How can fragility be averted in open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor-level transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces outflows during market stress. Swing pricing also reduces concavity in the flow-performance relationship and dilution in fund performance.
The Review of Financial Studies
We study the impact of an epidemic disease on modern financial development by exploiting geographic variations in the precolonial survival conditions of the TseTse fly, which transmits an epidemic disease that is harmful to humans and fatal to livestock in Africa. Using newly georeferenced data, we discover that firms and households in regions historically more exposed to the epidemic disease have less access to external financing today. Exploring the channels, we find that people in historically infested regions are less likely to trust others and financial institutions, to share credit information and to learn and adopt new financial technologies.
Journal of Financial Economics
This paper provides a simple unified analysis of optimal interval division problems. My primitive is a cell function that assigns a value to each subinterval (cell). Submodular cell functions conveniently imply the property of decreasing marginal returns. Also, for coarse decision problems, optimal cutoffs commonly increase as prior belief shifts upward. Its implications on language and efficient menus are discussed.
The Economic Journal
This paper studies how the two types of uncertainty due to ignorance, parameter and model uncertainty, jointly affect strategic consumption-portfolio rules, precautionary savings, and welfare. We incorporate these two types of uncertainty into a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth, and derive analytical solutions and testable implications. We show that the interaction between the two types of uncertainty plays a key role in determining the demand for precautionary savings and risky assets. We derive formulas to evaluate both marginal and total welfare costs of ignorance-induced uncertainty and show they are significant for plausible parameter values.
Journal of Economic Theory