I examine the effect of financial sector stress on risk sharing in a novel setting: the CME’s weather derivatives market. The structure of the market allows me to disentangle price movements due to financial sector stress from price movements due to fundamentals. Contracts, which are typically priced near their actuarially fair value, experience significant price declines during periods of financial sector stress. Contracts with greater margin requirements and total risk are the most affected. The results provide causal evidence of the effect of financial sector stress on the pricing of exchange-traded financial contracts and risk sharing in the economy. Received July 21, 2017; editorial decision July 22, 2018 by Editor Philip Strahan.

We find that firms’ financial resources play an important role in mitigating the spread of COVID-19. We study nursing homes—whose residents account for over one-third of all U.S. COVID-19 deaths—at a time when investment in risk mitigation was costly and critical. Facilities with less liquidity and those experiencing more severe cash flow shocks had more cases of COVID-19. The importance of cash flow is further supported by tests exploiting state-level variation in Medicaid reimbursement expansion. Evidence on personal protective equipment supplies suggests a lack of financial resources leads to lower investment in risk mitigation.

Using proprietary data from a major fund data provider, we analyze the screening activity of investment consultants (ICs). We find that ICs frequently shortlist funds using threshold screens clustered at $500MM for AUM, 0% for benchmark-adjusted return, and quartiles for return percentile rank screens. Funds just above the $500MM AUM threshold get 14%–18% more page views and 5–9 pp greater flows over the next year compared to similar funds just below the threshold. Our results are consistent with ICs using a two-stage consider-then-choose decision-making process and cognitive reference numbers in selecting screening thresholds. (JEL G41, G11, G14, G29) Received January 8, 2021; editorial decision September 3, 2021.

We document significant persistence in the market timing performance of active individual investors, suggesting that some investors are skilled at timing. Using data on all trades by active Finnish individual investors over almost 15 years, we also show that the net purchases of skilled versus unskilled investors predict monthly market returns. Our results lend credibility to the view that market returns are predictable, without having to specify which variables active investors use to successfully time the market.

We analyze the role of financial markets in shaping the incentives of government agencies using a unique empirical setting: the weather derivatives market. We show that the introduction of weather derivative contracts on the Chicago Mercantile Exchange (CME) improves the accuracy of temperature measurement by 13% to 20% at the underlying weather stations. We argue that temperature‐based financial markets generate additional scrutiny of the temperature data measured by the National Weather Service, which motivates the agency to minimize measurement errors. Our results have broader implications: the visibility and scrutiny generated by financial markets can potentially improve the efficiency of government agencies.