This dissertation studies three different topics in empirical finance, specifically, portfolio management, short selling constraints and stock price informational efficiency, and one of the puzzling calendar anomalies: turn-of-the-month effect. The first chapter studies whether educational endowments earn superior returns. This is an interesting question, given the strong returns earned by some legendary endowments (e.g., Yale under the management of David Swensen), which has led to the widespread adoption of the so-called endowment model of investing. Using NACUBO/Commonfund data from 1991 to 2011, Brad M. Barber (UC Davis) and I analyze the returns earned by US educational endowments using simple style attribution models pioneered by Sharpe (1992). We document that for the average endowment, models with only public stock and bond benchmarks explain virtually all the time-series variation in returns, yield no alpha, and generate sensible factor loadings. Elite institutions perform better than public stock and bond benchmarks because of large allocations to alternative investments. We found no evidence that manager selection, market timing, and tactical asset allocation generate alpha. The second chapter uses the event of short selling ban removal in China in March, 2010 to study the relation between short selling and stock returns. First, I document that an increase in short interest predicts negative future returns, indicating that short sellers are informed about future stock returns. The long-short portfolio that buys stocks with no increase in short interest and shorts stocks with an increase in short interest earns a daily return of 0.085% (t=3.97). Second, consistent with the prediction of the Diamond and Verrecchia (1987) model, I find that the reduced short sale constraint leads to smaller price adjustments in response to earnings surprises. Specifically, I document that the price reaction to earnings announcements during the period that allows short selling is 67% lower than the price reaction during the period in which short selling is banned. In combination, these results indicate that short sellers play an important role in setting prices in financial markets. In the last chapter, Nathan George (UC Berkeley), Ethan Namvar (UC Berkeley), and I study the turn-of-the-month effect (TOM)--stocks have significantly higher returns during the period spanning from the last trading day of the previous month to the third trading day of the current month than during other trading days. Specifically, using the 13F institutional ownership data over the last three decades, we study the cross-sectional difference of the TOM effect across stocks held by different investors. First, we confirm the existence of the TOM effect in the stock market across stocks with different institutional ownership. Second, we document two patterns: (1) For stocks mainly held by individuals, the stock return out-performance during the TOM period mainly comes from the last trading day of the previous month; and (2) For stocks mainly held by institutions, the TOM effect in raw returns is evenly distributed across each day in that period, and that effect is completely explained by their exposures to the market. Furthermore, for stocks with high institutional ownership, the three days leading up to the last trading day of a month exhibit a significantly positive abnormal return compared to those of the other days. We propose that the difference in the trading behaviors of individuals and institutions may explain this dispersion.

In the Ơ̐1rst essay, I decompose inƠ̐2ation risk into (i) a part that is correlated with real returns on the market portfolio and factors that determine investor0́9s preferences and investment opportunities and (ii) a residual part. I show that only the Ơ̐1rst part earns a risk premium. All nominal Treasury bonds, including the nominal money-market account, are equally exposed to the residual part except inƠ̐2ation-protected Treasury bonds, which provide a means to hedge it. Every investor should put 100% of his wealth in the market portfolio and inƠ̐2ation-protected Treasury bonds and hold a zero-investment portfolio of nominal Treasury bonds and the nominal money market account. In the second essay, I solve the dynamic asset allocation problem of Ơ̐1nite lived, constant relative risk averse investors who face inƠ̐2ation risk and can invest in cash, nominal bonds, equity, and inƠ̐2ation-protected bonds when the investment opportunityset is determined by the expected inƠ̐2ation rate. I estimate the model with nominal bond, inƠ̐2ation, and stock market data and show that if expected inƠ̐2ation increases, then investors should substitute inƠ̐2ation-protected bonds for stocks and they should borrow cash to buy long-term nominal bonds. In the lastessay, I discuss how heterogeneity in preferences among investors withexternal non-addictive habit forming preferences aƠ̐0ects the equilibrium nominal term structure of interest rates in a pure continuous time exchange economy and complete securities markets. Aggregate real consumption growth and inƠ̐2ation are exogenously speciƠ̐1ed and contain stochastic components thataƠ̐0ect their means andvolatilities. There are two classes of investors who have external habit forming preferences and diƠ̐0erent localcurvatures oftheir utility functions. The eƠ̐0ects of time varying risk aversion and diƠ̐0erent inƠ̐2ation regimes on the nominal short rate and the nominal market price of risk are explored, and simple formulas for nominal bonds, real bonds, and inƠ̐2ation risk premia that can be numerically evaluated using Monte Carlo simulation techniques are provided.