[This article analyzes the dynamic coordination problem among creditors of a firm with a time-varying fundamental and a staggered debt structure. In deciding whether to roll over his debt, each maturing creditor is concerned about the rollover decisions of other creditors whose debt matures during his next contract period. We derive a unique threshold equilibrium and characterize the roles of fundamental volatility, credit lines, and debt maturity in driving runs. In particular, we show that when fundamental volatility is sufficiently high, commonly used measures such as temporarily keeping the firm alive under runs and increasing debt maturity can exacerbate rather than mitigate runs.]

[This paper presents a dynamic equilibrium model of bond markets in which two groups of agents hold heterogeneous expectations about future economic conditions. The heterogeneous expectations cause agents to take on speculative positions against each other and therefore generate endogenous relative wealth fluctuation. The relative wealth fluctuation amplifies asset price volatility and contributes to the time variation in bond premia. Our model shows that a modest amount of heterogeneous expectations can help explain several puzzling phenomena, including the "excessive volatility" of bond yields, the failure of the expectations hypothesis, and the ability of a tent-shaped linear combination of forward rates to predict bond returns.]

I study convergence traders with logarithmic utility in a continuous-time equilibrium model. In general, convergence traders reduce asset price volatility and provide liquidity by taking risky positions against noise trading. However, when an unfavorable shock causes them to suffer capital losses, thus eroding their risk-bearing capacity, they liquidate their positions, thereby amplifying the original shock. In extreme circumstances, this wealth effect causes convergence traders to be destabilizing in that they trade in exactly the same direction as noise traders. This situation is consistent with the near-collapse of Long-Term Capital Management in 1998.

This paper uses segmented dual-class shares of Chinese firms—A shares traded in mainland China by local investors and H shares traded in Hong Kong by foreign investors—to document a rich pattern in the differential reactions of local and foreign investors to analyst recommendations. This pattern reveals that social connections between analysts and investors affect investor reactions to analyst recommendations. Because of the investors' differential reactions, analyst recommendations may exacerbate, rather than attenuate, the market segmentation between the two share classes.

A number of authors have suggested that investors derive utility from realizing gains and losses on assets that they own. We present a model of this “realization utility,” analyze its predictions, and show that it can shed light on a number of puzzling facts. These include the disposition effect, the poor trading performance of individual investors, the higher volume of trade in rising markets, the effect of historical highs on the propensity to sell, the individual investor preference for volatile stocks, the low average return of volatile stocks, and the heavy trading associated with highly valued assets.

We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over annual gains and losses; in the other, they are defined over realized gains and losses. Surprisingly, the annual gain/loss model often fails to predict a disposition effect. The realized gain/loss model, however, predicts a disposition effect more reliably. Utility from realized gains and losses may therefore be a useful way of thinking about certain aspects of individual investor trading.

The success of behavioral economics has led to a new challenge: many biases offer observationally similar predictions for a targeted financial anomaly. To tame this bias zoo, we combine subjective survey responses with observational data to propose a new approach, one that is robust to question-specific biases introduced through surveys. We illustrate this approach by administering a nationwide survey of Chinese retail investors to elicit their trading motives. In cross-sectional regressions of respondents’ actual turnover on survey-based trading motives, perceived information advantage and gambling preference dominate other motives, though they are not the most prevalent biases based on survey responses.

Financial contagion is described as a wealth effect in a continuous‐time model with two risky assets and three types of traders. Noise traders trade randomly in one market. Long‐term investors provide liquidity using a linear rule based on fundamentals. Convergence traders with logarithmic utility trade optimally in both markets. Asset price dynamics are endogenously determined (numerically) as functions of endogenous wealth and exogenous noise. When convergence traders lose money, they liquidate positions in both markets. This creates contagion, in that returns become more volatile and more correlated. Contagion reduces benefits from portfolio diversification and raises issues for risk management.

Motivated by the behavior of asset prices, trading volume, and price volatility during episodes of asset price bubbles, we present a continuous-time equilibrium model in which overconfidence generates disagreements among agents regarding asset fundamentals. With short-sale constraints, an asset buyer acquires an option to sell the asset to other agents when those agents have more optimistic beliefs. As in a paper by Harrison and Kreps, agents pay prices that exceed their own valuation of future dividends because they believe that in the future they will find a buyer willing to pay even more. This causes a significant bubble component in asset prices even when small differences of beliefs are sufficient to generate a trade. In equilibrium, bubbles are accompanied by large trading volume and high price volatility. Our analysis shows that while Tobin's tax can substantially reduce speculative trading when transaction costs are small, it has only a limited impact on the size of the bubble or on price volatility.