Abstract: We propose a novel framework to compute transaction costs of trading strategies using infrequently traded assets. The method explicitly accounts for the trade-off between bid-ask spreads and execution delays. The benefit of waiting for a better trading opportunity with lower bid-ask spreads is partly offset by the opportunity cost of delayed or missed execution. Applying this method to corporate bonds that trade infrequently, we show that even the latest machine-learning-based trading strategies earn zero or negative bond CAPM alphas after transaction costs. Consequently, our results raise doubts about the realistic outperformance capabilities of active bond trading strategies relative to the bond market factor.
Abstract: How do portfolio choices and asset prices impact inequality when agents have stock market participation constraints? To answer this question, we develop a new methodology for using deep learning to characterize global solutions to macroeconomic models with long-term assets, agent heterogeneity, and household optimization under financial frictions. We first characterize the equilibrium recursively in the space of wealth shares and then show how to train neural networks to approximate the equilibrium. This approach extends deep learning tools to a general class of macro-finance models. We use our toolkit to study how asset market participation constraints impact inequality. Market segmentation generates endogenous volatility, which allows wealthy agents to take greater of advantage high expected returns during a recession and amplifies inequality.
Abstract: I propose an arbitrage-pricing approach to analyze how noise trading flows impact asset prices. This approach uses no-arbitrage conditions to determine the impact of these flows on the stochastic discount factor, and consequently, on the cross-section of asset prices. By generalizing classic arbitrage theory, I show that noisy flows impact asset prices through a few important factors. The resulting model features rich patterns of cross-asset substitution beyond traditional mean-variance price impact models and logit demand systems. My theory also addresses prevalent misconceptions regarding the aggregation of asset flows into factor flows and the definition of factor-level price multipliers.
