We study bailouts of banks that suffer from debt overhang problems and have private information about the quality of their assets-in-place and new investment opportunities. Menus of bailout plans are used as a screening device. Constrained-optimality involves over capitalization and nonlinear...

Hedge funds significantly reduced their equity holdings during the recent financial crisis. In 2008Q3-Q4, hedge funds sold about 29% of their aggregate portfolio. Redemptions and margin calls were the primary drivers of selloffs. Consistent with forced deleveraging, the selloffs took place in...

Recent literature suggests that trading by institutional investors may affect the first and second moments of returns. Elaborating on this intuition, we conjecture that arbitrageurs can propagate liquidity shocks between related markets. The paper provides evidence in this direction by studying...

Large institutional investors own an increasing share of equity markets in the U.S. The implications of this development for financial markets are still unclear. The paper presents novel empirical evidence that ownership by large institutions predicts higher volatility and greater noise in stock...

This paper seeks to inform about a feature of monetary policy that is largely overlooked, yet occupies a central role in modern monetary and financial systems, namely central bank collateral frameworks. Their importance can be understood by the observation that the money at the core of these...

The spread between unsecured and repo rates (collateral spread) fluctuates substantially and is negative on a significant portion of days. Recent theoretical work argues that collateral spreads are determined by a constrained-arbitrage relation between the unsecured rate, the repo rates, and the...

Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured...