The Equity Premium and Structural Breaks

A long return history is useful in estimating the current equity premium even if the historical distribution has experienced structural breaks. The long series helps not only if the timing of breaks is uncertain but also if one believes that large shifts in the premium are unlikely or that the premium is associated, in part, with volatility. Our framework incorporates these features along with a belief that prices are likely to move opposite to contemporaneous shifts in the premium. The estimated premium since 1834 fluctuates between four and six percent and exhibits its sharpest drop in the last decade.

Evaluating and Investing in Equity Mutual Funds

Our framework for evaluating and investing in mutual funds combines observed returns on funds and passive assets with prior beliefs that distinguish pricing-model inaccuracy from managerial skill. A fund's alpha' is defined using passive benchmarks. We show that returns on non-benchmark passive assets help estimate that alpha more precisely for most funds. The resulting estimates generally vary less than standard estimates across alternative benchmark specifications. Optimal portfolios constructed from a large universe of equity funds can include actively managed funds even when managerial skill is precluded. The fund universe offers no close substitutes for the Fama-French and momentum benchmarks.

Liquidity Risk and Expected Stock Returns

This study investigates whether market-wide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5% annually, adjusted for exposures to the market return as well as size, value, and momentum factors.

Comparing Asset Pricing Models: An Investment Perspective

We investigate the portfolio choices of mean-variance-optimizing investors who use sample evidence to update prior beliefs centered on either risk-based or characteristic-based pricing models. With dogmatic beliefs in such models and an unconstrained ratio of position size to capital, optimal portfolios can differ across models to economically significant degrees. The differences are substantially reduced by modest uncertainty about the models' pricing abilities. When the ratio of position size to capital is subject to realistic constraints, the differences in portfolios across models become even less important, nonexistent in some cases.

On the Size of the Active Management Industry

We argue that active management’s popularity is not puzzling despite the industry’s poor track record. Our explanation features decreasing returns to scale: As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

Predictive Systems: Living with Imperfect Predictors

The standard regression approach to modeling return predictability seems too restrictive in one way but too lax in another. A predictive regression models expected returns as an exact linear function of a given set of predictors but does not exploit the likely economic property that innovations in expected returns are negatively correlated with unexpected returns. We develop an alternative framework - a predictive system - that accommodates imperfect predictors and beliefs about that negative correlation. In this framework, the predictive ability of imperfect predictors is supplemented by information in lagged returns as well as lags of the predictors. Compared to predictive regressions, predictive systems deliver different and substantially more precise estimates of expected returns as well as different assessments of a given predictor's usefulness.

The Solution to North America’s Triple Problem: The Case for a North American Investment Fund

Despite the expansion of trade and investment achieved by the North American Free Trade Agreement, challenges remain. The most serious is the persistence of an income gap between Mexico and its northern neighbors. Unless this gap is narrowed, other challenges, including immigration, trade, and security, will persist. The solution is the creation of a viable North American Investment Fund, which will be possible only if the three governments articulate a North American Community and pledge to contribute, each in its own way, to a strategy that will close the income gap and build institutions to resolve old problems and address new opportunities

El TLC como centro de un proceso de integración: las cuestiones no comerciales

En la primavera de 1990 el presidente de México, Carlos Salinas de Gortari, propuso una zona de libre comercio con Estados Unidos. Desde la perspectiva de México, que durante la mayor parte del siglo XX había tratado de mantenerse alejado de Estados Unidos por temor a que se minara la soberanía mexicana, la idea de Salinas era genuinamente revolucionaria. Su meta era garantizar el acceso de los productos mexicanos a los mercados estadunidenses, promoviendo así la inversión extranjera para generar empleos y desarrollo en su país. Cuando se iniciaron formalmente las negociaciones, en junio de 1991, Canadá se había unido a Estados Unidos y a México en la mesa de negociaciones, a fin de celebrar un Tratado de Libre Comercio de América del Norte. Salinas, el presidente George Bush y el primer ministro canadiense Brian Mulroney, deseaban limitar la agenda a las cuestiones del comercio y de la inversión, utilizando como modelo el Acuerdo de Libre Comercio firmado por Estados Unidos y Canadá en 1988. Pero el TLC no era una negociación de libre comercio típica; era la primera vez que países industrializados estaban negociando con un país en desarrollo mucho más pobre, sobre la base del acceso recíproco. El acceso de España y Portugal a la Comunidad Europea a fines de los años ochenta guardaba cierta semejanza con el TLC, excepto que la disparidad del ingreso entre los países del norte y los del sur era considerablemente mayor en América del Norte que en Europa.

Third-Harmonic and intermodulation distortion in bulk acoustic-wave resonators

This article discusses on the measured third-order intermodulation (IMD3) products and third harmonics (H3) appearing in a set of six different solidly mounted resonators (SMR) and bulk acoustic-wave (BAW) resonators with different shapes and stack configurations. The discussion is supported by a comprehensive nonlinear distributed circuit model that considers the nonlinear effects potentially occurring in any layer of the resonator stack. The aluminum-nitride (AlN) and silicon-dioxide (SiO2) layers are identified as the most significant contributors to the IMD3 and H3. The frequency profile of the third-order spurious signals also reveals that, in temperature-compensated resonators, where the SiO2 layers are usually thicker, the remixing effects from the second-order nonlinear terms are the major contributors to the IMD3 and H3. These second-order terms are those that explain the second-harmonic (H2) generation, whose measurements are also reported in this article. Unique values of the nonlinear material constants can explain all the measurements despite the resonators have different shapes, resonance frequencies, and stack configurations.Peer ReviewedPostprint (author's final draft