1. Motivating Question Imagine you've just seen Apple's most recent return, $r$, which is Apple's long-run expected return, $\mu^\star$, plus some random noise, $\epsilon \overset{\scriptscriptstyle \mathrm{iid}}{\sim} \mathrm{N}(0, \, … [Continue reading]
1. Motivating Example This post shows that, if traders face convex transaction costs (i.e., it costs them more per share to buy $2$ shares of stock than to buy $1$ share of stock), then it is possible to infer traders' investment horizons from … [Continue reading]
1. Motivation In the standard model of house-price dynamics, there are two kinds of cities: supply constrained and supply unconstrained. In supply-constrained cities (e.g., New York, Boston, or San Francisco), it's difficult and costly to build … [Continue reading]
1. Motivation I have been trying to use dimensional analysis to understand asset-pricing problems. In many hard physical problems, it is possible to gain some insight about the functional form of the solution by examining the dimensions of the … [Continue reading]
1. Motivation This post looks at the consequences of ETF rebalancing. These funds follow pre-announced rules that involve discrete thresholds. The well-known SPDR tracks the S&P 500, but there are over 1400 different ETFs tracking a wide variety … [Continue reading]