A Rational Model of the Closed-End Fund Discount

The discount on closed-end funds is widely accepted as proof of investor irrationality. We show,however, that a parsimonious rational model can generate a discount that exhibits many of the characteristics observed in practice. The only required features of the model are that managers have (imperfectly observable) ability to generate excess returns; they sign long-term contracts guaranteeing them a fee each year equal to a fixed fraction of assets under management; and they can leave to earn more money elsewhere if they turn out to be good. With these assumptions, time-varying discounts are not an anomaly in a rational world with competitive investors -- they are required.

Return Persistence and Fund Flows in the Worst Performing Mutual Funds

We document that the observed persistence amongst the worst performing actively managed mutual funds is attributable to funds that have performed poorly both in the current and prior year. We demonstrate that this persistence results from an unwillingness of investors in these funds to respond to bad performance by withdrawing their capital. In contrast, funds that only performed poorly in the current year have a significantly larger (out)flow of funds/return sensitivity and consequently show no evidence of persistence in their returns.

Winter Places 2.0: A Design Guide and Report on Winter Placemaking

The past two years have presented a series of unimaginable financial, social and health challenges for communities across the globe. A continuing global pandemic forced the closures of businesses, the physical separation of people and all of us to grapple with the idea that outdoors was safer than indoors with a virus spread through the air around us. While none of us had ever lived through something like this before, communities across the country and around the globe got to work, supporting their communities by opening streets, granting permission to replace street parking with dining setups, establishing shared community dining spaces and much more. Creative projects were now embraced by public and private sector in a bid to keep people safe while allowing their communities to find opportunities to stay socially connected and local businesses to remain open and solvent throughout the pandemic.The winter of 2020 presented a unique set of challenges, one that required even more planning and support than the summer and fall of 2020. With the virus still raging cold weather communities had to think quickly to figure out ways to provide their communities a safe, outdoor, inviting space to connect with friends and neighbors while also providing the opportunity to support local businesses through what is already one of the more difficult times of the year. In the fall of 2020 we released a Winter Places Guide with creative concepts and ideas aimed at supporting communities around the world in their efforts to get people outdoors in their towns, supporting local small businesses in the process. The guide was downloaded over 3,000 times by individuals and organizations from across the US, Canada, Europe and Asia and we heard incredible feedback from Mayors, Main Street Directors, Town Planners, residents and artists inspired to get their communities outdoors in the winter months.Thanks to a funding partnership with Boston based Barr Foundation, we were able to support and fund twelve community winter placemaking projects across Massachusetts that were inspired by ideas in the Winter Places guide. These placemaking projects were led by some incredible cross-sector, public/private partnerships within each community and were designed, implemented and programmed alongside area businesses, residents and with the support and guidance of local boards of health. Though many delays were encountered based upon local Covid-19 conditions on the ground in each community, each project drew hundreds, if not thousands of area residents into the local commercial districts, giving residents a space to gather safely and businesses the opportunity to have foot traffic again during a traditionally difficult time of year, made even more difficult by the pandemic related restrictions. Nearly 100 local artists and craftspeople were employed for the implementation of these projects and close to 250 Massachusetts small businesses participated directly in this winter programming experience.The following guide includes detailed project reports on each campaign funded across Massachusetts as part of our program with Barr Foundation, resources produced during last years Winter Places program and information on how you can get support to activate your community during the coming winter. We hope this guide serves not only to inspire you to embrace winter outdoors in your community but provides practical tips to help get you there as we continue to work together to find creative ways to build community, foster new relationships and support our local economies in a changing pandemic environment

Winter Places: A Design Guide for Winter Placemaking

As COVID-19 restrictions and public safety concerns limit indoor activities for restaurants, entertainment, public events and social gatherings, communities have adapted by expanding into the outdoors. This lifeline, perfect during the warmer spring and summer months, becomes more challenging during the impending colder, darker winter months But it's time to change our relationship with winter outdoors!Winter Places, a design challenge for winter placemaking, sought ideas and designs for innovative, quickly implementable, low cost interventions to drive visitors back to Main Streets to support area restaurants and small businesses. This program and its success wouldn't have been possible without the support of our partners in what has become an international collaboration to bring new life to our main streets and downtowns.Since July, our team has worked together to compile this resource and develop this guide. Thank you to every single student, team, architect, landscape architect, designer and artist who submitted a concept to Winter Places. We received submissions from 65 individuals or teams from 6 countries and couldn't be more thrilled to see this cross border and cross continent collaboration to help extend a lifeline to our main streets and commercial centers during these extraordinary times.The information contained in the guide is designed to support cities, towns, main streets, BIDS/ BIAS, non-profit organizations, community groups, businesses and others in reimagining what's possible this winter on their main streets and commercial districts. We encourage all communities to employ strategies to change mentalities around how we approach winter. Encourage personal warmth as a policy wear layers to spend time outdoors and bring a blanket for extra warmth (wool is best)! Look to implement projects in areas that get as much sun as possible during the day time and try to also factor in typical wind directions and wind tunnels in the area when choosing installation locations. Together, let's make this our first winter of many where we approach the winter with a positive attitude instead of hibernating indoors, welcoming the 4th season as one to enjoy and look forward to. One where we embrace the outdoors, embrace our communities and reconnect with our small businesses and neighbors again

Mutual Fund Flows and Performance in Rational Markets

We develop a simple rational model of active portfolio management that provides a natural benchmark against which to evaluate observed relationship between returns and fund flows. We show that many effects widely regarded as anomalous are consistent with this simple explanation. In the model, investments with active managers do not outperform passive benchmarks because of the competitive market for capital provision, combined with decreasing returns to scale in active portfolio management. Consequently, past performance cannot be used to predict future returns, or to infer the average skill level of active managers. The lack of persistence in active manager returns does not imply that differential ability across managers is nonexistent or unrewarded, that gathering information about performance is socially wasteful, or that chasing performance is pointless. A strong relationship between past performance and the ow of funds exists in our model, indeed this is the market mechanism that ensures that no predictability in performance exists. Calibrating the model to the fund flows and survivorship rates, we nd these features of the data are consistent with the vast majority (80%) of active managers having at least enough skill to make back their fees.

Human Capital, Bankruptcy and Capital Structure

We derive a firm's optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk, while equity holders can diversify this risk away. In the presence of corporate taxes, our model delivers optimal debt levels consistent with those observed in practice. It also makes a number of predictions for the cross-sectional distribution of firm leverage. Consistent with existing empirical evidence, it implies persistent idiosyncratic differences in leverage across firms. An important new empirical prediction of the model is that, ceteris paribus, firms with more leverage should pay higher wages.

Limited Capital Market Participation and Human Capital Risk

The non-tradability of human capital is often cited for the failure of traditional asset pricing theory to explain agents' portfolio holdings. In this paper we argue that the opposite might be true --- traditional models might not be able to explain agent portfolio holdings because they do not explicitly account for the fact that human capital does trade (in the form of labor contracts). We derive wages endogenously as part of a dynamic equilibrium in a production economy. Risk is shared in labor markets because firms write bilateral labor contracts that insure workers, allowing agents to achieve a Pareto optimal allocation even when the span of asset markets is restricted to just stocks and bonds. Capital markets facilitate this risk sharing because it is there that firms offload the labor market risk they assumed from workers. In effect, by investing in capital markets investors provide insurance to wage earners who then optimally choose not to participate in capital markets. The model can produce some of the most important stylized facts in asset pricing: (1) limited asset market participation, (2) the seemingly high equity risk premium, (3) the very large disparity in the volatility of consumption and the volatility of asset prices, and (4) the time dependent correlation between consumption growth and asset returns.

Journal of Financial Economics

We propose a new method of testing asset pricing models that relies on quantities rather than just prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the risk model that is closest to the model that investors use in making their capital allocation decisions. Using our method, we assess the performance of the most commonly used asset pricing models in the literature

Measuring Skill in the Mutual Fund Industry

Using the value that a mutual fund extracts from capital markets as the measure of skill, we find that the average mutual fund has used this skill to generate about $3.2 million per year. Large cross-sectional differences in skill persist for as long as ten years. Investors recognize this skill and reward it by investing more capital with better funds. Better funds earn higher aggregate fees, and a strong positive correlation exists between current compensation and future performance. The cross-sectional distribution of managerial skill is predominantly reflected in the cross-sectional distribution of fund size, not gross alpha