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Thesis: Ph. D., Massachusetts Institute of Technology, Sloan School of Management, 2018., Cataloged from PDF version of thesis., Includes bibliographical references., This dissertation consists of three chapters. Chapter 1 shows that, for active mutual funds, historical in-sample alpha is a poor predictor of out-of-sample alpha. However, by focusing on a subset of skilled managers who are able to generate positive alpha via profitable bets on firm specific risks (stock-picking), I show that a new first-order stochastic dominance (FSD) condition can be employed as an additional search criterion to identify such skilled stock-pickers. I implement an FSD filter to select funds by bootstrapping the return distribution in a given period associated with a random stock-picking strategy that has a given factor exposure and degree of diversification. Simulations show that the identification of funds as skilled by the FSD filter performs well in finite samples, in the face of heteroscedasticity and benchmark mis-specification. With the new FSD filter, I identify a group of active funds that are able to outperform the Carhart benchmark by 2.04% (t=2.78) per year before fees (0.78% (t=1.07) per year after fees) out of sample. Moreover, in this sample of funds, in-sample alpha is significantly predictive of out-of-sample alpha: the top quintile of stock-picking mutual funds deliver an out-of-sample alpha of 3.55% (t=3.24) per year before fees (2.24% (t=2.05) per year after fees). These outperforming funds tend to be more aggressive stock-pickers (hold more concentrated portfolios), charge higher fees, and attract more fund flows. By exploring mutual fund managers' Herding tendency and Trading Intensity, Chapter 2 develops a systematic approach to identify mutual fund managers with the Warren Buffett style, i.e. managers who are fundamental, long-term, value investors. Using data during 1995-2015, I further show that the group of such managers outperformed the Carhart four-factor benchmark by 3.06% (t = 3.58) per year before fees (1.94% (t = 2.35) per year after fees). Moreover, these managers have both statistically and economically high expo, by Yixin Chen., 1. Individual Stock-picking Skills in Active Mutual Funds -- 2. Mutual Fund Managers from the Buffett School -- 3. A Global Risk Factor Is Needed to Price Global Assets., Ph. D.

Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2018., Cataloged from PDF version of thesis., Includes bibliographical references., This thesis consists of three chapters on inequality, interest rates and macroeconomic policies. The first chapter explores the macroeconomic consequences of the recent rise in permanent income inequality. First, I show that in many common macroeconomic models consumption is a linear function of permanent (labor) income. This implies that macroeconomic aggregates are neutral with respect to shifts in the distribution of permanent income. Motivated by this neutrality result, I develop novel approaches to test for linearity in U.S. household panel data. The estimates suggest an elasticity of 0.7, soundly rejecting linearity. I quantify the effects of this deviation from neutrality using a novel non-homothetic precautionary-savings model. In the model, the rise in U.S. permanent labor income inequality since the 1970s caused: (a) a decline in real interest rates of around 1%; (b) an increase in the wealth-to-GDP ratio of around 30%; (c) wealth inequality to rise almost as rapidly as it did in the data. The second chapter, joint with Sebastián Fanelli, develops a theory of foreign exchange interventions in a small open economy with limited capital mobility between home and foreign bond markets. Due to limited capital mobility, the central bank can implement nonzero bond spreads by managing its portfolio. Crucially, spreads are inherently costly as they allow foreign intermediaries to make carry-trade profits. Optimal interventions balance these costs with terms of trade benefits. We show that they lean against the wind of global capital flows to avoid excessive currency appreciation. Due to the convexity of the costs, interventions should be small and spread out, relying on credible promises (forward guidance) of future interventions. By contrast, excessive smoothing of the exchange rate path may create large spreads, inviting costly speculation. Finally, in a multi-country extension of our model, we find that the decentralized equilibrium features too much reserve accu, by Ludwig Straub., Ph. D.

Thesis: Ph. D., Massachusetts Institute of Technology, Sloan School of Management, 2018., Cataloged from PDF version of thesis., Includes bibliographical references., This dissertation consists of three chapters. Chapter 1 shows that, for active mutual funds, historical in-sample alpha is a poor predictor of out-of-sample alpha. However, by focusing on a subset of skilled managers who are able to generate positive alpha via profitable bets on firm specific risks (stock-picking), I show that a new first-order stochastic dominance (FSD) condition can be employed as an additional search criterion to identify such skilled stock-pickers. I implement an FSD filter to select funds by bootstrapping the return distribution in a given period associated with a random stock-picking strategy that has a given factor exposure and degree of diversification. Simulations show that the identification of funds as skilled by the FSD filter performs well in finite samples, in the face of heteroscedasticity and benchmark mis-specification. With the new FSD filter, I identify a group of active funds that are able to outperform the Carhart benchmark by 2.04% (t=2.78) per year before fees (0.78% (t=1.07) per year after fees) out of sample. Moreover, in this sample of funds, in-sample alpha is significantly predictive of out-of-sample alpha: the top quintile of stock-picking mutual funds deliver an out-of-sample alpha of 3.55% (t=3.24) per year before fees (2.24% (t=2.05) per year after fees). These outperforming funds tend to be more aggressive stock-pickers (hold more concentrated portfolios), charge higher fees, and attract more fund flows. By exploring mutual fund managers' Herding tendency and Trading Intensity, Chapter 2 develops a systematic approach to identify mutual fund managers with the Warren Buffett style, i.e. managers who are fundamental, long-term, value investors. Using data during 1995-2015, I further show that the group of such managers outperformed the Carhart four-factor benchmark by 3.06% (t = 3.58) per year before fees (1.94% (t = 2.35) per year after fees). Moreover, these managers have both statistically and economically high expo, by Yixin Chen., 1. Individual Stock-picking Skills in Active Mutual Funds -- 2. Mutual Fund Managers from the Buffett School -- 3. A Global Risk Factor Is Needed to Price Global Assets., Ph. D.

Thesis: Ph. D., Massachusetts Institute of Technology, Sloan School of Management, 2018., Cataloged from PDF version of thesis., Includes bibliographical references., This dissertation consists of three chapters. Chapter 1 shows that, for active mutual funds, historical in-sample alpha is a poor predictor of out-of-sample alpha. However, by focusing on a subset of skilled managers who are able to generate positive alpha via profitable bets on firm specific risks (stock-picking), I show that a new first-order stochastic dominance (FSD) condition can be employed as an additional search criterion to identify such skilled stock-pickers. I implement an FSD filter to select funds by bootstrapping the return distribution in a given period associated with a random stock-picking strategy that has a given factor exposure and degree of diversification. Simulations show that the identification of funds as skilled by the FSD filter performs well in finite samples, in the face of heteroscedasticity and benchmark mis-specification. With the new FSD filter, I identify a group of active funds that are able to outperform the Carhart benchmark by 2.04% (t=2.78) per year before fees (0.78% (t=1.07) per year after fees) out of sample. Moreover, in this sample of funds, in-sample alpha is significantly predictive of out-of-sample alpha: the top quintile of stock-picking mutual funds deliver an out-of-sample alpha of 3.55% (t=3.24) per year before fees (2.24% (t=2.05) per year after fees). These outperforming funds tend to be more aggressive stock-pickers (hold more concentrated portfolios), charge higher fees, and attract more fund flows. By exploring mutual fund managers' Herding tendency and Trading Intensity, Chapter 2 develops a systematic approach to identify mutual fund managers with the Warren Buffett style, i.e. managers who are fundamental, long-term, value investors. Using data during 1995-2015, I further show that the group of such managers outperformed the Carhart four-factor benchmark by 3.06% (t = 3.58) per year before fees (1.94% (t = 2.35) per year after fees). Moreover, these managers have both statistically and economically high expo, by Yixin Chen., 1. Individual Stock-picking Skills in Active Mutual Funds -- 2. Mutual Fund Managers from the Buffett School -- 3. A Global Risk Factor Is Needed to Price Global Assets., Ph. D.

Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2018., Cataloged from PDF version of thesis., Includes bibliographical references., This thesis consists of three chapters on inequality, interest rates and macroeconomic policies. The first chapter explores the macroeconomic consequences of the recent rise in permanent income inequality. First, I show that in many common macroeconomic models consumption is a linear function of permanent (labor) income. This implies that macroeconomic aggregates are neutral with respect to shifts in the distribution of permanent income. Motivated by this neutrality result, I develop novel approaches to test for linearity in U.S. household panel data. The estimates suggest an elasticity of 0.7, soundly rejecting linearity. I quantify the effects of this deviation from neutrality using a novel non-homothetic precautionary-savings model. In the model, the rise in U.S. permanent labor income inequality since the 1970s caused: (a) a decline in real interest rates of around 1%; (b) an increase in the wealth-to-GDP ratio of around 30%; (c) wealth inequality to rise almost as rapidly as it did in the data. The second chapter, joint with Sebastián Fanelli, develops a theory of foreign exchange interventions in a small open economy with limited capital mobility between home and foreign bond markets. Due to limited capital mobility, the central bank can implement nonzero bond spreads by managing its portfolio. Crucially, spreads are inherently costly as they allow foreign intermediaries to make carry-trade profits. Optimal interventions balance these costs with terms of trade benefits. We show that they lean against the wind of global capital flows to avoid excessive currency appreciation. Due to the convexity of the costs, interventions should be small and spread out, relying on credible promises (forward guidance) of future interventions. By contrast, excessive smoothing of the exchange rate path may create large spreads, inviting costly speculation. Finally, in a multi-country extension of our model, we find that the decentralized equilibrium features too much reserve accu, by Ludwig Straub., Ph. D.