132 research outputs found
Do Optimists Grow Faster and Invest More?
The paper discusses a two-period model of an economy with two industries, positive production externalities and random shocks to production functions. Multiple equilibria that arise in such a framework can be ranked according to agent's optimism. The equilibria with higher levels of optimism are characterized by higher economic growth, higher production growth and higher proportion of investments in externality yielding industries. Using the U.S. data, it is shown that changes in sentiment predict economic growth. Sentiment has significant positive impact on industry growth, aggregate economic growth and relative levels of investment in industries. Externality yielding industries also appear to be more affected by shifts in sentiment than non-externality yielding industries.
On the Industry Concentration of Actively Managed Equity Mutual Funds
Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries.
Rational Attention Allocation Over the Business Cycle
The literature assessing whether mutual fund managers have skill typically regards skill as an immutable attribute of the manager or the fund. Yet, many measures of skill, such as returns, alphas, and measures of stock-picking and market-timing, appear to vary over the business cycle. Because time-varying ability seems far-fetched, these results call into question the existence of skill itself. This paper offers a rational explanation, arguing that skill is a general cognitive ability that can be applied to different tasks, such as picking stocks or market timing. Using tools from the rational inattention literature, we show that the relative value of these tasks varies cyclically. The model generates indirect predictions for the dispersion and returns of fund portfolios that distinguish this explanation from others and which are supported by the data. In turn, these findings offer useful evidence to support the notion of rational attention allocation.
Implicit Guarantees and Risk Taking: Evidence from Money Market Funds
A firm's termination generates bankruptcy costs. This may create
incentives for a firm's owner to bail out a firm in bankruptcy and to
curb the firm's risk taking outside bankruptcy. We analyze the role of
such implicit guarantees in the context of financial institutions that
sponsor money market mutual funds. Our identification strategy exploits
a large, exogenous expansion in risk-taking opportunities of money
market funds during the period of August 2007 to August 2008. We find
that a fund's response to the expansion depends on its sponsor's ability
to provide implicit guarantees: Funds sponsored by financial
institutions with higher equity take on less risk than those sponsored
by financial institutions with lower equity. Moreover, fund sponsors
with higher equity are more likely to provide financial support to their
funds during a market-wide run in September 2008. The difference in risk
taking disappears once implicit guarantees by fund sponsors are replaced
with an explicit government guarantee. Overall, our findings suggest
that implicit guarantees may reduce, rather than increase, risk taking
Implicit Guarantees and Risk Taking: Evidence from Money Market Funds
A firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. We analyze the role of such implicit guarantees in the context of financial institutions that sponsor money market mutual funds. Our identification strategy exploits a large, exogenous expansion in risk-taking opportunities of money market funds during the period of August 2007 to August 2008. We find that a fund's response to the expansion depends on its sponsor's ability to provide implicit guarantees: Funds sponsored by financial institutions with higher equity take on less risk than those sponsored by financial institutions with lower equity. Moreover, fund sponsors with higher equity are more likely to provide financial support to their funds during a market-wide run in September 2008. The difference in risk taking disappears once implicit guarantees by fund sponsors are replaced with an explicit government guarantee. Overall, our findings suggest that implicit guarantees may reduce, rather than increase, risk taking.
When Safe Proved Risky: Commercial Paper During the Financial Crisis of 2007-2009
Commercial paper is one of the largest money market instruments and has long been viewed as a safe haven for investors seeking low risk. However, during the financial crisis of 2007-2009, the commercial paper market experienced twice the modern-day equivalent of a bank run with investors unwilling to refinance maturing commercial paper. We analyze the supply of and demand for commercial paper and show that, in contrast to previous turbulent episodes, the crisis centered on commercial paper issued by, or guaranteed by, financial institutions. We describe the importance of Federal Reserveâs interventions in restoring stability of the market. Finally, we propose three possible explanations for the sharp decline of the commercial paper market: substitution to alternative sources of financing by commercial paper issuers, adverse selection, and institutional constraints among money market funds.
Time-Varying Fund Manager Skill
Mutual fund managers can outperform the market by picking stocks or
timing the market successfully. Previous work has estimated picking and
timing skill, assuming that each manager is endowed with a fixed amount
of each and found some evidence of picking skills and little evidence of
timing skills among successful managers. This paper estimates skill
separately in booms and recessions and finds that the extent to which
managers focus on stock picking or market timing fluctuates with the
state of the economy. Stock picking is more prevalent in booms, while
market timing dominates in recessions. We use this finding to develop a
new methodology for detecting managerial skill. The results suggest that
some but not all managers have skill. We describe the characteristics of
the skilled managers and show that skilled managers significantly
outperform the market
Rational Attention Allocation over the Business Cycle
The literature assessing whether mutual fund managers have skill
typically regards skill as an immutable attribute of the manager or the
fund. Yet, many measures of skill, such as returns, alphas, and measures
of stock-picking and market-timing, appear to vary over the business
cycle. Because time-varying ability seems far-fetched, these results
call into question the existence of skill itself. This paper offers a
rational explanation, arguing that skill is a general cognitive ability
that can be applied to different tasks, such as picking stocks or market
timing. Using tools from the rational inattention literature, we show
that the relative value of these tasks varies cyclically. The model
generates indirect predictions for the dispersion and returns of fund
portfolios that distinguish this explanation from others and which are
supported by the data. In turn, these findings offer useful evidence to
support the notion of rational attention allocation
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