A privately informed trader will engage in costly arbitrage, that is, trade on his knowledge that the price of an asset is different from the fundamental value if: (1) his order does not move the price immediately to reflect the information; and (2) he can hold the asset until the date when the information is reflected in the price. We study a general equilibrium model in which all agents optimize. In each period, there may be a trader with a limited horizon who has private information about a distant event. Whether he acts on his information, and whether subsequent informed traders act, is shown to depend on the possibility of a sequence or chain of future informed traders spanning the event date. An arbitrageur who receives good news will buy only if it is likely that, at the end of his trading horizon, a subsequent arbitrageur's buying will have pushed up the expected price. We show that limited trading horizons result in inefficient prices, because informed traders do not act on their information until the event date is sufficiently close. We also show that limited horizons can arise because of the cost-carry associated with holding an arbitrage portfolio over an extended period of time.

Trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets. These securities, which can arise endogenously, have values that do not depend on the information known only to informed agents. Bank debt (deposits) is an example of this type of liquid security which protect relatively uninformed agents, and we provide a rationale for deposit insurance in this content. High‐grade corporate debt and government bonds are other examples, implying that a money market mutual fund‐based payments system may be an alternative to one based on insured bank deposits.

We consider a model of the stock market with delegated portfolio management. Managers try, but sometimes fail, to discover profitable trading opportunities. Although it is best not to trade in this case, their clients cannot distinguish “actively doing nothing,” in this sense, from “simply doing nothing.” Because of this problem, (i) some portfolio managers trade even though they have no reason to prefer one asset to another (noise trade). We also show that (ii) the amount of such noise trade can be large compared to the amount of hedging volume. Perhaps surprisingly, (iii) noise trade may be Pareto‐improving. Noise trade may be viewed as a public good. Results i and ii are compatible with observed high levels of turnover in securities markets. Result iii illustrates some of the possible subtcties of the welfare economics of financial markets. In our model, all agents are rational: some trade for hedging reasons, investors optimally contract with portfolio managers who may have stock‐picking abilities, and portfolio managers trade optimally given the incentives provided by this contract.

Banks produce short-term debt for transactions and storing value. The value of this debt must not vary over time so agents can easily trade it at par like money. To produce money-like safe liquidity, banks keep detailed information about their loans secret, reducing liquidity if needed to prevent agents from producing costly private information about the banks' loans. Capital markets involve information revelation, so they produce risky liquidity. The trade-off between less safe liquidity and more risky liquidity determines which firms choose to fund projects through banks and which ones through capital markets.

Too-big-to-fail" is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to

We document that the percentage of all U.S. assets that are “safe” has remained stable at about 33 percent since 1952. This stable ratio is a rare example of calm in a rapidly changing financial world. Over the same time period, the ratio of U.S. assets to GDP has increased by a factor of 2.5, and the main supplier of safe financial debt has shifted from commercial banks to the “shadow banking system.” We analyze this pattern of stylized facts and offer some tentative conclusions about the composition of the safe-asset share and its role within the overall economy.

We propose a theory of mergers that combines managerial merger motives with an industry‐level regime shift that may lead to value‐increasing merger opportunities. Anticipation of these merger opportunities can lead to defensive acquisitions, where managers acquire other firms to avoid losing private benefits if their firms are acquired, or “positioning” acquisitions, where firms position themselves as more attractive takeover targets to earn takeover premia. The identity of acquirers and targets and the profitability of acquisitions depend on the distribution of firm sizes within an industry, among other factors. We find empirical support for some unique predictions of our theory.

We integrate a widely accepted version of the separation of ownership and control—Michael Jensen's (1986) free cash flow theory—into a dynamic equilibrium model, and study the effect of imperfect corporate control on asset prices and investment. Aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices, investment, and the cyclical behavior of interest rates and the yield curve. The financial friction causes cash-flow shocks to affect investment, and causes otherwise i.i.d. shocks to be transmitted from period to period. The shocks propagate through large firms and during booms.

Stablecoins are a new form of private money. They are fragile but largely trade at par. How? We present a model and empirical work to examine a novel source of demand for stablecoins. Stablecoin owners are indirectly compensated for run risk by lending their coins to crypto speculators. The stablecoin can then support its $1 peg, but this arrangement links crypto speculation to traditional financial markets where stablecoins invest their reserves.