Can Markets Learn to Avoid Bubbles?

One of the most striking results in experimental economics is the ease with which market bubbles form in a laboratory setting and the difficulty of preventing them. This article re-examines bubble experiments in light of the results of an earlier series of market experiments that examine how learning occurs in markets characterized by an asymmetry of information between buyers and sellers, such as found in Akerlof’s lemons model and Spence’s signaling model and extends the arguments put forth in the author’s book, Paving Wall Street: Experimental Economics and the Quest for the Perfect Market. Markets with asymmetric information are incomplete because they lack markets for specific levels of product quality. Such markets either lump all qualities together (lemons) or using external indications of quality to separate them (signaling). Similarly, the markets used in bubble experiments are incomplete in that they are lacking a complete set of forward or futures markets, depriving traders of the information supplied by the prices in those markets. Preliminary experimental results suggest that the addition of a single forward market can sometimes mitigate bubble formation and this article suggests more extensive research in this direction is warranted. Market bubbles outside of the laboratory usually are found in markets in with forward and futures markets that are either legally restricted or otherwise limited. Experimentation in markets with asymmetric information also indicates that the ability of subjects to learn how to send and receive signals can be enhanced by changing the way that market information is presented to them. We explore how this result might be used to help asset markets learn to avoid bubbles.Market bubbles, learning and adaptation, behavioral finance, signaling, asymmetric information

Measuring the True Cost of Active Management by Mutual Funds

Recent years have seen a dramatic shift from mutual funds into hedge funds even though hedge funds charge management fees that have been decried as outrageous. While expectations of superior returns may be responsible for this shift, this article shows that mutual funds are more expensive than commonly believed. Mutual funds appear to provide investment services for relatively low fees because they bundle passive and active funds management together in a way that understates the true cost of active management. In particular, funds engaging in “closet” or “shadow” indexing charge their investors for active management while providing them with little more than an indexed investment. Even the average mutual fund, which ostensibly provides only active management, will have over 90% of the variance in its returns explained by its benchmark index. This article derives a method for allocating fund expenses between active and passive management and constructs a simple formula for finding the cost of active management. Computing this “active expense ratio” requires only a fund’s published expense ratio, its R-squared relative to a benchmark index, and the expense ratio for a competitive fund that tracks that index. At the end of 2004, the mean active expense ratio for the large-cap equity mutual funds tracked by Morningstar was 7%, over six times their published expense ratio of 1.15%. More broadly, funds in the Morningstar universe had a mean active expense ratio of 5.2%, while the largest funds averaged a percent or two less.mutual fund expenses, cost allocation, active expense ratio, active alpha, portable alpha

A systematic look at the Very High and Low/Hard state of GX 339-4: Constraining the black hole spin with a new reflection model

We present a systematic study of GX 339-4 in both its very high and low hard states from simultaneous observations made with XMM-Newton and RXTE in 2002 and 2004. The X-ray spectra of both these extreme states exhibit strong reflection signatures, with a broad, skewed Fe-Kalpha line clearly visible above the continuum. Using a newly developed, self-consistent reflection model which implicitly includes the blackbody radiation of the disc as well as the effect of Comptonisation, blurred with a relativistic line function, we were able to infer the spin parameter of GX 339-4 to be 0.935 +/- 0.01 (statistical) +/- 0.01 (systematic) at 90 per cent confidence. We find that both states are consistent with an ionised thin accretion disc extending to the innermost stable circular orbit around the rapidly spinning black hole.Comment: 10 pages, 10 figures, accepted for publication in MNRAS 17/04/0

Evidence of a Warm Absorber that Varies with QPO Phase in the AGN RE J1034+396

A recent observation of the nearby (z=0.042) narrow-line Seyfert 1 galaxy RE J1034+396 on 2007 May 31 showed strong quasi-periodic oscillations (QPOs) in the 0.3-10 keV X-ray flux. We present phase-resolved spectroscopy of this observation, using data obtained by the EPIC PN detector onboard XMM. The "low" phase spectrum, associated with the troughs in the light curve, shows (at >4 sigma confidence level) an absorption edge at 0.86+/-0.05 keV with an absorption depth of 0.3+/-0.1. Ionized oxygen edges are hallmarks of X-ray warm absorbers in Seyfert active galactic nuclei (AGN); the observed edge is consistent with H-like O VIII and implies a column density of N_{OVIII}~3x10^{18} cm^{-2}. The edge is not seen in the "high" phase spectrum associated with the crests in the light curve, suggesting the presence of a warm absorber in the immediate vicinity of the supermassive black hole which periodically obscures the continuum emission. If the QPO arises due to Keplerian orbital motion around the central black hole, the periodic appearance of the O VIII edge would imply a radius of ~9.4(M/[4x10^6 Msun])^{-2/3}(P/[1 hr])^{2/3} r_g for the size of the warm absorber.Comment: Accepted for publication in ApJ (tentatively scheduled for the July 2010 v717 issue). 5 figures and 19 pages (in aastex preprint format

Phosphatidylinositol 3-kinase pathway genomic alterations in 60,991 diverse solid tumors informs targeted therapy opportunities.

BackgroundThe phosphatidylinositol 3-kinase (PI3K) pathway is frequently altered in cancer. This report describes the landscape of PI3K alterations in solid tumors as well as co-alterations serving as potential resistance/attenuation mechanisms.MethodsConsecutive samples were analyzed in a commercial Clinical Laboratory Improvement Amendment-certified laboratory using comprehensive genomic profiling performed by next-generation sequencing (315 genes). The co-alterations evaluated included the Erb-B2 receptor tyrosine kinase 2 (ERBB2), ERBB3, ERBB4, RAS, MET proto-oncogene tyrosine kinase (MET), and mitogen-activated protein kinase kinase (MAP2K) genes as well as tumor protein 53 (TP53), estrogen receptor 1 (ESR1), and androgen receptor (AR).ResultsAlterations in any of 18 PI3K-pathway associated genes were identified in 44% of 60,991 tumors. Although single base and insertions/deletions (indels) were the most frequent alterations, copy number changes and rearrangements were identified in 11% and 0.9% of patients, respectively. Overall, the most frequently altered genes were PIK3 catalytic subunit α (PIK3CA) (13%), phosphatase and tensin homolog (PTEN) (9%), and serine/threonine kinase 11 (STK11) (5%). Tumor types that frequently harbored at least 1 PI3K alteration were uterine (77%), cervical (62%), anal (59%), and breast (58%) cancers. Alterations also were discerned frequently in tumors with carcinosarcoma (89%) and squamous cell carcinoma (62%) histologies. Tumors with a greater likelihood of co-occurring PI3K pathway and MAPK pathway alterations included colorectal cancers (odds ratio [OR], 1.64; P < .001), mesotheliomas (OR, 2.67; P = .024), anal cancers (OR, 1.98; P = .03), and nonsquamous head and neck cancers (OR, 2.03; P = .019). The co-occurrence of ESR1 and/or AR alterations with PI3K alterations was statistically significant in bladder, colorectal, uterine, prostate, and unknown primary cancers.ConclusionsComprehensive genomic profiling reveals altered PI3K-related genes in 44% of solid malignancies, including rare disease and histology types. The frequency of alterations and the co-occurrence of resistance pathways vary by tumor type, directly affecting opportunities for targeted therapy

Incentives and the Optimally Imperfect Information Structure

This paper constructs the optimal incentive structure for an economy through the simultaneous choice of the optimal income tax and the optimal information structure. An information structure in the economy is given by the proportion of workers whose productivity is directly observable by employers relative to the number who can only convey productivity through a signal. A second-best situation exists because the government has distributional goals and the tax it levies to achieve these goals depends on income and not on ability. The main result of this paper is that the optimal information structure is the one where the productivity of no worker is directly observable by employers, i.e., all workers must signal productivity. This result comes about because the income tax may be adjusted when productivity is not observable to achieve any distribution of incomes that is possible when productivity is observable. In addition, the incentive effects of signaling serve to offset the disincentive effects of the income tax

Black hole accretion disks in the canonical low-hard state

Stellar-mass black holes in the low-hard state may hold clues to jet formation and basic accretion disk physics, but the nature of the accretion flow remains uncertain. A standard thin disk can extend close to the innermost stable circular orbit, but the inner disk may evaporate when the mass accretion rate is reduced. Blackbody-like continuum emission and dynamically-broadened iron emission lines provide independent means of probing the radial extent of the inner disk. Here, we present an X-ray study of eight black holes in the low-hard state. A thermal disk continuum with a colour temperature consistent with $L \propto T^{4}$ is clearly detected in all eight sources, down to $\approx5\times10^{-4}L_{Edd}$. In six sources, disk models exclude a truncation radius larger than 10rg. Iron-ka fluorescence line emission is observed in half of the sample, down to luminosities of $\approx1.5\times10^{-3}L_{Edd}$. Detailed fits to the line profiles exclude a truncated disk in each case. If strong evidence of truncation is defined as (1) a non-detection of a broad iron line, {\it and} (2) an inner disk temperature much cooler than expected from the ${\rm L} \propto {\rm T}^{4}$ relation, none of the spectra in this sample offer strong evidence of disk truncation. This suggests that the inner disk may evaporate at or below $\approx1.5\times10^{-3}L_{Edd}$.Comment: Accepted for publication in MNRAS, 20 pages, 18 figure