the credit crisis as a problem in the sociology of knowledge this article analyzes the role in the credit crisis of the processes by which market participants produce knowledge about financial instruments employing documentary sources and 87 predominantly oral history interviews the article presents a historical sociology of the clusters of evaluation practices surrounding abss asset backed securities most importantly mortgage backed securities and cdos collateralized debt obligations despite the close structural similarity between abss and cdos these practices came to differ substantially and became the province e g in the rating agencies of organizationally separate groups in consequence when abs cdos cdos in which the underlying assets are abss emerged they were evaluated in two separate stages this created a fatally attractive arbitrage opportunity large scale exploitation of which sidelined previously important gatekeepers risk sensitive investors in the lower tranches of mortgage backed securities and eventually magnified and concentrate

war peace and the size of countries this paper studies the relationship between international con ict and the size distribution of countries in a model in which both peaceful bargaining and non peaceful confrontations are possible we show how the size distribution of countries depends on the likelihood bene ts and costs of con ict and war we also study the role of international law and show how better de ned international property rights may lead to country breakup and more numerous local con icts

evidence on growth increasing returns and the extent of the market if economic growth relies upon the extent of the market then openness will decrease the connection between initial income and later growth alternatively learning by doing models suggest that wealth will be more positively correlated with growth in open economies because trade causes advanced economies to specialize in products with more opportunities for learning we examine twentieth century less developed countries and nineteenth century u s states in both data sets there is a much stronger correlation between growth and initial wealth among closed economies these findings support the importance of the extent of the market and aggregate demand in fostering growth

asset pricing with loss aversion using standard preferences for asset pricing has not been very successful to match asset price characteristics such as the risk free interest rate equity premium and the sharpe ratio to time series data behavioral nance has recently proposed more realistic preferences such as preferences with loss aversion to model asset pricing research has now started to explore the implications of behaviorally founded preferences for asset price characteristics encouraged by some studies of benartzki and thaler 1995 and barberis et al 2001 we study asset pricing with loss aversion in a production economy we here employ a stochastic growth model and use a stochastic version of a dynamic programming method with adaptive grid scheme to compute the above mentioned asset price characteristics of a model with loss aversion in preferences as our results show a model with loss aversion performs considerably better than pure consumption based asset pricing models

r d and technology policy in nics as learning processes abstract this paper presents a dynamic learning perspective to research and development activity and to policies promoting these activities and technological development more generally the basic idea is that successful penetration of research and development rd multidisciplinary learning both technoeconomic and managerial organizational and learning which is cumulative through time this is especially so at an early infant phase of diffusion of this process through the economy a dynamic view of externalities and market failures is presented one that provides the basis for a catalytic perspective of technological policy this perspective is based on the distinction between an infant and a mature phase of policy where massive flexible search oriented support in the early phase sets the base for endogenization routinization of r d in the economy and for the possibility of drastic reductions in government support for traditional forms of r d in the later phase

mutual fund performance an analysis of quarterly portfolio holdings this article employs the 1975 84 quarterly holdings of a sample of mutual funds to construct an estimate of their gross returns this sample which is not subject to survivorship bias is used in conjunction with a sample that contains the actual net returns of the mutual funds in addition to allowing the authors to estimate the bias in measured performance that is due to the survival requirement and to estimate total transaction costs the sample is used to test for the existence of abnormal performance the tests indicate that the risk adjusted gross returns of some funds were significantly positive copyright 1989 by the university of chicago

regions of europe a feasible status to be discussed regions of europe jacques dreze a new concept is proposed that of regions of europe which do not have full statehood and belong not to any state but to the community directly without endorsing this possibility and limiting itself to its economic aspects this article discusses the various dimensions of its economic desirability it appears that in general autonomous regions will not find it advantageous to insure each other investigating how assets and liabilities should be apportioned at the time of secession it argues in favour of distributive neutrality net incomes are unchanged by the secession itself in both the seceding region and the rest of the nation how distributive neutrality could be implemented is explored through a number of suggestive examples in general a region receives a share of the public debt related to its share of the public primary deficit with corrections to account for growth unsustainability of the public debt and so on

hedge funds the good the bad and the lucky we develop an estimation approach based on a modified expectation maximization em algorithm and a mixture of normal distributions associated with skill groups to assess performance in hedge funds by allowing luck to affect both skilled and unskilled funds we estimate the number of skill groups the fraction of funds from each group and the mean and variability of skill within each group for each individual fund we propose a performance measure combining the fund s estimated alpha with the cross sectional distribution of fund skill in out of sample tests an investment strategy using our performance measure outperforms those using estimated alpha and t statistic

forecasting and trading monetary policy effects on the riskless yield curve with regime switching nelson siegel models abstract we use 1982 2014 data on the us riskless yield curve to show that regime switching dynamics in nelson siegel factor models extended to encompass variables that summarize the state of monetary policy lead to superior predictive accuracy such spread in forecasting power turns out to be statistically significant even controlling for parameter uncertainty and sample variation exploiting regimes we obtain evidence that the increase in predictive accuracy is stronger during the great financial crisis when monetary policy underwent a significant sudden shift although more caution applies in comparisons to a naive random walk benchmark over a few sub samples and when transaction costs are accounted for we report that the increase in predictive power owed to the combination of regimes and of variables that capture the stance of unconventional monetary policies is tradeable we devise and test butterfly strategies that exploit the forecasts from the models and obtain evidence of risk adjusted profits both per se and in comparisons to simpler models

the effect of investment constraints on hedge fund investor returns this paper examines the effect of real world investor level investment constraints including several that have not been studied before on hedge fund performance and its persistence using a large consolidated database we demonstrate that hedge fund performance persistence is significantly reduced when rebalancing rules reflect fund size restrictions and liquidity constraints but remains statistically significant at higher rebalancing frequencies hypothetical investor portfolios that incorporate additional minimum diversification constraints minimum investment requirements and focus on open funds suggest that the performance and its persistence documented in earlier studies of hedge funds is not easily exploitable especially by large investors

liquidity shocks size and the relative performance of hedge fund strategies abstract we examine whether the increase in the flow of capital to hedge funds over the period 1994 2005 had a negative impact on performance more specifically we study the relative performance of small versus large funds for each of the hedge fund strategies our results indicate that on an absolute return basis small funds outperform large funds on a risk adjusted return basis however we find that large funds outperform small funds and that large funds are also shown to hold less liquid assets and take on less systematic and idiosyncratic risk than small funds further funds that experience positive liquidity shocks generally outperform those that experience negative liquidity shocks we also find evidence that hedge fund managers that are aggressive in dealing with liquidity shocks perform better than hedge fund managers that are conservative in dealing with liquidity shocks

the risk in hedge fund strategies theory and evidence from trend followers hedge fund strategies typically generate option like returns linear factor models using benchmark asset indices have difficulty explaining them following the suggestions in glosten and jagannathan 1994 this article shows how to model hedge fund returns by focusing on the popular trend following strategy we use lookback straddles to model trend following strategies and show that they can explain trend following funds returns better than standard asset indices though standard straddles lead to similar empirical results lookback straddles are theoretically closer to the concept of trend following our model should be useful in the design of performance benchmarks for trend following funds

optimal degree of public information dissemination financial markets and macroeconomic environments are often characterised by positive external ities in these environments transparency may reduce expected welfare public announcements serve as focal points for higher order beliefs and affect agentsbehaviour more than justified by their informational contents some scholars conclude that reducing public signalsprecision or entirely withholding information may improve welfare this article shows that public information should always be provided with maximum precision but under certain conditions not to all agents restricting the degree of publicity is a better suited instrument for preventing the negative welfare effects of public announcements than restrictions on their precision are there is a general presumption that higher central bank transparency in terms of information disclosure to a wider audience improves the effectiveness of monetary policy and is beneficial to markets as it reduces information asymmetries helps to assess risk better and arrive at more informed decisions thus enhancing market efficiency while practitioners in central banks and international institutions agree on the desirability of informative announcements and promote higher transparency on the ground that any information is valuable to markets recent academic literature distin guishes private and public information and argues that public announcements may destabilise markets and reduce efficiency by their effects on higher order beliefs if markets are characterised by positive externalities morris and shin 2002 henceforth m s have shown that noisy public announcements may be detrimental to welfare from an ex ante point of view they conclude that a commitment to withholding relevant information or deliberately reducing its precision may be welfare enhancing in this article we challenge this conclusion by distinguishing two components of transparency precision ofinformationanddegreeofpublicity the degreeof publicity is the proportion of agents who receive a signal using a stylised coordination game introduced by m s we show that information should always be provided to the market

the adequacy of investment choices offered by 401k plans abstract the choices made by 401 k participants are the product of two different decisions what is offered and what is chosen while there have been a number of studies of the decisions made by participants in 401 k plans there have been no studies of the adequacy of the full set of choices offered to 401 k participants this paper analyzes the adequacy and characteristics of the choices offered to 401 k plan participants for over 400 plans we find that only 53 of the plans offer an adequate set of options and that over a 20 year period offering inadequate options makes a difference in terminal wealth of over 53 we find that funds included in the plans are riskier but have a slightly higher return than the general population of funds in the same categories however we find that the return difference is roughly equal to the difference in expenses between funds selected by plans and randomly selected funds we study the characteristics of plans that are associated with adequate investment choices including an analysis of the use of company stock plan size and the use of sophisticated strategies

optimal policy intervention and the social value of public information svensson 2006 argues that morris and shin s 2002 analysis is contrary to what is claimed actually pro transparency this paper re examines the issue but with an important modification to the original morris and shin framework recognizing that central banks impact on the economy not only indirectly via their public announcements but also directly through their policy actions we consider the social value of public information in the presence of active policy intervention our results strengthen morris and shin s conclusions considerably in particular we find that public disclosure of the central bank s information is always undesirable

hedge funds risk and return from a database that is relatively free of bias this article provides measures of the returns of hedge funds and of the distinctly nonnormal characteristics of the data the results include risk adjusted measures of performance and tests of the degree to which hedge funds live up to their claim of market neutrality the substantial attrition of hedge funds is examined the determinants of hedge fund demise are analyzed and results of tests of return persistence are presented the conclusion is that hedge funds are riskier and provide lower returns than is commonly supposed

rural electricity access in south asia is grid extension the remedy a critical review abstract despite the historical priority to grid based electrification in south asia two out of every five people in the region still live without access to electricity due to various limitations of conventional grid based rural electrification as brought out by a number of studies and reports demand for alternative models such as renewable energy based off grid and distributed generation solutions are gaining increasing attention globally however due to the absence of any study that could juxtapose these two modes in terms of their merits and demerits it is difficult to infer on their relative superiority or inferiority in view of that this paper makes an attempt to connect the dots by carrying out an extensive review of the literature to analyse the role of grid and off grid options in facilitating rural electrification and come out with a comparative assessment of their costs and impacts on the south asian countries the paper infers that instead of considering each of the modes of electrification in a standalone manner and perceiving them as mutually exclusive or competing with one another as usually perceived in the policy sphere off grid electrification can actually be considered as a complementary mode and should ideally be integrated with grid expansion to serve the bigger cause of ensuring universal and sustainable rural electrification in south asia

economic theories of the break up and integration of nations abstract this paper surveys the recent political economy literature on the size distribution of nations the main themes of this literature are 1 a the spread of democracy leads to the creation of too many sovereign states 2 b the extent of factor mobility plays a key role in determining the incentives towards separation or integration 3 c economic integration through the development of international trade may require greater political integration to create and effectively maintain a level playing field in international trade at the same time economic integration by reducing the economic costs of separation increases the incentives towards political separation

heterogeneous private sector information central bank disclosure and stabilization policy conventional wisdom has it that a central bank that uses an informational advantage to undertake active policy intervention can do as well at least so far as real outcomes are concerned by making its information publicly available and abstaining from stabilization this notion is examined using a framework incorporating heterogeneous private sector information concerning aggregate demand shocks an activist regime in which the central bank exploits its own information to engage in stabilization is found to be unambiguously superior to a noninterventionist regime where the central bank maintains a constant setting of policy but publicly discloses its own information

conversations among competitors conversation is a central part of economic life a wide range of information gets passed from one person to another via word of mouth communication and a number of authors argue that the nature of connections between people i e the structure of social networks can have a

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

the expectation hypothesis of the term structure of very short term rates statistical tests and economic value this paper re examines the validity of the expectation hypothesis eh of the term structure of us repo rates ranging in maturity from overnight to three months we extend the work of longstaff 2000a in two directions i we implement statistical tests designed to increase test power in this context ii more importantly we assess the economic value of departures from the eh based on criteria of profitability and economic significance in the context of a simple trading strategy the eh is rejected throughout the term structure examined on the basis of the statistical tests however the results of our economic analysis are favorable to the eh suggesting that the statistical rejections of the eh in the repo market are economically insignificant

hedge fund benchmarks information content and biases we discuss the information content and potential measurement biases in hedge fund benchmarks hedge fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases in addition broad based indexes mask the diversity of individual hedge fund return characteristics consequently these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds the approach to constructing hedge fund benchmarks we propose is based on the simple idea that the most direct way to measure hedge fund performance is to observe the investment experience of hedge fund investors themselves the funds of hedge funds fofs in terms of measurement biases returns of fofs can deliver a cleaner estimate of the investment experience of hedge fund investors than the traditional approach in terms of risk characteristics indexes of fofs are more indicative of the demand side dynamics driven by hedge fund investors p

strategic complementarity stabilization policy and the optimal degree of publicity this paper examines the welfare implications of public information dissemination within a model in which information is heterogeneous across agents and where a strategic complementarity is present the focus of the analysis is on how the presence of stabilization policy affects the case for transparency in considering this issue it extends james and lawler s 2011 contribution by incorporating an alternative payoff function and by employing a different representation of public disclosure the study s key finding is that the conclusions drawn in its precursor are robust to these modifications specifically in the presence of optimally designed policy intervention zero transparency maximizes welfare

asset based style factors for hedge funds asset based style factors link returns of hedge fund strategies to observed market prices they provide explicit and unambiguous descriptions of hedge fund strategies that reveal the nature and quantity of risk asset based style factors are key inputs for portfolio construction and for benchmarking hedge fund performance on a risk adjusted basis we used previously developed models to construct asset based style factors and demonstrate that one model correctly predicted the return behavior of trend following strategies during out of sample periods in particular during stressful market conditions like those of september 2001

hedge fund index engineering methodologies a comparison and demonstration we examine hedge fund hf index construction methodologies by describing and analyzing case studies from two well known database vendors and evaluating them using numerical examples on the same dataset despite the fact that they follow a similar due diligence process there are great differences in the index engineering practices arising from different quantitative techniques even for indices in the same hf category however those quantitative techniques provide similar results the differences are rather due to the use of different hf universes and different inclusion criteria this paper is the first to use actual numerical case studies to illustrate and compare how hf index engineering works having read it the reader will have a good understanding of how hf indices are formed

the dynamics of technological change in uk retail banking services an evolutionary perspective abstract the purpose of this paper is to elaborate an evolutionary perspective on the process of structural change that has characterized the banking industry in the united kingdom uk for this purpose the evolution of retail financial services is contrasted against the backdrop of the implementation and development of information and communication technologies icts the paper delves into the sources and the effects of technological change in banking over a long term perspective 1840s 1990s to point out the significance of the opportunities and the constraints that have shaped the growth and development of this industry this is interpreted as a three stage evolutionary process driven by intertemporal coordination across several complementary domains including activities of production business organization consumption and the underlying regulatory setting it is concluded that the evolution of uk retail banking displays the characteristics of a distributed process of innovation in which developers of technologies service suppliers and customers contribute to the process of structural change of the industry

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

the statistics of sharpe ratios the building blocks of the sharpe ratio expected returns and volatilities are unknown quantities that must be estimated statistically and are therefore subject to estimation error this raises the natural question how accurately are sharpe ratios measured to address this question i derive explicit expressions for the statistical distribution of the sharpe ratio using standard asymptotic theory under several sets of assumptions for the return generating process independently and identically distributed returns stationary returns and with time aggregation i show that monthly sharpe ratios cannot be annualized by multiplying by 12 except under very special circumstances and i derive the correct method of conversion in the general case of stationary returns in an illustrative empirical example of mutual funds and hedge funds i find that the annual sharpe ratio for a hedge fund can be overstated by as much as 65 percent because of the presence of serial correlation in monthly returns and once this

the breakup of nations a political economy analysis this paper develops a model of the breakup or unification of nations in each nation the decision to separate is taken by majority voting a basic trade off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted the model emphasizes political conflicts over redistribution policies the main results of the paper are i when income distributions vary across regions and the efficiency gains from unification are small separation occurs in equilibrium and ii when all factors of production are perfectly mobile all incentives for separation disappear i introduction following the demise of communism the entire map of europe from the atlantic coast to the urals is being redrawn and issues of separation unification and the redrawing of borders are yet again at the forefront of european concerns many of the issues raised by this process are primarily of a political cultural or linguistic nature however there are also economic considerations that bear on this problem the objective of this paper is to analyze some important economic and political determinants of the process of unification and separation of democratic nations the starting point of our analysis is to suppose that from an economic efficiency point of view separation of nations is never desirable a unified nation is always more efficient since free trade among regions is guaranteed duplication costs in defense and law enforcement are avoided and local public goods provision such as transportation and communication networks or common standards can be coordinated furthermore any benefits of decentralization that might be obtained in a world with several nations may also be achieved within a unified nation by replicating the administrative structure of the world with several

multi period performance persistence analysis of hedge funds since hedge funds specify significant lock up periods we investigate persistence in the performance of hedge funds using a multi period framework in which the likelihood of observing persistence by chance is lower than in the traditional two period framework under the null hypothesis of no manager skill no persistence the theoretical distribution of observing wins or losses follows a binormial distribution we test this hypothesis using the traditional two period framework and compare the findings with the results obtained using our multi period framework we examine whether persistence is sensitive to the length of return measurement intervals by using quarterly half yearly and yearly returns we find maximum persistence at the quarterly horizon indicating that presistence among hedge fund managers is short term in nature

only winners in tough times repeat hedge fund performance persistence over different market conditions we provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets specifically we construct two performance measures downsidereturns and upsidereturns conditioned on the level of overall hedge fund sector returns after adjusting for risks funds in the highest downsidereturns quintile outperform funds in the lowest quintile by about 7 in the subsequent year whereas funds with better upsidereturns do not outperform subsequently the downsidereturns can predict future fund performance over a horizon as long as 3 years for both winners and losers and for funds with few share restrictions

zero r 2hedge funds and market neutrality factor models yield an r 2 insignificantly different from 0 for one third of hedge funds in a broad sample these funds illustrate the concept of market neutrality and feature lower volatilities higher sharpe ratios and higher alphas than other funds indicating that they provide a successful alternative investment however large portfolios of zero r 2 funds contain fully half the volatility of portfolios of other funds suggesting that they feature substantial systematic risk furthermore these funds display an increased probability of failure even after controlling for idiosyncratic volatility these results indicate the presence of an omitted factor that exposes investors to significant downside risk

economic integration and political disintegration in a world of trade restrictions large countries enjoy economic benefits because political boundaries determine the size of the market under free trade and global markets even relatively small cultural linguistic or ethnic groups can benefit from forming small homogeneous political jurisdictions this paper provides a formal model of the relationship between openness and the equilibrium number and size of countries and successfully tests two implications of the model firstly the economic benefits of country size are mediated by the degree of openness to trade secondly the history of nation state creations and secessions is influenced by the trade regime

a stochastic dominance analysis of yen carry trades abstract yen carry trades have made headline news for over a decade we examine the profitability of such trades for the period 2001 2009 yen carry trades generated high mean returns and sharpe ratios prior to the recent financial crisis they continued to outperform major stock markets for the full sample period given the non normality of carry trade returns we apply non parametric tests based on stochastic dominance sd to evaluate whether the high returns of yen carry trades are compatible with risk as reflected in returns on us and global stock market indices we apply a general test for sd developed recently by linton maasoumi and whang 2005 to six currencies as well as portfolios of these currencies for a large class of risk averse investors profits from yen carry trades cannot be attributed to risks

optimal monetary policy with imperfect common knowledge we study optimal nominal demand policy in a flexible price economy with monopolistic competition where firms have imperfect common knowledge about the shocks hitting the economy information imperfections emerge endogenously because firms are assumed to have finite shannon capacity to process information we then ask how policy that minimizes a quadratic objective in output and prices depends on firms processing capacity when price setting decisions of firms are strategic complements we find that policy should nominally accommodate white noise mark up shocks for a large range of capacity values this fi nding is robust to the policy maker observing shocks imperfectly or being uncertain about firms processing capacity when mark up shocks are persistent accommodation may even have to increase in the medium term but has to decrease in the long run thereby generating a hump shaped price response and a slow reduction in output instead when prices are strategic substitutes policy tends to react with nominal demand contractions to mark up shocks in addition there might exist discontinuities between common knowledge equilibria and equilibria with small amounts of imperfect common knowledge

evaluation by the aumann and serrano performance index and sharpe ratio bitcoin performance abstractwe compare bitcoin performance based on the aumann and serrano performance index and sharpe ratio assuming that asset returns follow the class of discrete normal mixture distributions the aumann and serrano performance index can take into account higher moments of the underlying distribution of assets and is relevant for risk averse investors we evaluate bitcoin performance based on the aumann and serrano index relative to the performance of other assets our evaluation shows that bitcoin is rated highly by the sharpe ratio but rated very poorly by the aumann and serrano index we also find some stock assets can beat bitcoin by the sharpe ratio when an investment horizon is monthly

the road less traveled strategy distinctiveness and hedge fund performance we investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance we propose a measure of the distinctiveness of a fund s investment strategy based on historical fund return data we call the measure the strategy distinctiveness index sdi we document substantial cross sectional variations as well as strong persistence in sdi our main result indicates that on average a higher sdi is associated with better subsequent performance after adjusting for risk funds in the highest sdi quintile outperform funds in the lowest quintile by 3 5 in the subsequent year the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

the role of heterogeneity in asset pricing the effect of a clustering approach in this article we use a novel clustering approach to study the role of heterogeneity in asset pricing we present evidence that the equity premium is consistent with a stochastic discount factor sdf calculated as the average of the household clusters intertemporal marginal rates of substitution in the 1984 2002 period the result is driven by the skewness of the cluster based cross sectional distribution of consumption growth but cannot be explained by the cross sectional variance and mean alone we find that nine clusters are sufficient to explain the equity premium with relative risk aversion coefficient equal to six the result is robust to various averaging schemes of cluster based consumption growth used to construct the sdf lastly the analysis reveals that standard approximation schemes of the sdf using individual household data produce unreliable results implying a negative sdf

anticipatory traders and trading speed we examine whether speed is an important characteristic of traders who anticipate local price trends these anticipatory participants correctly trade prior to the overall market and systematically act before other participants they use manual and algorithmic order entry methods but most are not fast enough to be high frequency traders hfts those anticipating price trends have impacts as if they are informed traders while the case for anticipatory participants affecting the volume of other traders is rejected a follow up sample shows significant attrition in accounts and difficulty maintaining the anticipatory strategies to identify anticipatory traders we devise novel methods to isolate local price trends using order book data from the west texas intermediate wti crude oil futures market

a note on empirical sharpe ratio dynamics abstract generating a high positive excess return in a prospective period does not necessarily increase the empirical sharpe ratio of an investment fund therefore we derive a critical range in which prospective excess returns must lie in order to increase its empirical sharpe ratio we also give a formal statement of an excess return value within this critical range that leads to the maximum possible empirical sharpe ratio in the prospective period

openness country size and government abstract this paper shows that smaller countries have a larger share of public consumption in gdp and are also more open to trade these empirical observations are consistent with recent theoretical models explaining country formation and break up and may account for the observed positive empirical relationship between trade openness and government size

do hedge funds deliver alpha a bayesian and bootstrap analysis abstract using a robust bootstrap procedure we find that top hedge fund performance cannot be explained by luck and hedge fund performance persists at annual horizons moreover we show that bayesian measures which help overcome the short sample problem inherent in hedge fund returns lead to superior performance predictability sorting on bayesian alphas relative to ols alphas yields a 5 5 per year increase in the alpha of the spread between the top and bottom hedge fund deciles our results are robust and relevant to investors as they are neither confined to small funds nor driven by incubation bias backfill bias or serial correlation

ranking of investment funds acceptability versus robustness abstract within the class of performance ratios the sharpe measure can lead to misleading evaluation and various modifications have been investigated as a starting point we consider the axiomatic approach based on the notion of acceptable index of performance our goal is to show how the promising properties possessed by alternative measures such as the gain loss ratio or the average value at risk ratio are not compatible with the statistical robustness of their estimated counterparts this clearly affects the ranking of funds and consequently the performance persistence we study the qualitative robustness along with the quantitative resistance of the corresponding estimators in a nonparametric setting we include the value at risk ratio which is not an acceptability index of performance these measures do not possess qualitative robustness nonetheless we show how some degree of resistance to data contamination restricted to bounded intervals can be recovered using the relationship between the influence function of estimators and their bias for large samples we suggest the average value at risk ratio and the value at risk ratio as the less sensitive to outliers as a consequence acceptability is no longer a prerequisite for performance evaluation to limit the alteration of a given ranking among alternative investment funds one can use the not acceptable value at risk ratio as well eventually we propose a modified ratio either of the trimmed mean or of the median to the value at risk

hedge funds pricing controls and the smoothing of self reported returns w e investigate the extent to which hedge fund managers smooth self reported returns in contrast to prior research on the anomalous properties of hedge fund returns we observe the mechanisms used to price the fund s investment positions and report the fund s performance to investors thereby allowing us to differentiate between asset illiquidity and misreporting based explanations we find that funds using less verifiable pricing sources and funds that provide managers with greater discretion in pricing investment positions are more likely to have returns consistent with intentional smoothing traditional controls however such as removing the manager from the setting and reporting of the fund s net asset value and the use of reputable auditors and administrators are not associated with lower levels of smoothing with respect to asset illiquidity versus misreporting investment style and portfolio characteristics explain 14 0 24 3 of the variation in our smoothing measures and pricing controls explain an additional 4 1 8 8 suggesting that asset illiquidity is the major factor driving the anomalous properties of self reported hedge fund returns jel g12 g23 m41 m42

on limiting or encouraging rivalry in technical progress the effect of patent scope decisions abstract this essay is on the effects of the scope of a patent e g how broad its allowed claims on subsequent inventing in a field it is argued that this depends on the topography of technical advance in a field in particular on how inventions are linked to each other and in the extent to which rapid technical advance requires a diversity of actors and minds as contrasted with being facilitated by express coordination of inventive activity technical advance is examined in several different fields with a focus on how patents influenced the pace and quality of development the authors conclude that allowing and enforcing broad patent claims tends to hinder technical progress

performance characteristics of hedge funds and commodity funds natural vs spurious biases it is well known that the pro forma performance of a sample of investment funds contains biases these biases are documented in brown goetzmann ibbotson and ross 1992 using mutual funds as subjects the organization structure of hedge funds as private and often offshore vehicles makes data collection a much more onerous task amplifying the impact of performance measurement biases theis paper reviews these biases in hedge funds we also propose using funds of hedge funds to measure aggregate hedge fund performance based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds

hedge fund return dependence model misspecification or liquidity spirals we test whether model misspecification or liquidity spirals primarily explain the observed excess dependence in filtered for economic fundamentals hedge fund index returns and the links between volatility liquidity shocks and hedge fund return clustering evidence supports the model misspecification hypothesis i hedge fund filtered return clustering is symmetric ii filtered short bias fund returns exhibit negative dependence with filtered returns for other hedge fund types iii negative liquidity shocks are associated with clustering in both tails and market volatility subsumes the role of negative liquidity shocks and iv these same patterns appear in size sorted equity portfolios

an economic evaluation of empirical exchange rate models this paper provides a comprehensive evaluation of the short horizon predictive ability of economic fundamentals and forward premiums on monthly exchange rate returns in a framework that allows for volatility timing we implement bayesian methods for estimation and ranking of a set of empirical exchange rate models and construct combined forecasts based on bayesian model averaging more importantly we assess the economic value of the in sample and out of sample forecasting power of the empirical models and find two key results 1 a risk averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one that conditions on the forward premium with stochastic volatility innovations and 2 strategies based on combined forecasts yield large economic gains over the random walk benchmark these two results are robust to reasonably high transaction costs

the signaling role of policy actions abstract in an economy affected by shocks that are imperfectly known the monetary instrument takes on a dual stabilizing role as a policy response that directly influences the economy and as a vehicle for information that reveals the central bank s assessment to firms because mark up shocks cannot be neutralized by monetary policy providing firms with more information about these shocks exacerbates their reaction and creates a larger distortion recognizing the signaling role of its instrument the central bank distorts its policy response in order to optimally shape firms beliefs while providing firms with more information is always detrimental to the output gap it has a more subtle effect on price dispersion depending on whether information is provided through the transparency channel or through the signaling channel although more transparency is always detrimental to welfare the information that is conveyed by the monetary instrument improves welfare when firms coordination is highly valuable

competing technologies and market dominance standard battles in the local area networking industry the rise of fast ethernet as the dominant standard for high speed connection in the local area networking industry is chosen to study the interaction between increasing returns to adoption and technical change in innovation diffusion contrary to most of the empirical papers on diffusion with increasing returns which study competition between an entrenched technology and a new competitor the focus is on the case in which several and different versions of a new technology are competing at the same time for market dominance within this context this article studies under which conditions an early technology may fail to capitalise on its initial time advantage and a new version without a clear early lead may become dominant in particular we will consider a case in which the initial time advantage is made ineffective by consistently adverse technological expectations then we analyse how the arrival on the market of different categories of buyers sensitive to specific applications further contribute to weaken the early leader and strengthen a competing version this is more likely to occur when buyers are highly familiar with the characteristics of that specific version copyright 2008 oxford university press

efficient use of information and social value of information this paper analyzes equilibrium and welfare for a tractable class of economies games that have externalities strategic complementarity or substitutability and heterogeneous information first we characterize the equilibrium use of information complementarity heightens the sensitivity of equilibrium actions to public information raising aggregate volatility whereas substitutability heightens the sensitivity to private information raising cross sectional dispersion next we define and characterize an efficiency benchmark designed to address whether the equilibrium use of information is optimal from a social perspective the efficient use of information reflects the social value of aligning choices across agents finally we examine the comparative statics of equilibrium welfare with respect to the information structure the social value of information is best understood by classifying economies according to the inefficiency if any in the equilibrium use of information we conclude with a few applications including production externalities beauty contests business cycles and large cournot and bertrand games

on the risk of stocks in the long run a familiar proposition is that investing in common stocks is less risky the longer an investor plans to hold them if this proposition were true then the cost of insuring against earning less than the risk free rate of interest should decline as the investment horizon lengthens this paper shows that the opposite is true even if stock returns are mean reverting in the long run the case for young people investing more heavily than older people in stocks cannot therefore rest solely on the long run properties of stock returns for guarantors of money fixed annuities the proposition that stocks in their portfolios are a better hedge the longer the maturity of their obligations is unambiguously wrong

heterogeneous information quality strategic complementarities and optimal policy design abstract the beauty contest framework of morris and shin 2002 is extended to allow sub groups within the population of agents to differ in the quality i e precision of their private information we discuss the inefficiency of the resulting model s equilibrium and assess the relative effectiveness in remedying this inefficiency of i a pigouvian tax scheme ii direct policy intervention by means of an instrument which can modify the state of the world the disclosure policy implications of each of these two policy approaches are also analyzed

socially optimal coordination characterization and policy implications in recent years there has been a growing interest in macro models with heterogeneity in information and complementarity in actions these models deliver promising positive properties such as heightened inertia and volatility but they also raise important normative questions such as whether the heightened inertia and volatility are socially undesirable whether there is room for policies that correct the way agents use information in equilibrium and what are the wel

the adaptive markets hypothesis evidence from the foreign exchange market we analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true out of sample tests on previously studied rules the excess returns of the 1970s and 1980s were genuine and not just the result of data mining but these profit opportunities had disappeared by the early 1990s for filter and moving average rules returns to less studied rules also have declined but have probably not completely disappeared high volatility prevents precise estimation of mean returns these regularities are consistent with the adaptive markets hypothesis lo 2004 but not with the efficient markets hypothesis

on the number and size of nations this paper studies the equilibrium determination of the number of countries in different political regimes and in different economic environments with more or less economic integration we focus on the trade off between the benefits of large jurisdictions and the costs of heterogeneity of large and diverse populations our model implies that i democratization leads to secessions ii in equilibrium one generally observes an inefficiently large number of countries iii the equilibrium number of countries is increasing in the amount of economic integration

does the choice of performance measure influence the evaluation of hedge funds abstract the sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund hedge fund returns differ significantly from a normal distribution for this reason other performance measures for hedge fund returns have been proposed in both the academic and practice oriented literature in conducting an empirical study based on return data of 2763 hedge funds we compare the sharpe ratio with 12 other performance measures despite significant deviations of hedge fund returns from a normal distribution our comparison of the sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds

path dependence and the korean keyboard abstract this paper recounts the evolution of the korean keyboard as a case in which the disadvantages of the inherited standard turn into a nonissue with the advancement of auxiliary technologies the persistence of an inherited standard when a superior alternative is available is usually regarded as market failure however if the transition costs to the new standard are such that the net gains from the transition are insufficient the situation is unfortunate but not market failure the situation may change over time if the net gain from the alternative standard increases or transition costs to new alternative decrease or both the situation turns into one in which entrepreneurs can profit by making the transition where appropriate an institutional reform may lower transition costs substantially this paper suggests an additional possibility of technological changes that make the transition unnecessary in the case of the korean keyboard changes in auxiliary technologies have rendered the disadvantages of the inherited standard innocuous the case provides a cautionary tale against the temptation to drastically alter a seemingly hopelessly inferior inherited standard the lesson of the korean keyboard applies to japanese and chinese keyboards with even greater force

social value of public information comment morris and shin 2002 is actually pro transparency not con the main result of morris and shin 2002 restated in papers by amato morris and shin 2002 and amato and shin 2003 and commented upon by the economist 2004 has been presented and interpreted as an anti transparency result more public information can be bad however some scrutiny of the result shows that it is actually pro transparency except in very special circumstances more public information is good furthermore for a conservative benchmark of equal precision in public and privateinformation social welfare is higher than in as ituation without public information

hedge fund risk dynamics implications for performance appraisal accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes strategies and leverage in response to changing market conditions and arbitrage opportunities the standard measure of performance is the abnormal return defined by a hedge fund s exposure to risk factors if exposures are assumed constant when in fact they vary through time estimated abnormal returns may be incorrect we employ an optimal changepoint regression that allows risk exposures to shift and illustrate the impact on performance appraisal using a sample of live and dead funds during the period january 1994 through december 2005