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]
ETF-Rebalancing Cascades
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]
The Characteristic Scale of House-Price Variation
1. Introduction There are many reasons why two houses might have different prices. To start with, one house might just be larger or have a better layout than the other. Let's call these sorts of house-to-house differences "fine-grained". But, … [Continue reading]
Using the LASSO to Forecast Returns
1. Motivating Example A Popular Goal. Financial economists have been looking for variables that predict stock returns for as long as there have been financial economists. For some recent examples, think about Jegadeesh and Titman (1993), which … [Continue reading]
Notes on Kyle (1989)
1. Motivating Example In several earlier posts (e.g., here and here) I've talked about the two well-known information-based asset-pricing models, Grossman and Stiglitz (1980) and Kyle (1985). But, there are lots of situations that don't really … [Continue reading]