We propose a dynamic equilibrium model with stochastic interest rates in which agents hold heterogeneous valuations for the same asset and take on positions against each other. The model shows that interest rate uncertainty and investor heterogeneity are key determinants of price dispersion. Higher search intensity reduces price dispersion, while raising volume, leading to a negative volatility-volume relation. The sensitivity of volatility to volume is high when liquidity is low, interest rate variations are high and investors’ valuations are more heterogeneous. Evidence supports our model’s predictions and shows that search frictions play an important role in driving the volatility-volume relation.

This paper investigates the roles of illiquidity and credit risk in determining the relations between price volatility of a bond and its trading frequency and trade size based on a large transaction dataset from October 2004 to June 2012. We find a positive relation between volatility and trading frequency and a negative relation between volatility and trade size. Consistent with the prediction of the search-based theory, the relations are much stronger for illiquid and risky bonds. Furthermore, both liquidity and credit risk become more important in times of stress and their effects are reinforcing. Results strongly suggest that search frictions and credit risk are important factors driving the relation between volatility and trading activity in the corporate bond market.

We study the underpricing and long-term performance of A- and B-share initial public offerings (IPOs) issued in China during the 1993–1998 period. The average underpricing for A- and B share IPOs are 178% and 11.6%, respectively. The underpricing of A-share IPOs is positively related to the number of days between the offering and the listing and the number of stock investors in the province from which the IPO comes, and negatively related to the number of shares being issued. None of these characteristics explain the underpricing of B-share IPOs. In the long run, A-share IPOs slightly underperform the size- and/or book/market (B/M)-matched portfolios while B-shares outperform the benchmark portfolios.

Exploring the role of social proximity in bank lending using a proprietary data set, we uncover evidence of a significant social proximity effect on private information acquisition. Local loan officers have better information to identify higher-quality borrowers through improved screening. This advantage is greater when firms have higher information asymmetry and lower ratings. Results suggest that sociocultural resources drive locals’ informational advantages and improve their lending performance. Importantly, we find that the social proximity advantage interacts with loan officer incentives. Strong evidence suggests that loan officers can be incentivized to use their social proximity advantage to make better loans.

This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liquidity beta is robust to the effects of default and term betas, liquidity level, and other bond characteristics, as well as to different model specifications, test methodologies, and a variety of liquidity measures. The results suggest that liquidity risk is an important determinant of expected corporate bond returns.

We evaluate the efficacy of price discovery in the round-the-clock U.S. Treasury market. Using a comprehensive intraday database, we explore informational role of trades over the 24-hour day. We find that information asymmetry is generally highest in the preopen period and lowest in the postclose period. Information asymmetry in the overnight period is comparable to that in the regular trading period. However, on days with macroeconomic announcements, information asymmetry peaks shortly after the news release at 8:30. Moreover, information asymmetry is higher on Monday morning and higher immediately before than after the open of U.S. Treasury futures trading. Although volume is low after hours and trading cost is relatively high, overnight trading generates significant price discovery. Results suggest that overnight trading activity is an important part of the Treasury price discovery process.

We conduct an international study on the effect of climate policy uncertainty on the systemic risk of banks from G20 countries. We find that climate policy uncertainty is associated with lower bank systemic risk. This relation is more pronounced in countries with high innovation capacity, climate readiness, more systemically important banks, and a more competitive banking system. Climate-related information disclosure and sustainable investments are critical economic channels through which the effect of climate policy uncertainty works. Our findings alleviate the concern that climate transition risk may contribute to financial instability and provide practical implications for regulators to design climate transition policies.

This paper examines the pricing of volatility risk and idiosyncratic volatility in the cross-section of corporate bond returns for the period of 1994–2016. Results show that bonds with high volatility betas have low expected returns, and this negative relation appears in all segments of corporate bonds. Further, bonds with high idiosyncratic bond (stock) volatility have high (low) expected returns, and this relation strengthens as ratings decrease. Conventional risk factors and bond/issuer characteristics cannot account for these cross-sectional relations. There is evidence that the effect of idiosyncratic stock volatility on expected bond returns works through the channel of contemporaneous stock returns.