In efficient markets the price should reflect the arrival of private information. The mechanism by which this is accomplished is arbitrage. 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...

The dynamic behavior of security prices is studied in a setting where two agents trade strategically and learn from market prices. Each trader receives a private signal about fundamentals, the significance of which depends on the signal received by the other trader. In trading, each agent wants...

We consider a model of the stock market with delegated portfolio management. All agents are rational: some trade for hedging reasons, some investors optimally contract with portfolio managers who may have stock-picking abilities, and portfolio managers trade optimally given the incentives...

The dynamic behavior of security prices is studied in a setting where two agents trade strategically and learn from market prices. Each trader receives a private signal about fundamentals, the significance of which depends on the signal received by the other trader. In trading, each agent wants...

The usual approach to determine if market prices of uninsured bank liabilities reflect the risk of default is to regress the yield spread of bank debt against accounting measures of bank risk. To date these results have been mixed. Here we argue that this is because previous investigations lack...

In the last two decades U.S. banks have become systematically less profitable and riskier as nonbank competition has eroded the profitability of banks’ traditional activities. Bank failures, insignificant from 1934, the date the Glass-Steagall Act was passed, until 1980, rose exponentially in...

Banking panics are the central event informing and rationalizing government intervention into the banking industry. In the last decade progress has been made in understanding the origins of panics. This essay reviews recent theoretical and empirical work on the origins of banking panics. New...

In the last ten to fifteen years financial derivative securities have become an important, and controversial, product for commercial banks. The controversy concerns whether the size, complexity, and risks associated with these securities, the difficulties with accurately reporting timely...

The existence of nominal wage and debt contracts is a puzzle. In a model with strategic complementarities, where imperfectly competitive firms inefficiently underinvest, nominal wage or debt contracts are shown to be preferred to indexed contracts. Nominal contracts are an optimal arrangement...