We model the opacity of over-the-counter (OTC) markets in a setup where agents share risks, but have incentives to default and their financial positions are not mutually observable. We show that this setup results in excess "leverage" in that parties take on short OTC positions that lead to...

Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market in completeness or transactions costs of any kind. Instead, we modify a...

If the asset market is complete then the difference between foreign and domestic agents' log intertemporal marginal rates of substitution (IMRSs) equals the log change in the real exchange rate. This equation is frequently used to argue that changes in real exchange rates reflect differences...

Many seemingly discordant results are reconciled if firm-specific return volatility is characterized as the intensity with which firm-specific events occur. A functionally efficient stock market allocates capital to its highest value uses, which often amounts to financing Schumpeterian creative...

What explains short-term fluctuations of stock prices? This paper exploits a natural experiment from the 18th century in which information flows were regularly interrupted for exogenous reasons. English shares were traded on the Amsterdam exchange and news came in on sailboats that were often...

We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more...

We re-examine the Fama (1984) puzzle – the finding that ex post depreciation and interest differentials are negatively correlated, contrary to what theory suggests – for eight advanced country exchange rates against the US dollar, over the period up to June 2019. The rejection of the joint...

Stock prices are more informative when the information has less social value. Speculators with limited resources making costly (private) information production decisions must decide to produce information about some firms and not others. We show that producing and trading on private information...

Despite their current prevalence and historical significance, little is known about the economics of open air markets. This paper uses open air markets as a natural laboratory to provide initial insights into the underlying operation of such markets. Using data on thousands of individual...

This paper analyzes non-fundamental volatility and efficiency in a class of large games (including e.g. linear-quadratic beauty contests) that feature strategic interaction and endogenous information acquisition. We adopt the rational inattention approach to information acquisition but...