A speculative security is an asset whose payoff depends on a random shock uncorrelated with economic fundamentals (a sunspot) about which some traders have superior information. In this paper we show that agents may find it desirable to trade such a security in spite of the fact that it is a...

This paper introduces a new theory of market incompleteness based on the information transmission role of prices and its adverse impact on the provision of insurance in financial markets. We analyze a simple security design model which endogenizes not only the characteristics of each individual...

This paper introduces a theory of market incompleteness based on the information transmission role of prices and its adverse impact on the provision of insurance in financial markets. We analyse a simple security design model in which the number and payoff of securities are endogenous. Agents...

Our basic premise is that fund managers performance is related to superior information about an asset payoff. We investigate the relationship between managerial skills and trading behavior within a two-period rational expectation equilibrium (REE) model where agents trade on private information...

This paper documents that at the individual stock level, insiders' sales peak many months before a large drop in the stock price, while insiders' purchases peak only the month before a large jump.We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric...

We define two measures: the Model Performance Ratio (MPR), which ranks asset pricing models based on their ability to price random portfolios, and the Rate of Market Efficiency (RME), which measures market efficiency assuming the best pricing model (largest MPR). We find that: (i) market...

We analyze the interaction between growth and financial development in a model of product innovation. Innovation is risky and can be monitored only imperfectly and at a cost. Financial intermediaries emerge endogenously to avoid the duplication of monitoring activities and negotiate contracts...

As a consequence of the recent bear stock market, the aggregate funding level of defined benefit pension plans has tremendously deteriorated. A relevant issue is whether the market value of the firms sponsoring these plans reflects their pension liabilities. In sharp contrast with earlier...

We explore the role of corporate insiders vs. firms as traders of last resort. We develop a simple model of insider trading in which insiders provide price support, as well as liquidity, in security markets. Consistent with the model predictions we find that in the US markets insiders' trading...