Abstract: This paper develops a model in which arbitrageurs are collectively unconstrained, but may still prefer to incur individual limits to arbitrage rather than make full use of their combined resources. These deliberate limits arise because the communication of an arbitrage position reveals the underlying idea, which creates future competition in the absence of relevant property rights. We allow arbitrage opportunities to vary along two dimensions: the ease with which they can be identified and the speed at which they mature. We find that deliberate limits to arbitrage arise for opportunities in the mid-range of the maturity dimension. This range widens when the opportunities are easier to find. Our results thus offer a set of theoretical predictions about the arbitrage trades that are likely to exist in the market.
Abstract: This paper develops a model of active asset management in which fund managers may forego alpha-generating strategies, and prefer instead to take negative-alpha trades that enable them to temporarily manipulate the investors' perception of their skills. We show that such "fake alpha" is optimally generated by taking on hidden tail risk, and that it is more likely to occur when fund managers are impatient, their trading skills are scalable, and generate a high profit per unit of risk. We exhibit long-term contracts that deter this behavior by dynamically adjusting the dates at which the manager is compensated in response to her cumulative performance.
Sources of Systematic Risk, (with D. Papanikolaou). [Latest version January 2009]. Winner of Crowell Memorial Prize (second place), PanAgora Asset Management, 2007.
Abstract: Using the restrictions implied by the heteroskedasticity of stock returns, we identify four factors in the U.S. industry returns. The first correlates highly with the market portfolio; the second is a portfolio of stocks that produce investment goods minus stocks that produce consumption goods; the third differentiates between cyclical and noncyclical stocks. The fourth, a portfolio of industries that produce input goods minus the rest of the market, is a robust predictor of excess returns on the market portfolio and bond returns. The extracted factors are shown to contain significant information about future macroeconomic and financial variables.