I examine the effect that the precision of securitization has on the market quality of the underlying asset, as well as focus on the market quality of the derivative asset. With securitization, the underlying portfolio has improved liquidity, the trading intensity of an informed trader is increased, and the informed trader’s expected profit is increased. When arbitrageurs are discretionary, jumps in illiquidity can occur. The combination of the underlying portfolio and derivative portfolio prices are revealing about the unknown liquidation value of the underlying portfolio and the derivative price is also revealing about the unknown tracking error.

I identify intraday jumps and cojumps in exchange rates controlling for volatility patterns and relate these events to pre-scheduled macroeconomic news and market conditions. Event study results show that preceding jump and cojump events, exchange rate quote volume, illiquidity, signed order flow, and informed trades are at heightened levels revealing that jump events are consistent with rational dealer quoting behavior. Following jump and cojump events, quote volume and return variance remain at heightened levels while illiquidity, informed trade, and signed order flow remain at depressed levels providing evidence that order flow following jump events is largely uninformed liquidity provision.

I provide evidence that financial contagion risk is an important source of the equity risk premium. Banks’ contributions to aggregate financial contagion are estimated in a state space framework and linked to systemic risk. Greater bank connectedness today leads to increased systemic risk 3–12 months later. More contagious banks earn significantly greater risk-adjusted returns than less contagious ones and the tradable high contagion-minus-low contagion bank portfolio is priced in the cross-section of stock returns. Stocks that co-move more strongly with contagious banks have greater expected returns. These results are robust to factor model specification, test assets, and time period considered.