Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?

We study price discovery in municipal bonds, an important OTC market. As in markets for consumer goods, prices “rise faster than they fall.” Round‐trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Further, effective half‐spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to Treasuries also adjust with asymmetric speed in rising and falling markets. Finally, intraday price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.     

How Sticky Is Sticky Enough? A Distributional and Impulse Response Analysis of New Keynesian DSGE Models

In this paper, we add to the literature on the assessment of how well data simulated from new-Keynesian dynamic stochastic general equilibrium (DSGE) models reproduce the dynamic features of historical data. In particular, we evaluate sticky price, sticky price with dynamic indexation, and sticky information models using impulse response and correlation measures and via implementation of a distribution based approach for comparing (possibly) misspecified DSGE models using simulated and historical inflation and output gap data. One of our main findings is that for a standard level of stickiness (i.e., annual price or information adjustment), the sticky price model with indexation dominates other models. We also find that when a lower level of information and price stickiness is used (i.e., bi-annual adjustment), there is much less to choose between the models (see Bils and Klenow 2004 , for evidence in favor of lower levels of stickiness). This finding is due to the fact that simulated and historical densities are "much" closer under bi-annual adjustment.     

Corporate Governance and Capital Structure Dynamics

We develop a dynamic tradeoff model to examine the importance of manager–shareholder conflicts in capital structure choice. In the model, firms face taxation, refinancing costs, and liquidation costs. Managers own a fraction of the firms’ equity, capture part of the free cash flow to equity as private benefits, and have control over financing decisions. Using data on leverage choices and the model's predictions for different statistical moments of leverage, we find that agency costs of 1.5% of equity value on average are sufficient to resolve the low‐leverage puzzle and to explain the dynamics of leverage ratios. Our estimates also reveal that agency costs vary significantly across firms and correlate with commonly used proxies for corporate governance.     

Demographic Discontinuity: Another Explanation for Consumerism?

This supplemental explanation for consumerism focuses on how unique demographics may have contributed to the movement. Prior movements may not have achieved the scale or magnitude of the most recent movement because they did not occur after a period of rapid population growth. The latter is speculated to be part of the societal structural strains that contributed, not only to the consumerism movement, but also to the social discontent of the 1960s and 1970s.