The Jacobs Levy Center Research Paper Prizes are chosen from recent additions to the Jacobs Levy Center’s working paper series, which features topics in quantitative finance. The prizes, established in 2014, include a Best Paper award of $10,000 and one or more Outstanding Paper awards of $5,000.
Lubos Pastor, University of Chicago Booth School of Business
Robert Stambaugh, The Wharton School
Lucian Taylor, The Wharton School
Abstract: We derive equilibrium relations among active mutual funds’ key characteris- tics: fund size, expense ratio, turnover, and portfolio liquidity. As our model predicts, funds with smaller size, higher expense ratios, and lower turnover hold less liquid portfolios. A portfolio’s liquidity, a concept introduced here, depends not only on the liquidity of the portfolio’s holdings but also on the portfolio’s diversification. We derive simple, theoretically motivated measures of portfolio liquidity and diversification. Both measures have trended up over time. We also find larger funds are cheaper, funds trading less are larger and cheaper, and excessively large funds underperform, as our model predicts.
Using Stocks or Portfolios in Tests of Factor Models
Andrew Ang, Columbia University
Jun Liu, University of California San Diego
Krista Schwarz, The Wharton School
Abstract: We examine the efficiency of using individual stocks or portfolios as base assets to test asset pricing models using cross-sectional data. The literature has argued that creating portfolios reduces idiosyncratic volatility and allows more precise estimates of factor loadings, and con- sequently risk premia. We show analytically and empirically that smaller standard errors of portfolio beta estimates do not lead to smaller standard errors of cross-sectional coefficient es- timates. Factor risk premia standard errors are determined by the cross-sectional distributions of factor loadings and residual risk. Portfolios destroy information by shrinking the dispersion of betas, leading to larger standard errors.
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Jules van Binsbergen, The Wharton School
Christian Opp, The Wharton School
Abstract: We examine the importance of asset pricing anomalies for the real economy. When firms interpret public information in the way it is reflected in market prices, informational inefficiencies manifesting in financial markets as anomalies can cause material real inefficiencies. We estimate the joint dynamic distribution of firm characteristics that have been linked to anomalies and other firm variables, such as investment, capital, and value added. Based on a model that matches these joint dynamics, we then evaluate the counterfactual dynamic distribution of these quantities in an informationally efficient economy, and find significant deviations. Our results suggest that if financial- and academic institutions helped reduce and/or eliminate such anomalies they could provide large value added to the economy. We show that informational inefficiencies are particularly destructive for high Tobin’s q firms, and that the persistence and the amount of mispriced capital are major determinants of the real economic consequences.
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