Using structural credit risk models to estimate default dependence requires estimates of correlations of changes in distance-to-default. We present a structural model that yields simple relations between asset value, distance-to-default, and CDS spreads, allowing the correlations to be estimated from CDS spreads. We generalize the model to include a randomly varying default boundary; in this version the distance-to-default dynamics also depend on the movement of the default boundary. The CDS spread correlations we estimate exceed equity correlations, consistent with a randomly varying default boundary. We also present evidence that variations in funding liquidity affect the correlations, consistent with recent models.

We examine tone dispersion, or the degree to which tone words are spread evenly within a narrative, to evaluate whether narrative structure provides insight into managers’ voluntary disclosures and users’ responses to those disclosures. We find that tone dispersion is associated with current aggregate and disaggregated performance and future performance, managers’ financial reporting decisions, and managers’ incentives and actions to manage perceptions. Furthermore, we find that tone dispersion is associated with analysts’ and investors’ responses to conference call narratives. Our results suggest that tone dispersion both reflects and affects the information that managers convey through their narratives.

This article uses detailed barcode data on purchase transactions by households in 49 U.S. cities to calculate the first theoretically founded urban price index. In doing so, we overcome a large number of problems that have plagued spatial price index measurement. We identify two important sources of bias. Heterogeneity bias arises from comparing different goods in different locations, and variety bias arises from not correcting for the fact that some goods are unavailable in some locations. Eliminating heterogeneity bias causes 97% of the variance in the price level of food products across cities to disappear relative to a conventional index. Eliminating both biases reverses the common finding that prices tend to be higher in larger cities. Instead, we find that price level for food products falls with city size.

The value of a conventional convertible bond is the value of a straight bond plus the value of the option to exchange it for a specified number of shares of common stock. First, I develop a closed-form contingent-claims convertible bond valuation model that quantifies the value of the exchange option when the short-term riskless rate, the firm's credit spread, and its share price are stochastic. I model the firm's decision to force early conversion as a stopping time problem in which the firm forces conversion as soon as the conversion value reaches the forced conversion barrier. I empirically validate the model by comparing model and market prices for a sample of 148 corporate convertible bonds issued between 2006 and 2010. The average median and mean pricing errors are −0.18% and 0.21%, respectively, which are within the average bid–ask spread for convertible bonds during the sample period. I use the model to quantify the disruptive impact that the prohibition on short selling during the recent financial crisis had on convertible bond prices.

We study the identification through instruments of a nonseparable function that relates a continuous outcome to a continuous endogenous variable. Using group and dynamical systems theories, we show that full identification can be achieved under strong exogeneity of the instrument and a dual monotonicity condition, even if the instrument is discrete. When identified, the model is also testable. Our results therefore highlight the identifying power of strong exogeneity when combined with monotonicity restrictions.

For many goods and services such as electricity, health care, cellular phone service, debit-card transactions, or those sold with loyalty discounts, the price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention. When inattentive consumers are sophisticated but heterogeneous in their expected demand, bill-shock regulation reduces social welfare in fairly-competitive markets, which may be the effect of the Federal Communication Commission's recent bill-shock agreement. If some consumers are attentive while others naively fail to anticipate their own inattention, however, then bill-shock regulation increases social welfare and can benefit consumers. Hence, requiring zero-balance alerts in addition to the Federal Reserve's new opt-in rule for debit-card overdraft protection may benefit consumers.

We examine the economic determinants of short-sale supply, and its consequences for future stock returns. Lendable supply increases with expected borrowing costs and decreases with financial statement constructs that indicate overvaluation. Although rising loan fees help ease supply constraints, we find shares are still least available when they are most attractive to short sellers. Using a number of firm characteristics, we derive useful instruments for real-time loan supply and demand conditions in the lending market. Further, we show that (1) when lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to “special” stocks, and (3) loan fees significantly reduce the profitability of the short side and several of these anomalies cease to be profitable. Overall our evidence highlights the central role played by the supply of lendable shares in equity price formation and returns prediction.

We introduce ex post participation constraints in the standard sequential screening model. This captures the presence of consumer withdrawal rights as, for instance, mandated by European Union regulation of “distance sales contracts”. With such additional constraints, the optimal contract is static and, unlike with only ex ante participation constraints, does not elicit the agent's information sequentially. This holds whenever differences in ex ante and ex post outside options are below a positive upper bound. Welfare effects of mandatory withdrawal rights are ambiguous. Since it is insufficient in our setting to consider only local incentive constraints, we develop a novel technique to identify the relevant global constraints.

A recent line of research highlights trust as an important element guiding the decision of households to invest into risky financial assets and insurance products. This paper contributes to this literature by identifying happiness as another key driver of the same decision. Using detailed survey data from a sample of Dutch households, we show that the impact of happiness on households’ financial decisions works in the opposite direction and is more economically important compared to trust. Specifically, happiness leads to a lower probability of investing into risky financial assets and having insurance, while trust has the usual positive effect found in the literature. Furthermore, the negative effect of happiness on the ownership of risky financial assets is about 6% higher compared to the positive equivalent of trust. Similarly, the negative effect of happiness on the ownership of insurance is 3% higher than the positive effect of trust.

This paper studies regulated health insurance markets known as exchanges, motivated by the increasingly important role they play in both public and private insurance provision. We develop a framework that combines data on health outcomes and insurance plan choices for a population of insured individuals with a model of a competitive insurance exchange to predict outcomes under different exchange designs. We apply this framework to examine the effects of regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find substantial adverse selection leading to full unraveling of our simulated exchange, even when age can be priced. While the welfare cost of adverse selection is substantial when health status cannot be priced, that of reclassification risk is five times larger when insurers can price based on some health status information. We investigate several extensions including (i) contract design regulation, (ii) self‐insurance through saving and borrowing, and (iii) insurer risk adjustment transfers.