, ALBERT J. MENKVELD

We offer a general equilibrium analysis of cryptocurrency pricing. The fundamental value of the cryptocurrency is its stream of net transactional benefits, which depend on its future prices. This implies that, in addition to fundamentals, equilibrium prices reflect sunspots. This in turn implies multiple equilibria and extrinsic volatility, that is, cryptocurrency prices fluctuate even when fundamentals are constant. To match our model to the data, we construct indices measuring the net transactional benefits of Bitcoin. In our calibration, part of the variations in Bitcoin returns reflects changes in net transactional benefits, but a larger share reflects extrinsic volatility.

Banks, Low Interest Rates, and Monetary Policy Transmission

Published: 3/9/2025,  Volume: 80,  Issue: 3  |  DOI: 10.1111/jofi.13436  |  Cited by: 24

OLIVIER WANG

I study how the secular decline in interest rates affects banks' intermediation spreads and credit supply. Following a permanent decrease in rates, bank lending may rise initially but contracts in the long run. As lower rates compress deposit spreads even well above the zero lower bound, banks' retained earnings, equity, and lending fall until loan spreads have risen enough to offset the reduction in deposit spreads. A higher inflation target can support bank lending at the cost of higher liquidity premia. I find support for the model's predictions in U.S. aggregate and bank‐level data.

Discussion

Published: 8/2001,  Volume: 56,  Issue: 4  |  DOI: 10.1111/0022-1082.00366  |  Cited by: 4

Zhenyu Wang

Asset Pricing with Conditioning Information: A New Test

Published: 2/2003,  Volume: 58,  Issue: 1  |  DOI: 10.1111/1540-6261.00521  |  Cited by: 123

Kevin Q. Wang

This paper presents a new test of conditional versions of the Sharpe‐Lintner CAPM, the Jagannathan and Wang (1996) extension of the CAPM, and the Fama and French (1993) three‐factor model. The test is based on a general nonparametric methodology that avoids functional form misspecification of betas, risk premia, and the stochastic discount factor. Our results provide a novel view of empirical performance of these models. In particular, we find that a nonparametric version of the Fama and French model performs well, even when challenged by momentum portfolios.

Agency Conflicts, Investment, and Asset Pricing

Published: 1/10/2008,  Volume: 63,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01309.x  |  Cited by: 191

RUI ALBUQUERUE, NENG WANG

The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q , higher return volatility, larger risk premia, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.

Optimal Sequential Selling Mechanism and Deal Protections in Mergers and Acquisitions

Published: 5/13/2023,  Volume: 78,  Issue: 4  |  DOI: 10.1111/jofi.13235  |  Cited by: 14

YI CHEN, ZHE WANG

We study the dynamic profit‐maximizing selling mechanism in a merger and acquisitions (M&A) environment with costly bidder entry and without entry fees. Depending on the parameters, the optimal mechanism is implemented by a standard auction or by a two‐stage procedure with exclusive offers to one bidder followed by an auction potentially favoring that bidder. The optimal mechanism may involve common deal protections like termination fees, asset lockups, or stock option lockups. Our proposed procedures resemble sales of targets filing Chapter 11 bankruptcy or M&A involving public targets, and they shed light on how to use deal protections in practice.

A Note on the Asymptotic Covariance in Fama‐MacBeth Regression

Published: 4/1998,  Volume: 53,  Issue: 2  |  DOI: 10.1111/0022-1082.334095  |  Cited by: 8

Ravi Jagannathan, Zhenyu Wang

On the Design of Contingent Capital with a Market Trigger

Published: 3/12/2015,  Volume: 70,  Issue: 2  |  DOI: 10.1111/jofi.12134  |  Cited by: 152

SURESH SUNDARESAN, ZHENYU WANG

Contingent capital (CC), which aims to internalize the costs of too‐big‐to‐fail in the capital structure of large banks, has been under intense debate by policy makers and academics. We show that CC with a market trigger, in which direct stakeholders are unable to choose optimal conversion policies, does not lead to a unique competitive equilibrium unless value transfer at conversion is not expected ex ante. The “no value transfer” restriction precludes penalizing bank managers for taking excessive risk. Multiplicity or absence of equilibrium introduces the potential for price uncertainty, market manipulation, inefficient capital allocation, and frequent conversion errors.

Did Structured Credit Fuel the LBO Boom?

Published: 7/19/2011,  Volume: 66,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2011.01667.x  |  Cited by: 164

ANIL SHIVDASANI, YIHUI WANG

The leveraged buyout (LBO) boom of 2004 to 2007 was fueled by growth in collateralized debt obligations (CDOs) and other forms of securitization. Banks active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through structured credit markets did not lead to worse LBOs, overpayment, or riskier deal structures. Securitization markets altered banks' access to capital, affected their lending policies, and fueled the recent LBO boom.

Does Corporate Headquarters Location Matter for Stock Returns?

Published: 8/2006,  Volume: 61,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2006.00895.x  |  Cited by: 714

CHRISTO PIRINSKY, QINGHAI WANG

We document strong comovement in the stock returns of firms headquartered in the same geographic area. Moreover, stocks of companies that change their headquarters location experience a decrease in their comovement with stocks from the old location and an increase in their comovement with stocks from the new location. The local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents. We argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents.

An Asymptotic Theory for Estimating Beta‐Pricing Models Using Cross‐Sectional Regression

Published: 8/1998,  Volume: 53,  Issue: 4  |  DOI: 10.1111/0022-1082.00053  |  Cited by: 257

Ravi Jagannathan, Zhenyu Wang

Without the assumption of conditional homoskedasticity, a general asymptotic distribution theory for the two‐stage cross‐sectional regression method shows that the standard errors produced by the Fama–MacBeth procedure do not necessarily overstate the precision of the risk premium estimates. When factors are misspecified, estimators for risk premiums can be biased, and the t ‐value of a premium may converge to infinity in probability even when the true premium is zero. However, when a beta‐pricing model is misspecified, the t ‐values for firm characteristics generally converge to infinity in probability, which supports the use of firm characteristics in cross‐sectional regressions for detecting model misspecification.

Empirical Evaluation of Asset‐Pricing Models: A Comparison of the SDF and Beta Methods

Published: 10/2002,  Volume: 57,  Issue: 5  |  DOI: 10.1111/1540-6261.00498  |  Cited by: 92

Ravi Jagannathan, Zhenyu Wang

The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset‐pricing models. There have been concerns that, compared to the classical beta method, the generality of the SDF method comes at the cost of efficiency in parameter estimation and power in specification tests. We establish the correct framework for comparing the two methods and show that the SDF method is as efficient as the beta method for estimating risk premiums. Also, the specification test based on the SDF method is as powerful as the one based on the beta method.

The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment

Published: 11/17/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12851  |  Cited by: 212

CARY FRYDMAN, BAOLIAN WANG

We test whether the display of information causally affects investor behavior in a high‐stakes trading environment. Using investor‐level brokerage data from China and a natural experiment, we estimate the impact of a shock that increased the salience of a stock's purchase price but did not change the investor's information set. We employ a difference‐in‐differences approach and find that the salience shock causally increased the disposition effect by 17%. We use microdata to document substantial heterogeneity across investors in the treatment effect. A previously documented trading pattern, the “rank effect,” explains heterogeneity in the change in the disposition effect.

Optimal CEO Compensation with Search: Theory and Empirical Evidence

Published: 9/10/2013,  Volume: 68,  Issue: 5  |  DOI: 10.1111/jofi.12069  |  Cited by: 38

MELANIE CAO, RONG WANG

We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay‐to‐performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay‐to‐performance sensitivity depends positively on a firm's idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.

Regulating Over‐the‐Counter Markets

Published: 5/30/2025,  Volume: 80,  Issue: 4  |  DOI: 10.1111/jofi.13461  |  Cited by: 4

TOMY LEE, CHAOJUN WANG

Over‐the‐counter (OTC) trading thrives despite competition from exchanges. We let OTC dealers cream skim from exchanges in an otherwise standard Glosten and Milgrom framework. Restricting the dealer's ability to cream skim induces “cheap substitution”: some traders exit while others with larger gains from trade enter. Cheap substitution implies trading costs, trade volumes, and market shares are poor policy indicators. In a benchmark case, restricting the dealer raises welfare only if trading cost increases, volume falls, and OTC market share is high. By contrast, the restriction improves welfare when adverse selection risk is low. A simple procedure implements the optimal Pigouvian tax.

Trading and Returns under Periodic Market Closures

Published: 2/2000,  Volume: 55,  Issue: 1  |  DOI: 10.1111/0022-1082.00207  |  Cited by: 143

Harrison Hong, Jiang Wang

This paper studies how market closures affect investors' trading policies and the resulting return‐generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U‐shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open‐to‐open returns than close‐to‐close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs.

Lazy Investors, Discretionary Consumption, and the Cross‐Section of Stock Returns

Published: 8/2007,  Volume: 62,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2007.01253.x  |  Cited by: 265

RAVI JAGANNATHAN, YONG WANG

When consumption betas of stocks are computed using year‐over‐year consumption growth based upon the fourth quarter, the consumption‐based asset pricing model (CCAPM) explains the cross‐section of stock returns as well as the Fama and French (1993) three‐factor model. The CCAPM's performance deteriorates substantially when consumption growth is measured based upon other quarters. For the CCAPM to hold at any given point in time, investors must make their consumption and investment decisions simultaneously at that point in time. We suspect that this is more likely to happen during the fourth quarter, given investors' tax year ends in December.

Agency Conflicts, Investment, and Asset Pricing: Erratum

Published: 9/3/2015,  Volume: 70,  Issue: 5  |  DOI: 10.1111/jofi.12307  |  Cited by: 2

RUI ALBUQUERUE, NENG WANG

Model Misspecification and Underdiversification

Published: 11/7/2003,  Volume: 58,  Issue: 6  |  DOI: 10.1046/j.1540-6261.2003.00612.x  |  Cited by: 379

Raman Uppal, Tan Wang

AbstractIn this paper, we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification. We develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio, but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks. We find that when the overall ambiguity about the joint distribution of returns is high, then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean‐variance portfolio.

The Conditional CAPM and the Cross‐Section of Expected Returns

Published: 3/1996,  Volume: 51,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1996.tb05201.x  |  Cited by: 1149

RAVI JAGANNATHAN, ZHENYU WANG

Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the value‐weighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the cross‐section of average returns on stocks. We assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. We include the return on human capital when measuring the return on aggregate wealth. Our specification performs well in explaining the cross‐section of average returns.

Corporate Financial Policy and the Value of Cash

Published: 8/2006,  Volume: 61,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2006.00894.x  |  Cited by: 1242

MICHAEL FAULKENDER, RONG WANG

We examine the cross‐sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi‐quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.