Knowledge that Transforms

Cover Get access The Review of Financial Studies, Volume 27, Issue 6, June 2014, Page i1, https://doi.org/10.1093/rfs/hht091 Published: 06 May 2014

Journal Article Cover Get access The Review of Financial Studies, Volume 27, Issue 1, January 2014, Page i1, https://doi.org/10.1093/rfs/hht083 Published: 16 December 2013

Volume 27 Number 1 January 2014The Review of Financial Studies - Table of Contents Get access The Review of Financial Studies, Volume 27, Issue 1, January 2014, Page i4, https://doi.org/10.1093/rfs/hht119 Published: 16 December 2013

Cover The Review of Financial Studies, Volume 27, Issue 4, April 2014, Page i1, https://doi.org/10.1093/rfs/hht089 Published: 13 March 2014

Liquidity providers in a security often use prices of other securities as a source of information to set their quotes. As a result, liquidity is higher when prices are more informative. In turn, prices are more informative when liquidity is higher. We show that this self-reinforcing relationship between price informativeness and liquidity is a source of contagion and fragility: a small drop in the liquidity of one security propagates to other securities and can, through a feedback loop, result in a large drop in market liquidity. Fur-thermore, this relationship also generates multiple equilibria characterized either by high illiquidity and low price informativess or low illiquidity and high price informativeness. A switch from the latter to the former type of equilibrium generates a liquidity crash. We use the model to interpret the Flash Crash of May 6, 2010.

We study whether investors can exploit serial dependence in stock returns to improve out-of-sample portfolio performance. We show that a vector-autoregressive (VAR) model captures stock return serial dependence in a statistically significant manner. Analytically, we demonstrate that, unlike contrarian and momentum portfolios, an arbitrage portfolio based on the VAR model attains positive expected returns regardless of the sign of asset return cross-covariances and autocovariances. Empirically, we show, however, that both the arbitrage and mean-variance portfolios based on the VAR model outperform the traditional unconditional portfolios only for transaction costs below ten basis points.

Dark pools are equity trading systems that do not publicly display orders. Dark pools offer potential price improvements but do not guarantee execution. Informed traders tend to trade in the same direction, crowd on the heavy side of the market, and face a higher execution risk in the dark pool, relative to uninformed traders. Consequently, exchanges are more attractive to informed traders, and dark pools are more attractive to uninformed traders. Under certain conditions, adding a dark pool alongside an exchange concentrates price-relevant information into the exchange and improves price discovery. Improved price discovery coincides with reduced exchange liquidity.

This paper studies the quantitative impact of microprudential bank regulations on bank lending and value metrics of efficiency and welfare in a dynamic model of banks that are financed by debt and equity, undertake maturity transformation, are exposed to credit and liquidity risks, and face financing frictions. We show that (1) there exists an inverted U-shaped relationship between bank lending, welfare, and capital requirements, (2) liquidity requirements unambiguously reduce lending, efficiency, and welfare, and (3) resolution policies contingent on observed capital, such as prompt corrective action, dominate in efficiency and welfare terms (noncontingent) capital and liquidity requirements.

We examine whether constraints on public firms affect firms' efficiency by testing if going private improves plant-level productivity relative to peer control groups. We find that, despite increases in productivity after going private, there is little evidence of efficiency gains relative to peer groups of plants constructed to control for industry, age, size, past productivity, and the endogeneity of the going-private decision. Going-private firms do extensively restructure their portfolio of plants, selling and closing plants more quickly than others. Our findings cast doubt on the view that public markets cause listed firms to operate plants less efficiently due to overinvestment but indicate that going private increases restructuring activity.