A consensus has recently emerged that variables beyond the level, slope, and curvature of the yield curve can help predict bond returns. This paper shows that the statistical tests underlying this evidence are subject to serious small-sample distortions. We propose more robust tests, including a novel bootstrap procedure specifically designed to test the spanning hypothesis. We revisit the analysis in six published studies and find that the evidence against the spanning hypothesis is much weaker than it originally appeared. Our results pose a serious challenge to the prevailing consensus.

Previous research documents differences in trading desk skills across management companies that result in significant variation in execution costs. In this paper, we utilize links between management companies and their institutional clients to explore variation in execution costs within management companies. For a subset of management companies, we find that systematic differences in execution costs exist across clients; these differences are comparable to the variation documented across management companies and persist over time. Clients who receive lower execution costs reward management companies with an increase in dollar trading volume. We find no evidence that the results are driven by broker commissions or differences in trading practices. Given the economic significance of our findings and implications for institutional investors, this aspect of execution should be recognized regardless of the ultimate source of the differences.

I examine the behavior of forex prices around the setting of the 4:00 pm WMR Fix. Numerous banks have been fined by regulators for their trading activities around the Fix, but the overall impact of their actions is not known. I first examine trading patterns around the Fix in a microstructure model of competitive trading. I then compare the model with the empirical behavior of forex prices across 21 currencies over a decade. Contrary to the predictions of the model, forex price changes display extraordinary volatility and negative serial correlation around the Fix.

This paper investigates the size and development of banking book interest rate risk positions of Dutch banks during 2008 to 2015. Due to hedging, interest rate risk is small and the income from maturity transformation is only a small share of the net interest margin and the return on assets. However, interest rate risk positions do vary significantly between banks and over time. My results suggest that banks lower their interest rate risk significantly when the yield curve flattens. Interest rate risk is negatively related to on-balance sheet leverage and has a U-shaped relation with solvability for banks that do not use derivatives. Banks that received government assistance during the financial crisis have higher interest rate risk than banks that did not receive assistance.

We study the evolution of investment-banking relationships from 1933 to 2007. Relationship exclusivity and client concerns for the state of their banking relationships were strong through the first part of our sample period but then entered a period of sharp decline beginning around 1970. We interpret the bank-client relationship as an informal governance mechanism for curbing opportunistic behavior in a weak contracting environment and examine how technological change aggravated conflicts of interest within investment banks and between banks and their clients. This perspective sheds light on why trust between banks and their clients now appears to be in short supply.Received March 2, 2018; editorial decision June 11, 2018 by Editor Paolo Fulghieri.

We model sequential bidding in a private value English auction when it is costly to submit or revise a bid. We show that, even when bid costs approach zero, bidding occurs in repeated jumps, consistent with certain types of natural auctions such as takeover contests. In contrast with most past models of bids as valuation signals, every bidder has the opportunity to signal and increase the bid by a jump. Jumps communicate bidders’ information rapidly, leading to contests that are completed in a few bids. The model additionally predicts; informative delays in the start of bidding; that the probability of a second bid decreases in, and the jump increases in, the first bid; that objects are sold to the highest valuation bidder; and that revenue and efficiency relationships between different auctions hold asymptotically.

Difference-in-differences (DID) is a method to evaluate the effect of a treatment. In its basic version, a “control group” is untreated at two dates, whereas a “treatment group” becomes fully treated at the second date. However, in many applications of the DID method, the treatment rate only increases more in the treatment group. In such fuzzy designs, a popular estimator of the treatment effect is the DID of the outcome divided by the DID of the treatment. We show that this ratio identifies a local average treatment effect only if the effect of the treatment is stable over time, and if the effect of the treatment is the same in the treatment and in the control group. We then propose two alternative estimands that do not rely on any assumption on treatment effects, and that can be used when the treatment rate does not change over time in the control group. We prove that the corresponding estimators are asymptotically normal. Finally, we use our results to reassess the returns to schooling in Indonesia.

We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the specific collateral repurchase agreement (repo) rates of all outstanding U.S. Treasury securities. We find a positive and significant scarcity premium for on- and off-the-run Treasuries that persists for approximately 3 months and is larger in magnitude for shorter-term securities. This scarcity effect seems to pass through to Treasury cash market prices, providing additional evidence for the scarcity channel of quantitative easing (QE). On the contrary, the Federal Reserve’s reverse repo operations could help reduce the scarcity premium by alleviating potential shortages of high-quality collateral.