How agents form expectations and, in particular, whether they are rational and efficiently incorporate all available information into their forecasts, is a question of fundamental importance in macroeconomic analysis. Ultimately this question can best be resolved through empirical analysis of expectations data. It is therefore not surprising that a large literature has been devoted to empirically testing forecast rationality based on survey data such as the Livingston data or the Survey of Professional Forecasters (SPF). Unfortunately, the empirical evidence is inconclusive and seems to depend on the level of aggregation of data, sample period, forecast horizon and type of variable under consideration.
While the finance literature has stressed the role played by the rise of financial intermediation on asset prices, scarce attention has been devoted to the pricing implications of the development of the mutual fund industry and, in particular, to the impact of the competition among mutual fund families on the stock market. This is all the more puzzling as mutual funds provide a very interesting case study to analyze the forces driving financial markets and, in particular, to investigate the determinants of stock liquidity.
This omission is mainly due to the fact that mutual funds have been considered as portfolios of assets and not as products sold by companies competing with each other. The standard theoretical models (Admati and Pfleiderer, 1995) assume away the market structure of the mutual fund industry or assume it to be monopolistic, with no effective competition between mutual fund providers. Mutual funds are identified as ”information collection mechanisms” that provide the service of specialized investment and information collection in return for the payment of fees that compensate for their services (Berk and Green, 2002). An increase in the number of mutual funds should, under these conditions, imply more information collected at equilibrium and greater market liquidity. Indeed, it is a widely held folk theorem that the introduction of mutual funds informationally improves financial markets, reduces stock price volatility and enhances market liquidity. This mantra, that has percolated in the financial press and has shaped the official position of the mutual fund industry, implies a positive relationship between number of funds and information generated.
On November 3, 1988, President Reagan signed the Fair Credit and Charge Card Disclosure Act (FCCCDA), a federal law that aims to improve the transparency of credit card pricing and simplify credit card shopping. While the centerpiece of the act is the tabular credit card price disclosure commonly referred to as the “Schumer Box,” a lesser known provision of the law requires the Board of Governors of the Federal Reserve System to “collect, on a semiannual basis, credit card price and availability information…from a broad sample of financial institutions” and make such information “available to the public upon request.” Congress inserted this provision into the FCCCDA because it believed such pricing information would aid consumers in finding the best credit card deals and encourage issuers to compete against each other. The Senate report that accompanied the bill explained, “[i]t is anticipated that newspapers and consumer groups will use this information to inform consumers about the virtues and vices of different cards.”
Pursuant to Congress’ mandate, every January and July select credit card issuers throughout the U.S. provide the Federal Reserve System with interest rate and fee information for their most popular credit card plan open to new customers. This survey information is ultimately published on the Federal Reserve Board’s website as part of a step-by-step shopping guide that aims to assist consumers in choosing a credit card.
