Imagine you're a quantitative long-short equities trader. If you can predict which stocks will have above-average returns next period and which will have below-average returns, then you can profit by buying the winners and selling short the losers. … [Continue reading]
When you ask people to trade an asset with an unknown terminal payout in a lab experiment, it's really common to observe a boom in the asset's price followed by a sudden crash right before the trading session ends. In other words, it's very common to … [Continue reading]
Imagine you're an asset-pricing researcher. You've just thought up a new variable, $X$, that might predict the cross-section of returns. And you've regressed returns on $X$ in a market environment $e$ of your choosing (i.e., using data on some … [Continue reading]
An asset-pricing model is a claim about which optimization problem people are solving when they choose their investment portfolios. One way to make such a claim testable is to derive a condition that should hold if people were actually solving this … [Continue reading]
Asset-pricing research consistently produces many different explanations for the same empirical facts. As a rule of thumb, you should expect asset-pricing researchers to wildly overachieve. Behavioral researchers can typically point to several … [Continue reading]