The "quant crisis" of 2007 and subsequent unfolding of the global financial crisis highlighted the importance of the "crowded-trade" problem (not being able to know how many others are taking the same position). To investigate the crowded trading, we present a model in which informed and...

This paper discusses the efficient market hypothesis and behavioral finance under a general framework using the literature of decision theories and information sciences. The focus is centered on the broad de nition of subjective rationality, the imprecision, and reliability of information. The...

How does a market digest order imbalance? We show that when market participants learn about the level of adverse selection (the risk of trading against better-informed counterparties) from order flow, a large order imbalance can be destabilizing, causing sharp price movements and evaporation of...

Markets often experience liquidity deteriorations during financial crisis and improvements during reforms in trading rules. To explain these phenomena, we present a price formation model in which market makers are subject to ambiguity. When the market maker is sufficiently ambiguity averse, the...

We find that approximately 30% of financial advisers in the United States are involved in misconduct, yet only about one-third of those are detected. Advisers involved in misconduct tend to be male, work in a "toxic" environment, change firms more often, pass fewer industry exams, and have less...