Daniel Kahneman received the Nobel Prize in economics sciences in 2002, December 8, Stockholm, Sweden. This article is the edited version of his Nobel Prize lecture. The author comes back to the problems he has studied with the late Amos Tversky and to debates conducting for several decades already. The statement is based on worked out together with Shane Federik the quirkiness of human judgment. Language: ru

Maps of Bounded Rationality: Psychology for Behavioral Economics

/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1-N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1-N rule in terms of Sharpe ratio, certainty-equivalent return, or turnover, which indicates that, out of sample, the gain from optimal diversification is more than offset by estimation error. Based on parameters calibrated to the US equity market, our analytical results and simulations show that the estimation window needed for the sample-based mean-variance strategy and its extensions to outperform the 1-N benchmark is around 3000 months for a portfolio with 25 assets and about 6000 months for a portfolio with 50 assets. This suggests that there are still many "miles to go" before the gains promised by optimal portfolio choice can actually be realized out of sample. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

/pdf/optimal-versus-naive-diversification-how-inefficient-is-the-42sjq28l5w.pdf

Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?

Econometric policy evaluation: A critique

We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment. Using a regression discontinuity design, we show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in investment is concentrated in situations where agency and information problems are relatively more severe, highlighting how the state contingent allocation of control rights can help mitigate investment distortions arising from financing frictions.

How Does Financing Impact Investment? The Role of Debt Covenants

Using data from a unique episode in which the SEC disseminated securities filings to a small group of private investors before releasing them to the public, we provide a direct test of the process through which private information is impounded into stock prices. Because the delay between the time when the filings were privately distributed and when the filings were made public was randomly distributed, our setting provides a rare natural experiment for examining how markets process new private information. We find that it takes minutes — not seconds — for informed traders to incorporate fundamental information into stock prices. We also show that the private investors who had early access to fundamental information profited more, and convey more information into stock prices, when the delay before the filings are released to the public is longer. More importantly, the rate at which information is impounded into stock prices is more correlated with the length of the predicted delay before public release than the actual delay, suggesting that informed investors trade strategically. Our study serves as the modern counterpart to Koudijs’s (2014a) study on insider trading on eighteenth-century stock exchanges — except, in our case, week-long sailing voyages have been replaced by modern electronic transmission as the conduit for information flows.

How Quickly Do Markets Learn? Private Information Dissemination in a Natural Experiment I

This paper identi…es a limit to arbitrage that arises because …rm value is endogenous to the exploitation of arbitrage. Trading on private information reveals this information to managers and improves their real decisions, enhancing fundamental value. While this

/pdf/feedback-eects-and-the-limits-to-arbitrage-5aszru5ok1.pdf

Feedback Eects and the Limits to Arbitrage

For years, the Securities and Exchange Commission (SEC) accidentally distributed securities disclosures to some investors before the public. We exploit this setting, which is unique because the delay until public disclosure was exogenous and the private information window was well defined, to study informed trading with a random stopping time. Trading intensity and the pace at which prices incorporate information decrease with the expected delay until public release, but the relation between trading intensity and time elapsed varies with traders' learning process. Noise trading and relative information advantage play similar roles as in standard microstructure theories assuming a fixed time window.

Trading Against the Random Expiration of Private Information: A Natural Experiment

This paper formally analyzes the biases related to self-reporting in hedge fund databases by matching the quarterly equity holdings of a complete list of 13F-filing hedge fund companies to the union of five major commercial databases of self-reporting hedge funds between 1980 and 2008. We find that funds initiate selfreporting after positive abnormal returns which do not persist into the reporting period. Termination of selfreporting is followed by both return deterioration and outflows from the funds. The propensity to self-report is consistent with the trade-offs between the benefits (e.g., access to prospective investors) and costs (e.g., partial loss of trading secrecy and flexibility in selective marketing). Finally, returns of self-reporting funds are higher than that of non-reporting funds using characteristic-based benchmarks. However, the difference is not significant using alternative choices of performance measures.

Inferring reporting biases in hedge fund databases from hedge fund equity holdings

This paper studies the holdings by institutional investors that are filed with a significant delay through amendments to Form 13F and that are not included in the standard 13F holdings databases. We examine these confidential holdings and find that asset management firms (hedge funds and investment companies/advisors) are more likely to seek confidentiality compared to banks and insurance companies. The confidential holdings are disproportionately associated with information-sensitive events such as mergers and acquisitions, and include stocks subjected to greater information asymmetry. Moreover, the confidential holdings of asset management firms exhibit superior risk-adjusted performance over the horizon of two to six months. Our study highlights the tension between the regulators, public, and investment managers regarding the ownership disclosure, and points to the potential bias of the prior literature in estimating the level as well as the cross-sectional differences in the performance of different types of institutional investors.

http://centerforpbbefr.rutgers.edu/20thFEA/FinancePapers/Session9/Agarwal,%20Jiang,%20Tang,%20and%20Yang.pdf

Wei Jiang

Papers

How Quickly Do Markets Learn? Private Information Dissemination in a Natural Experiment I

Feedback Eects and the Limits to Arbitrage

Trading Against the Random Expiration of Private Information: A Natural Experiment

Inferring reporting biases in hedge fund databases from hedge fund equity holdings

Do Institutional Investors Have an Ace up Their Sleeves? --Evidence from Confidential Filings of Portfolio Holdings 1