Brokers and Order Flow Leakage: Evidence from Fire Sales

Using trade‐level data, we study whether brokers play a role in spreading order flow information in the stock market. We focus on large portfolio liquidations that result in temporary price drops, and identify the brokers who intermediate these trades. These brokers’ clients are more likely to predate on the liquidating funds than to provide liquidity. Predation leads to profits of about 25 basis points over 10 days and increases the liquidation costs of the distressed fund by 40%. This evidence suggests a role of information leakage in exacerbating fire sales.     

The Value of Financial Flexibility

We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates that determine the effective cost of holding cash, the firm's growth potential and maturity, and the reversibility of capital. Through simulations, we demonstrate that firms facing financing frictions should simultaneously borrow and lend, and we examine the nature of dynamic debt and liquidity policies and the value associated with corporate liquidity.     

Model Uncertainty and Option Markets with Heterogeneous Beliefs

This paper provides option pricing and volume implications for an economy with heterogeneous agents who face model uncertainty and have different beliefs on expected returns. Market incompleteness makes options nonredundant, while heterogeneity creates a link between differences in beliefs and option volumes. We solve for both option prices and volumes and test the joint empirical implications using S&P500 index option data. Specifically, we use survey data to build an Index of Dispersion in Beliefs and find that a model that takes information heterogeneity into account can explain the dynamics of option volume and the smile better than can reduced‐form models with stochastic volatility.     

The Interbank Market after August 2007: What Has Changed,and Why?

After the onset of the financial crisis, spreads between interbank interest rates on unsecured and secured deposits for the major world currencies became exceptionally large and volatile. First, we find that the phenomenon was mainly driven by aggregate—rather than bank‐specific—factors, notably risk aversion, and accounting practices; by contrast, funding liquidity, capital shortage, and central bank interventions were not important determinants. Second, prior to August 2007, the spread was broadly insensitive to key borrower characteristics, whereas afterward it became somewhat more reactive to measures of creditworthiness. Third, conditions for big borrowers became relatively more favorable during the crisis, suggesting that moral hazard risks related to the “too‐big‐to‐fail” argument have increased. These results are discussed in the light of theories on the interbank market during a crisis.     

Habit Formation and Macroeconomic Models of the Term Structure of Interest Rates

This paper introduces a new class of nonaffine models of the term structure of interest rates that is supported by an economy with habit formation. Distinguishing features of the model are that the interest rate dynamics are nonlinear, interest rates depend on lagged monetary and consumption shocks, and the price of risk is not a constant multiple of interest rate volatility. We find that habit persistence can help reproduce the nonlinearity of the spot rate process, the documented deviations from the expectations hypothesis, the persistence of the conditional volatility of interest rates, and the lead‐lag relationship between interest rates and monetary aggregates.     

Organization Capital and the Cross‐Section of Expected Returns

Organization capital is a production factor that is embodied in the firm's key talent and has an efficiency that is firm specific. Hence, both shareholders and key talent have a claim to its cash flows. We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from shareholders' perspective. We find that firms with more organization capital have average returns that are 4.6% higher than firms with less organization capital.     

Correlation Risk and Optimal Portfolio Choice

We develop a new framework for multivariate intertemporal portfolio choice that allows us to derive optimal portfolio implications for economies in which the degree of correlation across industries, countries, or asset classes is stochastic. Optimal portfolios include distinct hedging components against both stochastic volatility and correlation risk. We find that the hedging demand is typically larger than in univariate models, and it includes an economically significant covariance hedging component, which tends to increase with the persistence of variance–covariance shocks, the strength of leverage effects, the dimension of the investment opportunity set, and the presence of portfolio constraints.     

The Most Beautiful Variations on Fair Wages and the Phillips Curve

This paper explores the connection between inflation and unemployment in two different models with fair wages in both the short and the long runs. Under customary assumptions regarding the sign of the parameters of the effort function, more inflation lowers the unemployment rate, albeit to a declining extent. This is because firms respond to inflation—which spurs effort by decreasing the reference wage—by increasing employment, thus maintaining the effort level constant as implied by the Solow condition. A stronger short‐run effect of inflation on unemployment is produced under varying as opposed to fixed capital, given that in the former case the boom produced by a monetary expansion is reinforced by an increase in investment. Therefore, I provide a new theoretical foundation for recent empirical contributions that find negative long‐ and short‐run effects of inflation on unemployment.     

Do They Have Your Number? Understanding the Moderating Role of Format Effects and Consumer Numeracy for Quantitative Front‐of‐Package Nutrition Claims

Front‐of‐package (FOP) nutrient content claims are often used by food manufacturers to promote the nutrition levels of their products. In this research, two studies examine the influence of the numerical format (either percentages or absolute numbers) presented on FOP‐reduced nutrient content claims and the moderating influence of consumers' numeracy levels (i.e., consumers' ability to interpret numbers). Low numerate consumers are more strongly influenced by the label's numerical format, but results differ across nutrition attributes linked to cardiovascular disease risk. For saturated fat, low numerate consumers had more favorable evaluations of the product that had a label presented in a percent format compared to an absolute unit format. In contrast, the moderating effect of numeracy had little effect on the format of reduced sodium claims. Implications are offered for policymakers, consumer researchers, and food manufacturers .