The sub-prime mortgage crisis raises serious questions about the role of a lender-of-last resort in containing the spread of a financial crisis. We use the founding of the Federal Reserve as a historical experiment to provide some insight into whether a lender-of-last resort can stabilize...

This paper incorporates institutional features of trading markets including the discrete nature of the price grid and determines the consequences for prices and strategic behavior. Interactions between market makers is complex: because equilibrium prices are not determined by a...

Testing for long-run abnormal performance has become an increasingly important part of the finance literature. We propose a test for abnormal performance in long-run event studies using the buy and hold abnormal return (BHAR). We augment the control firm approach of Barber and Lyon (1997) by...

Much textbook emphasis is placed on the mathematical notion of expected return and its historical estimate via an arithmetic average of past returns. But those wanting to forecast a typical future cumulative return should be more interested in estimating the median future cumulative return than...

On the NYSE and exchanges that feature open limit order books, larger orders receive worse prices. Accordingly, market microstructure theory has focused on developing consistent models. However, on exchanges such as the London Stock Exchange, NASDAQ and FX markets, larger orders receive better...

A standard presumption of market microstructure models is that competition between risk-neutral market makers inevitably leads to price schedules that leave market makers zero expected profits conditional on the order flow. This paper documents an important lack of robustness of this zero-profit...

We study insider trading in a dynamic setting. Rational, but uninformed, traders choose between investment projects with different levels of insider trading. Insider trading distorts investment towards assets with less private information. However, when investment is sufficiently information...

In this paper, we demonstrate using a simple model that reducing tick size may either reduce or increase adverse selection. Therefore, the effect of tick size on adverse selection is an important empirical question. At the same time, we demonstrate that the standard asymmetric information models...

We conduct an empirical test of rational decision theory using the auction that a contestant must win to advance on the television game show, The Price Is Right. This setting is unique---not only because successful contestants win substantial prizes, but also because the predicted outcomes do...

This paper examines the dual e ffects of informed trading on expected returns: information transmission and information risk. We show that the relationship between informed trading and expected returns can be non-linear in theory and is indeed non-linear empirically. Specifically, the...