1. Motivating Example Jegadeesh and Titman (1993) show that, if you rank stocks according to their returns over the previous $12$ months, then the past winners will outperform the past losers by $1.5{\scriptstyle \%}$ per month over the next $3$ … [Continue reading]
1. Motivation House-price growth is persistent. When you regress current house-price growth on lagged house-price growth using monthly Zip-code level data, \begin{align} \Delta \bar{p}_{z,t} &= \alpha_z + \beta_z \cdot \Delta \bar{p}_{z,t-1} + … [Continue reading]
1. Motivation Evolutionarily Slow. In modern financial markets, people simultaneously trade the exact same assets on vastly different timescales. For example, a Jegadeesh and Titman (1993)-style momentum portfolio turns over half its holdings once … [Continue reading]
1. Motivation In spite of how they are modeled in Merton (1971), traders don't pay attention to their portfolio every second of every day. What's more, this lumpy rebalancing behavior has important asset-pricing implications. If traders aren't … [Continue reading]
1. Motivation Kyle (1985) introduces an information-based asset-pricing model where informed traders keep trading until the marginal benefit of holding one additional share of the asset is exactly offset by the marginal cost of this last trade's … [Continue reading]