Sep 222017
Bill Longbrake

Bill Longbrake

Optimism in the domestic and global economic outlooks has ratcheted up a notch, but has not reached a euphoric level that often presages a building speculative bubble and end-of-cycle climax. Political drama in our nation’s capital and a spate of global and domestic natural disasters have not dampened optimism. Economic activity is grinding higher ever so slowly. Risks, which always lurk beneath the surface and which have a nasty habit of surprising markets, are slumbering. Eventually, a correction, or more likely a recession, will occur. Bill Longbrake observes that predicting timing is always difficult as the good times always seem to go on a lot longer than expected. In the absence of flagrant speculation-driven bubbles, there is good reason to expect favorable economic conditions to prevail for the next several quarters.

Read the full letter.

Sep 112017

CFP Director, Russ Wermers, quoted in this week’s Barron’s article, “In Fund Management, Winning Trends Persist.” 

Professor Wermers notes: “Yet analysts and academics have uncovered various precedents that can help to predict above-average returns. Their findings aren’t guaranteed to lead you to a top-of-class fund, but they could help to identify good performers and avoid poor ones.”

Read the full article:  http://www.barrons.com/articles/in-fund-management-winning-trends-persist-1504930850 


Sep 062017

The SEC, CFA Institute, Center for Financial Services at Lehigh University and the Center for Financial Policy at the Robert H. Smith School of Business are pleased to jointly host the fifth annual conference on the financial market regulation on May 10-11, 2018. The goal of the conference is to bring together participants from academia, industry and the SEC for an exchange of views on topics of relevance to the Commission.

Information about the event and details about the call can be found on the CFP’s WEBSITE.

Submit to the call for papers.

Aug 302017

Over the coming months the CFP will be highlighting the Smith finance faculty’s latest research.  Biographical and contact information on the faculty members can be found here.  Please direct any questions about this series to the CFP’s assistant director, Kristen Fanarakis.


Smooth Trading With Overconfidence and Market Power

by Albert S. Kyle, Anna A. Obizhaeva, Yajun Wang

In financial markets, both permanent and temporary price impacts are extremely important when traders design their optimal execution strategies for liquidations of existing positions.  When large traders in financial markets seek to profit from perishable private information, they face a fundamental trade-off. On the one hand, they want to trade slowly, to reduce their own temporary price impact costs resulting from adverse selection. On the other hand, they want to trade quickly, before the permanent price impact of competitors trading on similar information makes profit opportunities go away. The temporary price impact makes trading a given quantity over a shorter horizon more expensive than trading the same quantity over a longer horizon; as the market offers no instantaneous liquidity for block trades. 

This model explains well the “flash crash” of May 6, 2010 and how market prices would respond to a gigantic order executed much faster than the market expects orders of such size to be executed.  It provides a realistic description of trading by large asset managers, who seek out risks to exploit private information about individual stocks, often limit their trading acquiring positions over days, weeks, or even months.




We describe a symmetric continuous-time model of trading among relatively overconfident, oligopolistic informed traders with exponential utility. Traders agree to disagree about the precisions of their continuous flows of Gaussian private information. The price depends on a trader’s inventory (permanent price impact) and the derivative of a trader’s inventory (temporary price impact). More disagreement makes the market more liquid; without enough disagreement, there is no trade. Target inventories mean-revert at the same rate as private signals. Actual inventories smoothly adjust toward target inventories at an endogenous rate which increases with disagreement. Faster-than-equilibrium trading generates “flash crashes” by increasing temporary price impact. A “Keynesian beauty contest” dampens price fluctuations.

Aug 142017

Will Dodd-Frank Act Reform Be a Boon or Bust for Risk Managers?