There are relatively few direct tests of the economic effects of asymmetric information because of the difficulty in identifying exogenous information measures. We propose a novel exogenous measure of information based on the quality of property tax assessments in different regions and apply this to the U.S. commercial real estate market. We find strong evidence that information considerations are significant. Market participants resolve information asymmetries by purchasing nearby properties, trading properties with long income histories, and avoiding transactions with informed professional brokers. The evidence that the choice of financing is used to address information concerns is mixed and weak.

We develop a model of informal financial networks and present corroborating evidence by studying the role of property brokers in the U.S. commercial real estate market. Our model demonstrates that service intermediaries, who do not themselves supply loans, can facilitate their clients' access to finance through informal relationships with lenders. Empirically we find that, controlling for endogenous broker selection, hiring a broker strikingly increases the probability of obtaining bank finance. Our results demonstrate that even in the United States, with its well-developed capital markets, informal networks play an important role in controlling access to finance.

Price improvement is the difference between the execution price of an order and the quoted bid or ask when the order was submitted. We show that expected price improvement falls off dramatically as the size of the order approaches the quoted depth, and becomes negative for larger orders. This is particularly important for small firms because the quoted depths are low. Using quoted spreads and depths and our estimate of expected price improvement, we show that trading strategies that attempt to exploit the weekly predictability of small-firm returns would be swamped by transaction costs.

[Price improvement is the difference between the execution price of an order and the quoted bid or ask when the order was submitted. We show that expected price improvement falls off dramatically as the size of the order approaches the quoted depth, and becomes negative for larger orders. This is particularly important for small firms because the quoted depths are low. Using quoted spreads and depths and our estimate of expected price improvement, we show that trading strategies that attempt to exploit the weekly predictability of small-firm returns would be swamped by transaction costs.]

This paper presents an approach for pricing gold from investors’ perspective. The model is based on no-arbitrage principles with minimal structural assumptions. There is no need to specify investor preferences. When fitted to match 10-year real U.S. Treasury rates, the model can replicate the salient fluctuations in the time series of gold prices since 2007. The model is also able to capture key patterns of CME Comex gold futures prices. The model implies that the majority of the value of gold is due to its role as an investment asset.

Since October 2008, fixed rates for interest rate swaps with a 30-year maturity have been mostly below Treasury rates with the same maturity. Under standard assumptions, this implies the existence of arbitrage opportunities. This paper presents a model for pricing interest rate swaps, where frictions for holding bonds limit arbitrage. I analytically show that negative swap spreads should not be surprising. In the calibrated model, swap spreads can reasonably match empirical counterparts without the need for large demand imbalances in the swap market. Empirical evidence is consistent with the relation between term spreads and swap spreads in the model. Received April 16, 2017; editorial decision Januray 3, 2019 by Editor Stijn Van Nieuwerburgh.

[A mortgage program that offered borrowers greater flexibility in the timing of repayments increased a bank's volume by over 35%. Loans in the program exhibited superior performance. Despite this, a regression discontinuity analysis shows that the causal impact of offering flexibility was to attract borrowers to the bank who experienced quadruple the average delinquency rate. These contrasting findings are driven by the fact that the bank engaged in ex post sorting of stronger borrowers into the flexible program. This sorting masked the ex ante adverse selection effects that offering flexibility had on the entire borrowing pool.]

[Using a variety of different definitions of "neutrality," this study presents significant evidence against the neutrality to market risk of hedge funds in a range of style categories. I generalize standard definitions of "market neutrality," and propose five different neutrality concepts. I suggest statistical tests for each neutrality concept, and apply these tests to a database of monthly returns on 1423 hedge funds from five style categories. For the "market neutral" style, approximately one-quarter of the funds exhibit significant exposure to market risk; this proportion is statistically significantly different from zero, but less than the proportion of significant exposures for other hedge fund styles.]

[I model the contrasting capital-labor decisions of financially constrained and unconstrained firms. I show that financially restricted firms use relatively more labor than physical capital because informed employees provide more efficient financing than uninformed capital suppliers. I demonstrate that constrained firms cannot easily attract new employees to replace existing staff. Their greater employee retention aligns owner-worker incentives and encourages workers to make firm-specific investments. Constrained firms, however, gradually suffer from their inability to replace low-quality workers, such that their relative labor productivity decreases over time. Empirical tests utilizing instrumental variables confirm several implications of the theory.]

I present a new approach to the dynamic portfolio and consumption problem of an investor who worries about model uncertainty (in addition to market risk) and seeks robust decisions along the lines of Anderson, Hansen, and Sargent (2002). In accordance with max-min expected utility, a robust investor insures against some endogenous worst case. I first show that robustness dramatically decreases the demand for equities and is observationally equivalent to recursive preferences when removing wealth effects. Unlike standard recursive preferences, however, robustness leads to environment-specific “effective” risk aversion. As an extension, I present a closed-form solution for the portfolio problem of a robust Duffie-Epstein-Zin investor. Finally, robustness increases the equilibrium equity premium and lowers the risk-free rate. Reasonable parameters generate a 4% to 6% equity premium.