NBER Working Papers and Publications
|June 1991||Nonrational Actors and Financial Market Behavior|
with Richard Zeckhauser, Darryll Hendricks: w3731
The insights of descriptive decision theorists and psychologists, we believe, have much to contribute to our understanding of financial market macrophenomena. We propose an analytic agenda that distinguishes those individual idiosyncrasies that prove consequential at the macro-level from those that are neutralized by market processes such as poaching. We discuss five behavioral traits - barn-door closing, expert/reliance effects, status quo bias, framing, and herding - that we employ in explaining financial flows. Patterns in flows to mutual funds, to new equities, across national boundaries, as well as movements in debt-equity ratios are shown to be consistent with deviations from rationality.
Published: Theory and Decision, vol 31, 1991, pp 257-287
|June 1990||Hot Hands in Mutual Funds: The Persistence of Performance, 1974-87|
with Darryll Hendricks, Richard Zeckhauser: w3389
The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989.
The success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitilizing on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted exc...
Published: "Hot Hands in Mutual Funds: Short-Run Persistence of Performance, 1974-1988 ," Journal of Finance, vol 48, no 1, March 1993, pp 93-130.
|July 1987||Treasury Bill Futures as Hedges Against Inflation Risk|
with Richard J. Zeckhauser: w2322
An important risk facing agents in a monetary economy arises from inflation uncertainty: in the U.S. for the 1953-84 period, unexpected quarterly inflation had a standard deviation of 2.1%. The costs of such uncertainty are likely to be even higher for multi-year contracts, since we estimate that a 1% unexpected inflation this year implies an upward revision of 0.43% for expected inflation for the forthcoming year and 1% for the years beyond that. The prospect of hedging inflation risk exposure using conventional financial instruments is bleak, as has been widely documented. We develop a theoretical case for Treasury bill futures as a inflation risk hedge by jointly assuming that (1) the Fisher Hypothesis applies to Treasury bill yields, (2) the Unbiased Expectations Hypothesis (UEH) appli...
Published: "Treasury Bill Futures as Unbiased Predictors: New Evidence and Relation to Unexpected Inflation," Review of Futures Markets, vol 8, no 3, 1989, pp 35 2-368