This paper rationalizes the LASSO algorithm based on uncertain fat-tail priors and max-min robust optimization. Our rationalization excludes heuristic learning or restrictive prior assumptions in the original interpretation of LASSO (Tibshirani (1996)). In our setting, economic agents...

This paper identifies a limit to arbitrage that arises from the fact that a firm's fundamental value is endogenous to the act of exploiting the arbitrage. Trading on private information reveals this information to managers and helps them improve their real decisions, in turn enhancing...