Abstract Using euro conversion as the trigger, we examine what drives volume and spread changes when stock exchanges compete. Results show average trading costs on European exchanges decrease almost 9%, and turnover increases over 30%. Trading costs decline or remain unchanged on all exchanges, but volume deteriorates in some markets and improves in others. Frankfurt, Paris, London, and Milan are winners, while Madrid and Brussels lose volume. We examine the role of the spread-volume relation, firm characteristics, exchange trading rules, and country-level factors in determining these outcomes. Results suggest that euro conversion prompted competition by increasing transparency in market prices.

Abstract We use an event study approach to estimate the burden of the financial regulations associated with Systemically Important Financial Institution (SIFI) designation. On March 30, 2016, the US District Court determined that MetLife’s SIFI designation was arbitrary and capricious because the Financial Stability Oversight Council (FSOC) failed to weigh the economic cost of the financial regulation on MetLife against the benefits of increased financial stability. We find significant positive abnormal returns for MetLife and AIG on the date of the ruling. We estimate that the lifting of the SIFI designation created $1.4 billion in corporate wealth for MetLife, suggesting that MetLife would be 3.4% more profitable as a non-SIFI. These gains fall short of the $8 billion stipulated by MetLife in its complaint. We also find significant abnormal returns to SIFI institutions on the day following the US Presidential election.

Abstract We present a dynamic rational expectations model of closed-end fund discounts that incorporates feedback effects from activist arbitrage and lifeboats. Both activist arbitrage and lifeboats distort closed-end fund prices and lead to narrower discounts. Furthermore, both activist arbitrage and lifeboats effectuate an ex post wealth transfer from managers to investors but an ex ante wealth transfer from low-ability managers to high-ability managers. On average, investor wealth is unaffected by either activist arbitrage or lifeboats because their potential benefits are factored into higher fund prices. Although lifeboats can reduce takeover attempts, they do not increase expected managerial wealth.

Abstract I model the effect of associative memory on asset prices. The model includes mood-congruent memory, which predicts that the subjective goodness (or badness) of the agent’s affective state (e.g., mood) is a cue for positive (negative) information stored in long-term memory. I also include rehearsal, which implies that data recalled in the recent past are more likely to be recalled in the present. I show that mood-congruent memory causes the set of recalled information to be biased, and rehearsal generates autocorrelation in the biases across periods. The theory provides novel explanations for short-run continued overreaction to news, long-run correction of these effects, and excess volatility. I also make the novel predictions that excess volatility is highest during downturns, price biases are increasing in fundamental volatility, knowledge/experience may intensify these biases, and asset prices exhibit excess comovement.

Abstract We document that defined benefit pension plans with significant holdings in private equity (PE) earn substantially greater returns than plans with small holdings, in both the 1990s and the 2000s. A one standard deviation increase in PE holdings is associated with 4% greater returns per year. Up to one-third of this outperformance comes from lower costs that we link to economizing on costly intermediation by avoiding fund-of-funds and investing directly. The bulk of the outperformance comes from superior gross returns only partially explained by access and experience. We conjecture that larger PE investors have superior due diligence and ability to bridge information asymmetries in PE.

Abstract The views on financial liberalization are quite conflictive. Many argue that it triggers financial bubbles and crises. Others claim that financial liberalization allows markets to function properly and capital to move to its most profitable destination. The empirical evidence on these effects is not robust. This paper constructs a new comprehensive chronology of financial liberalization and shows that a key reason for the inconclusive evidence is that the effects of liberalization are time-varying. Financial liberalization is followed by large booms and busts only in the short run. In the long run institutions improve and financial markets tend to stabilize.

Abstract This paper provides evidence that “illusory correlations”—a well-documented source of cognitive bias—lead some agents to be imperfectly rational noise traders. We focus on the head-and-shoulders chart pattern, considered by technical analysts to provide one of the most reliable trading signals. Our findings indicate that the pattern is associated with a substantial rise in trading volume even though it does not profitably predict directional movements. We further substantiate the connection between head-and-shoulders trading and imperfectly rational noise trading by showing that the pattern is associated with lower bid-ask spreads.

Abstract We present a model in which flat (state-independent) capital requirements are undesirable because of shocks to bank capital. There is a rationale for countercyclical capital requirements that impose lower capital demands when aggregate bank capital is low. However, such capital requirements also have a cost as they increase systemic risk taking: by insulating banks against aggregate shocks (but not bank-specific ones), they create incentives to invest in correlated activities. As a result, the economy’s sensitivity to shocks increases and systemic crises can become more likely. Capital requirements that directly incentivize banks to become less correlated dominate countercyclical policies as they reduce both systemic risk-taking and cyclicality.

Abstract What is the impact of internationalization (firms raising capital and trading in international markets) on the liquidity of the remaining firms in domestic markets? To address this question, we assemble a panel database of nearly 2,900 firms from 45 emerging economies over the period 1989–2000, constructed from annual and daily data. First, we find evidence of migration. The domestic trading of firms that cross-list or issue depositary receipts in foreign public exchanges tends to decrease, while a significant proportion of their trading activity concentrates in international markets. Second, this migration is negatively related to the liquidity of the remaining firms in their home market through two separate channels. There are liquidity spillovers within markets: Aggregate domestic trading activity is positively associated with the liquidity of individual firms in the same market. Moreover, the proportion of trading abroad is negatively related to the liquidity of firms in the domestic market.

Abstract There have been important methodological changes in the Consumer Price Index (CPI) over time. These distort comparisons of inflation from different periods, which have become more prevalent as inflation has risen to 40-year highs. To better contextualize the current run-up in inflation, this article constructs new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the post-war period. Using these series, we find that current inflation levels are much closer to past inflation peaks than the official series would suggest. In particular, the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using today’s treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics.