We study the returns to investing in VIX futures and VIX Exchange Traded Notes (ETNs). We document a substantial negative return premium for both ETNs and the futures. For example, the a constant maturity portfolio of one-month VIX futures loses about 30% per year over our sample period (2006-2013). We propose an equilibrium model to explain these negative returns. In this model, increases in v...

This paper investigates whether the degree of predictability can be explained by existing asset pricing models, and provides two theoretical upper bounds on the R-square of the regression of stock returns on predictors for given classes of models of interest. Empirically, we find that the predictive R-square is significantly larger than the upper bounds permitted by well known asset pricing mod...

The average level and cross-sectional variability of fund alphas are estimated from a large sample of mutual funds. This information is incorporated, along with the usual regression estimate of alpha, in a (roughly) precision-weighted average measure of individual fund performance. Substantial ‘‘learning across funds’’ is documented, with significant effects on investment decisions. In a Bayesi...

We provide theory for calculating bounds on both the value of an individual’s human capital and the return on an individual’s human capital, given knowledge of the process governing earnings and financial asset returns. We calculate bounds using U.S. data on male earnings and financial asset returns. The large idiosyncratic component of earnings risk implies that bounds on values and returns ar...

We model sovereign debt in the absence of a bankruptcy code. Threat of trade sanctions and seizure of exports by the lenders are the drivers of enforcement of sovereign debt contracts.The borrower takes these potential actions into account when choosing optimal voluntary default and debt capacity. We obtain a closedform solution for the sovereign yield spreads that depend on the costs of sancti...

Many stockholders irrationally believe that high recent market returns predict high future market returns. I argue that the presence of these extrapolative investors can help resolve the equity premium puzzle if the elasticity of intertemporal substitution (EIS) is greater than unity. Extrapolators’ overreaction to dividend news generates countercyclical expected returns. Rational investors res...

This article constructs an economic model of a rational trader who operates in a market with transaction costs and noise trading. The level of trading affects the rational trader’s marginal cost of transacting; as a result, trading volume (through its effect on marginal cost) is a source of risk. This engenders an equilibrium relationship between returns and volume. The model also provides a si...

It has been widely debated how much nonsynchronous trading drives asymmetric portfolio cross-autocorrelations: lagged returns on a portfolio of larger-capitalization stocks are far more heavily correlated with current returns on a portfolio of smallercapitalization stocks than the converse. This paper proposes a new method to generate precise estimates of the extent to which nonsynchronous trad...

Existing microstructure literature cannot explain the empirical evidence that bid-ask spreads can decrease with information asymmetry and ignores either information asymmetry or inventory risks. We develop a market making model that highlights the asset pricing impact of market makers’ capability of making offsetting trades in markets where both information asymmetry and inventory risk are sign...

Recent research has documented that learning and evolution are capable of generating many well known features in financial times series. We extend the results of LeBaron & Yamamoto (2007) to explore the impact of varying amounts of imitation and agent learning in a simple order driven market. We show that in our framework, imitation is critical to the generation of long memory persistence in ma...