The GM and Ford downgrade to junk status during May 2005 caused a wide-spread sell-off in their corporate bonds. Using a novel dataset, we document that this sell-off appears to have generated significant liquidity risk for market-makers, as evidenced in the significant imbalance in their quotes...

Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay. As prices are informative about the asset payoff, insiders get a strictly larger expected utility than outsiders. Yet, information acquisition by one investor exerts a negative...

In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy...

While losses were accumulating during the 2007-09 financial crisis, many banks continued to maintain a relatively smooth dividend policy. We present a model that explains this behavior in a setting where there are financial externalities across banks. In particular, by paying out dividends, a...

Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental...

This paper argues that the European banking crisis can in part be explained by a “carry trade” behavior of banks. Factor loading estimates from multifactor models relating equity returns to GIPSI (Greece, Ireland, Portugal, Spain and Italy) and German government bond returns suggest that...

We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy by ameliorating the under-investment problem of the financial sector. However, increasing taxation of the non-financial sector to fund the bailout may be inefficient since it...

Capital flight associated with the onset of a financial crisis in a country is often accompanied by an inflow of capital associated with foreign direct investment (FDI). Our paper provides a theoretical framework for this puzzle, and draws wider conclusions on the welfare effects of foreign...

We consider a moral hazard setup wherein leveraged firms have incentives to take on excessive risks and are thus rationed when they attempt to borrow in order to meet liquidity shocks. The rationed firms can optimally pledge cash as collateral to borrow more, but in the process must liquidate...

We build an equilibrium model with commodity producers that are averse to future cash flow variability, and hedge using futures contracts. Their hedging demand is met by financial intermediaries who act as speculators, but are constrained in risk-taking. Increases (decreases) in producers’...