This paper reconciles the two explanations of a financial crisis, the self-fulfilling prophecy and the fundamental causes, in an empirically-relevant framework, by explicitly modeling the costly voluntary acquisition of information about fundamentals in a variant of Diamond and Dybvig [Diamond, D., Dybvig, P., 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419]. The model exhibits strategic complementarity in information acquisition. In the “partial run” equilibrium investors engage in costly evaluation of projects, so that banks with lower-return projects fail. There also exist the classic “full-run” and “no-run” equilibria in which there is no project evaluation. Investors’ coordination on a specific equilibrium is triggered by a self-fulfilling prophecy. So, financial crises are seen as both fundamentals-based and self-fulfilling prophecies-based phenomena.

This note revisits the proof of the steady-state growth theorem, first given by Uzawa in 1961.We provide a clear statement of the theorem, discuss intuition for why it holds, and present a new, elegant proof due to Schlicht (2006).

We show that the consolidation of orders is important for producing efficient prices, especially during times of high liquidity demand. The NYSE's centralized opening call market performs better than Nasdaq's decentralized opening process on typical trading days. The NYSE is much better than Nasdaq on witching days when index arbitrage activity subjects S&P 500 stocks to large, predictable, and mostly informationlessorder flow around quarterly futures contract expirations. Nasdaq opening price efficiency improves to NYSE levels once Nasdaq initiates a consolidated opening call in November 2004, but prices on the decentralized Nasdaq remain less efficient at other times of day.

This paper investigates the remarkable extremes of growth experiences within countries and the changes that occur across growth transitions. We find two main results. First, virtually all but the very richest countries experience both growth miracles and failures over substantial periods. Second, growth accelerations and collapses are asymmetric phenomena. Collapses typically feature reduced investment amidst increasing price instability, whereas growth takeoffs are primarily associated with large expansions in international trade. The results show that even very poor countries regularly grow rapidly, but sustaining growth is difficult and may pose a very different set of challenges than starting it. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

The timing of elections is flexible in many countries. We study this optimization by first creating a Bayesian learning model of a mean-reverting political support process. We then explore optimal electoral timing, modelling it as a renewable American option with interacting waiting and stopping values. Inter alia, we show that the expected longevity is a convex, then concave, function of the support. Finally, we calibrate our model to the post-1945 Labour-Tory U.K. rivalry. Our story quite well explains when the elections were called. We also show that election options approximately double the expected time in power in the current streak.

In this paper we theoretically and empirically examine the interaction between hedging, financing, and investment decisions. A simple equilibrium model with costly financial distress suggests that as firms become more efficient at risky investments vis a vis low risk investments, they will borrow less, invest more in risky assets, and hedge more. The model also predicts a positive relationship between hedging and leverage – a result consistent with debt capacity arguments. We test the model empirically using a simultaneous equations framework to investigate the determinants of firm-level hedging, financing and investing decisions. The results strongly support the hypothesis that the hedging, financing and investment decisions are jointly determined. In addition, we find strong support for the central hypothesis that firms more efficient investing in risky technologies more aggressively hedge and use less debt financing in order to maximize their comparative advantage.

Building on Duffie and Kan (1996) , we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations. Because these variables possess unambiguous economic interpretations, they generate a representation that is globally identifiable . Further, this representation has more identifiable parameters than the “maximal” model of Dai and Singleton (2000) . We implement this new representation for select three‐factor models and find that model‐independent estimates for the state vector can be estimated directly from yield curve data, which present advantages for the estimation and interpretation of multifactor models.

Regulation Fair Disclosure (FD), imposed by the Securities and Exchange Commission in October 2000, was designed to prohibit disclosure of material private information to selected market participants. The informational advantage such select participants gain is unclear. If multiple “insiders” receive identical information, private information is immediately incorporated in price and each insider has zero expected profit. If, on the other hand, Regulation FD has curtailed the flow of information from firms, private information becomes longer‐lived and more valuable. Hence, market makers will demand increased compensation by widening the adverse selection component of the bid‐ask spread. We identify the cost components of the bid‐ask spread for a sample of NASDAQ stocks surrounding the implementation of Regulation FD. Controlling for other factors affecting the spread, we find that adverse selection costs increase approximately 36% after Regulation FD. We interpret our finding as Regulation FD failing to achieve one of its desired objectives.

We construct a long daily panel of short sales using proprietary NYSE order data. From 2000 to 2004, shorting accounts for more than 12.9% of NYSE volume, suggesting that shorting constraints are not widespread. As a group, these short sellers are well informed. Heavily shorted stocks underperform lightly shorted stocks by a risk‐adjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional nonprogram short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The results indicate that, on average, short sellers are important contributors to efficient stock prices.