implicit collusion in non exclusive contracting under adverse selection this paper studies how implicit collusion may take place through simple non exclusive contracting under adverse selection when multiple buyers e g entrepreneurs with risky projects non exclusively contract with multiple firms e g banks it shows that any price schedule can be supported as equilibrium terms of trade in the market if each firm s expected prot is no less than its reservation profit firms sustain collusive outcomes through the triggering trading mechanism in which they change their terms of trade contingent only on buyers reports on the lowest average price that the deviating firm s trading mechanism would induce it suggests that a good can be overpriced in a competitive market even with fully rational traders and without firms explicit collusive agreement

does one soros make a difference a theory of currency crises with large and small traders do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets to address this issue we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals even abstracting from signaling the presence of the large investor does make all other traders more aggressive in their selling relative to the case in which there is no large investors small investors attach the currency when fundamentals are stronger yet the difference can be small or null depending on the relative precision of private information of the small and large investors adding signaling makes the influence of the large trader on small traders behaviour much stronger

limit order submission strategies under asymmetric information abstract this paper provides evidence that informed traders dominate the response of limit order submissions to shocks in a pure limit order market in the market we study informed traders are highly sensitive to spreads volatility momentum and depth by contrast uninformed traders are relatively insensitive to all these market conditions the dominance of the informed over limit order submissions is magnified by contrasts between them and the uninformed in the use of aggressively priced limit orders

limit order book as a market for liquidity we develop a dynamic model of an order driven market populated by discretionary liquidity traders these traders must trade yet can choose the type of order and are fully strategic in their decision traders differ by their impatience less patient traders demand liquidity more patient traders provide it three equilibrium patterns are obtained the pattern is determined by three parameters the degree of impatience of the patient traders which we model as the cost of execution delay in providing liquidity their proportion in the population which determines the degree of competition among the liquidity providers and the tick size which is the cost of the minimal price improvement despite its simplicity the model generates a rich set of empirical predictions on the relation between market parameters time to execution and spreads we argue that the economic intuition of this model is so basic its main results must be robust in much more general models

herding with and without payoff externalities an internet experiment most real world situations that are susceptible to herding are also characterized by direct payoff externalities yet the bulk of the theoretical and experimental literature on herding has focused on pure informational externalities in this paper we experimentally investigate the effects of several different forms of payoff externalities e g network effects first mover advantage etc in a standard information based herding model our results are based on an internet experiment with more than 6000 subjects of which more than 2400 participated in the treatments reported here including a subsample of 267 consultants from an international consulting firm we also replicate and review earlier cascade experiments finally we study reputation effects i e the influence of success models in the context of herding

estimating the gains from trade in limit order markets we present a method to estimate the gains from trade in limit order markets and provide empirical evidence that the limit order market is a good market design using observations on order submissions and execution and cancellation histories we estimate both the distribution of traders unobserved valuations for the stock and latent trader arrival rates we use the resulting estimates to compute the current gains from trade the gains from trade in a perfectly liquid market and the gains from trade with a monopoly liquidity supplier the current gains are 90 of the maximum gains and 150 of the monopolist gains the majority of the world s stock exchanges operate some form of a limit order market a feature of good market design is that traders realize most of the potential gains from trade we develop a method for identifying and estimating the gains from trade in a limit order market and apply our method to a sample from a particular limit order market the vancouver stock exchange vse we find that gains from trade in the vse are approximately 90 of the gains from trade in a perfectly liquid market and approximately 50 more than gains from trade in a market in which liquidity is supplied by a profit maximizing monopolist our results therefore provide new empirical evidence that the limitorder market is a good market design a large number of experimental studies document that the gains from trade in a double auction are close to the maximum gains from trade see for example cason and friedman 1996 or the survey by holt 1995 similarly our empirical results show that the limit order market a market design similar to

one two three infinity newspaper and lab beauty contest experiments beauty contest is a game in which participants have to choose typically a number in 0 100 the winner being the person whose number is closest to a proportion of the average of all chosen numbers we describe and analyze beauty contest experiments run in newspapers in uk spain and germany and find stable patterns of behavior across them despite the uncontrollability of these experiments these results are then compared with lab experiments involving undergraduates and game theorists as subjects in what must be one of the largest empirical corroborations of interactive behavior ever tried we claim that all observed behavior across a wide variety of treatments and subject pools can be interpretedas iterative reasoning level 1 reasoning level 2 reasoning and level 3 reasoning are commonly observed in all the samples while the equilibrium choice level maximum reasoning is only prominently chosen by newspaper readers and theorists the results show the empirical power of experiments run with large subject pools and open the door for more experimental work performed on the rich platform offered by newspapers and magazines

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

absentee ownership of immobile factors and environmental policies in a federation this paper studies the effects of absentee ownership of immobile factors on environmental policy of a jurisdiction in a federation an increase in emissions in a jurisdiction increases factor incomes but part of the increased factor incomes goes to absentee owners while only the residents of the jurisdiction bear the full disutility in addition the increase in emissions in a jurisdiction attracts capital and decreases capital in other jurisdictions reducing the incomes that the residents of the jurisdiction earn from owning immobile factors in other jurisdictions absentee ownership thus reduces the marginal benefit of an increase in emissions while it leaves the marginal cost unaffected from the jurisdiction s perspective as a consequence absentee ownership makes environmental policy of a jurisdiction too stringent relative to the efficient level the paper also considers the effects of absentee ownership on environmental policy when goods trade is allowed

so what orders do informed traders use we present a simple glosten milgrom type equilibrium model to analyze the decision of informed traders on whether to use limit or market orders we show that even after incorporating an order s price impact not only may informed traders prefer to use limit orders but the probability that they submit limit orders can be so high that limit orders convey more information than market orders we further show that the horizon of the private information is critical for this decision and is positively related to the use of limit orders our empirical analysis using torq suggests that informed traders do prefer limit orders to market orders and that limit orders are indeed more informative our model is in contrast to the literature that assumes that informed traders use market orders only and the literature that examines the limit order versus the market order decision of uninformed traders

herd behavior the penguin effect and the suppression of informational diffusion an analysis of informational externalities and payoff interdependency this article analyzes a technology adoption process in which the effect of informational spillover interacts with network externalities the interplay of informational externalities and payoff interdependency induces risk averse and clustering behavior in the technology adoption process the analysis differs from the herd behavior literature in focusing on how the herd behavior of subsequent users influences the initial adoption decision moreover herd behavior in this article stems from each agent s desire to inhibit the revelation of new information that can be used in a way detrimental to her rather than from each agent s effort to free ride on information contained in the decisions made by predecessors

capital mobility and the current account abstract this paper analyzes the effect of unanticipated changes in the terms of trade on consumption expenditures and the current account in a small open economy simple formulas are obtained for the covariances of changes in consumption expenditures the current account and the expected current account with changes in the terms of trade it is shown that if investment is uncorrelated with the terms of trade a necessary condition for unanticipated changes in the terms of trade to be correlated with changes in consumption expenditures and the expected current account is that the real expected return on foreign bonds differs from the real expected return on domestic bonds

the ems and the dollar the ems and the dollar francesco giavazzi and alberto giovannini this paper examines the behaviour of exchange rates prior to and since the inception of the european monetary system ems movements in bilateral european exchange rates tend to be associated with fluctuations in the dollar in particular the mark tends to appreciate against other european currencies when the dollar depreciates further most realignments of currencies in the ems have generally occurred after sharp movements in the dollar conventional explanations relying on portfolio diversification by investors do not seem to explain the facts fully a more satisfactory explanation is provided by the existence of capital controls these limit the mobility of assets and ensure an asymmetric response by european currencies to movements in the dollar these capital controls are in the absence of coordinated monetary policy essential to the smooth working of the ems however at the same time they limit the scope for the further integration of european capital markets thus the ems is not a step on the road to greater financial integration indeed it is a cul de sac

the effects of trade size and market depth on immediate price impact in a limit order book market abstract we compare trade size to the prevailing market depth at the best level in the limit order book to detect and account for zero impact trades in an immediate price impact model our model also incorporates standard trade attributes trade size market capitalization and volatility in a dynamic setting the incorporation of market depth information reduces the mean absolute squared forecast error of an immediate price impact prediction by about 60 after controlling for trade attributes market depth price impact dynamics and intra and inter day periodicities in order of relative importance all improve the prediction of a trade s price impact we demonstrate the value of our model by showing that splitting a big order into a series of smaller trades results in a reduction of between 60 and 82 of the immediate price impact cost of the big order we also find that our depth indicator helps with the prediction of order flow and permanent price impact

network effects software provision and standardization in this paper we examine the software provision decision of software firms the provision decision by software firms determines the value and hence the market share of competing hardware technologies we show how the provision decision by software firms determines whether multiple hardware technologies are supported in equilibrium or whether there is de facto standardization with only one hardware technology supplied with software in equilibrium we show that when consumers place a high value on software variety there is a suboptimal amount of standardization by the market

equilibrium price formation and the value of private information an economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset and then choose demand functions that determine the allocation of assets it is a well known paradox that if agents are price takers and prices are fully revealing then an equilibrium with costly information acquisition does not exist it is shown that if the price formation process is modeled explicitly and agnets are not price takers then it is possible to have an equilibrium with fully revealing prices and costly information acquisition article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach currency prices terms of trade and interest rates a general equilibrium asset pricing cash in advance approach

explaining the absence of international factor price convergence abstract as capital markets have become integrated factor prices have not converged as expected this paper provides an explanation the key observation is that non specific output risks are borne by capital making international portfolio diversification a dominant strategy capital market integration can elicit many patterns of factor price response under this circumstance factor prices will move in parallel if countries are identical when countries differ factor prices may diverge or even have their relative sizes reversed the integration of capital markets affects welfare through changes in risk and in overall returns to savings welfare need not improve

the high frequency trade off between speed and sophistication abstract central to the ability of a high frequency trader to make money is speed in order to be first to trading opportunities firms invest in the fastest hardware and the shortest connections between their machines and the markets yet this is not enough algorithms must be short no more than a few instructions as a result there is a trade off in the design of optimal high frequency trading strategies being the fastest necessitates being less sophisticated to understand the effect of this tension a computational model is presented that captures latency both of code execution and information transmission trading algorithms are modelled through genetic programming with longer programmes allowing more sophisticated decisions at the cost of slower execution times it is shown that depending on the market composition short fast strategies and slower more sophisticated strategies may both be viable and exploit different trading opportunities the relative profits of these different approaches vary however slow traders benefit and social welfare increase in the presence of hfts a suite of regulations are tested to manage the risks associated with high frequency trading the majority are found to be ineffective though constraining the ratio of orders to trades may be promising

capital income taxation in growing open economies abstract this paper studies how alternative capital mobility assumptions affect the incidence and efficiency of capital income taxation the study uses a two country intertemporal equilibrium model in which imperfectly elastic investment captures the notion of imperfectly mobile physical capital if home goods and foreign goods are perfect substitutes and investment is inelastic the tax effects in open and closed economies are similar only if physical capital is perfectly mobile are capital income taxes completely shifted in small open economies only then and if significant terms of trade effects are absent do open economy efficiency losses substantially exceed the closed economy losses

learning information processing and order submission in limit order markets by introducing a genetic algorithm learning with a classifier system into a limit order market this paper provides a unified framework of microstructure and agent based models of limit order markets that allows traders to determine their order submission endogenously according to market conditions it examines how traders process and learn from market information and how the learning affects limit order markets it is found that measured by the average usage of different group of market information trading rules under the learning become stationary in the long run also informed traders pay more attention to the last transaction sign while uninformed traders pay more attention to technical rules learning of uninformed traders improves market information efficiency but not necessarily when informed traders learn opposite to the learning of informed traders learning makes uninformed traders submit less aggressive limit orders and more market orders furthermore private values can have significant impact in the short run but not in the long run one implication is that the probability of informed trading pin is positively related to the volatility and the bid ask spread

private information flow and price discovery in the u s treasury market abstract using intraday data we identify the intensity of private information flow in the u s treasury market our results show that the intensity of private information flow is highly correlated with public information shocks and higher for longer maturity bonds more importantly we find that bond price changes associated with high intensity of private information flow tend to be persistent whereas those associated with low intensity of private information flow are more likely reversed while public information and private information are the main determinants of bond price variations on days with news announcements private information and liquidity shocks are important determinants of bond price variations on days with no significant events finally we show that the depth of limit order book is inversely related to the intensity of private information flow nevertheless informed dealers do not seem to use hidden orders to disguise their trading intentions

chasing trends at the micro level the effect of technical trading on order book dynamics abstract technical traders attempt to exploit trends in market prices and the order flow despite this little is known about how these traders behave in a micro structure context we consider a model of an order book based financial market the market contains two groups informed traders and technical traders a numerical technique is used to identify a markov perfect equilibrium of the trading game and so determine the optimal strategies we find that technical trading rules are profitable and allow traders to increase their returns the effect of technical traders on the market however is ambiguous they decrease volatility and pricing errors but also increase trading costs despite primarily acting as liquidity suppliers

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

world business cycles under fixed and flexible exchange rates this paper studies the behavior of monthly industrial production indices during the recent periods of fixed and flexible exchange rate s the central conclusions are as follows industrial production indices are subject to stochastic trend growth the variances of the monthly growth rates are higher in the flexible exchange rate period than in the fixed exchange rate period and are related to the degree of openness and to national income more open economies tend to experience more variability while richer more diversified economies experience less and output movements have been correlated across countries under both exchange rate regimes and there is evidence of a world business cycle copyright 1988 by ohio state university press

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

profits markups and entry fiscal policy in an open economy in this paper we develop a general model of an imperfectly competitive small open economy there is a traded and non traded sector whose outputs are combined in order to produce a single final good that can be either consumed or invested we make general assumptions about preferences and technology and analyze the impact of fiscal policy on the economy we find that the fiscal multiplier is between zero and one and provide sufficient conditions for it to be increasing in the degree of imperfect competition we also are able to compare the multiplier under free entry and with a fixed number of firms and welfare a simple graphical representation of the model is developed

payoff effects in information cascade experiments lisa r anderson i introduction this article examines payoff effects in information cascade experiments 1 cascade experiments provide a unique environment to study errors because decisions are made publicly and in sequence allowing people to learn from the decisions of others however there are no payoff interdependencies so subjects are only concerned with maximizing their own expected payoffs which cannot be directly affected by the actions of others this feature simplifies the analysis of the decision making process and makes it possible to focus more clearly on how subjects draw inferences from public decisions furthermore errors are recursive in the sense that mistakes made by initial decision makers influence the decisions of those that come later in the sequence this study focuses on learning and errors by analyzing data econometrically in a logistic error model econometric methods have gained popularity as a way to examine errors in experimental data harless and camerer 1994 present a maximum likelihood estimation method to test the predictive power of various utility theories using data from 23 different experiments mckelvey and palfrey 1995 and 1998 use the logistic structure to estimate error rates with data from a variety of games palfrey and prisbrey 1997 use a similar structure with a probit model to estimate error rates in a public goods experiment the analysis presented here differs from these previous econometric studies of experimental data in the following way in this model errors are analyzed in a sequential structure so the errors of others must be taken into account but there is no strategic element in the decision making process this study expands on the error analysis presented in anderson and holt 1997 by examining error rates under different payoff conditions smith and walker 1993a present a model of decision making in which the effort of contemplating a decision is balanced against potential gains in payoffs in addition they survey the experimental literature in economics and psychology addressing the issue of payoff effects and they find mixed results some studies report a decrease in error rates as payoffs increase others show little difference in results under payoff and no payoff treatments however there is a consensus that higher payoffs reduce the variance of decisions from the predicted outcome testing their own theory in the context of a first price auction experiment smith and walker 1993b report that the amount and severity of error decreases as payoffs increase interestingly behavior is not random even when there is no monetary reward for a correct decision using data from lottery choice experiments wilcox 1993 finds that higher monetary payoffs affect behavior in complex situations but not in relatively simple decision making environments harless and camerer 1994 use econometric methods to compare error rates in experiments with real losses to those with hypothetical losses they find that error rates are lower and variances are reduced in data with real losses this article adds to the literature on the saliency of rewards by analyzing behavior in a different experimental framework and by using the logistic model to generate econometric estimates of error rates under no payoff payoff and double payoff conditions the underlying behavioral model is an extension of the cascade model presented in bikhchandani hirshleifer and welch 1992 experimental procedures are discussed in section ii section iii discusses econometric details section iv reports results and section v concludes ii procedures 2 for each session of this experiment seven subjects were recruited from undergraduate economics courses at the university of virginia one subject was randomly chosen to be a monitor and the remaining six subjects were decision markers at the beginning of each period the monitor threw a six sided die to determine which of two urns was to be used for that period

trade in nominal assets and net international capital flows abstract nominal assets play a major role in international financial markets while trade in indexed bonds is limited as a result agents are exposed to both price and exchange rate uncertainty nonetheless previous research on net capital flows has assumed the presence of a risk free vehicle to intertemporal asset trade in this paper we develop a general equilibrium intertemporal model with trade limited to nominal bonds and equity we find that exposure to nominal risk dampens net capital flows thus making economies effectively more closed

asset markets tariffs and political risk abstract this paper examines a simple model in which exogenous political risk creates uncertainty about tariffs the model predicts a relation between consumption and tariffs that differs radically from that implied by models without asset markets or political risk given the probability distribution of tariffs domestic consumption and utility ex post are lower in states of the world with a domestic tariff and no foreign tariff than with a foreign tariff and no domestic tariff this conclusion emerges despite the fact that the opposite would be obtained in the absence of asset markets so economists should not be surprised if observed relations between consumption and tariffs differ from the predictions of static theory in either time series or cross sections

imperfect competition among informed traders we analyze competition among informed traders in the continuous time kyle 1985 model as foster and viswanathan 1996 do in discrete time we explicitly describe the unique linear equilibrium when signals are imperfectly correlated and confirm the conjecture of holden and subrahmanyam 1992 that there is no linear equilibrium when signals are perfectly correlated one result is that at some date and at all dates thereafter the market would have been more informationally efficient had there been a monopolist informed trader instead of competing traders the relatively large amount of private information remaining near the end of trading causes the market to approach complete illiquidity copyright the american finance association 2000

learning from the behavior of others conformity fads and informational cascades learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior for example why do people tend to converge on similar behavior why is mass behavior prone to error and fads the authors argue that the theory of observational learning and particularly of informational cascades has much to offer economics business strategy political science and the study of criminal behavior

dynamic behavior of capital accumulation in a cash in advance model abstract this paper analyzes the dynamic behavior of capital accumulation in stockman s cash in advance model if the cash in advance constraint applies only to consumption then money is superneutral along the transition path as well as in the long run alternatively if the cash in advance constraint applies to gross investment as well as consumption then a permanent increase in the rate of monetary growth reduces the steady state capital stock the effect on the speed of adjustment depends on the sign of a certain simple function of the parameters of preferences and technology

accumulation and growth in a two country model a simulation approach abstract this paper analyzes saving and capital accumulation in a two good growth model of two market economies in which economic agents optimize with perfect foresight the goal is to present a model in which short run dynamics and the steady state are soundly integrated we stress the importance of asset markets as the linkage that transmits disturbances both internationally and intertemporally while many components of the model described below can be found in the literature on optimal consumption investment and international growth models we provide a consistent synthesis our framework permits the analysis of structural adjustment in the global economy and the dynamic effects of a wide range of public policies

money and asset prices in a cash in advance economy an asset pricing model with money introduced via a cash in advance constraint is presented the monetary velocity is variable hence money demand does not obey the trivial quantity equation the effects of disturbances in output and money growth on real balances the price level and interest rates are examined monetary policy has effects on real asset prices the fisher relation and the premium on nominal bonds are discussed the precise role of the timing of information and transactions for properties of price levels and interest rates are clarified

exchange rate mean reversion from real shocks within an intertemporal equilibrium model abstract the post bretton woods era has been characterized by real exchange rates that exhibit mean reversion with mixed evidence as to whether this reversion is partial ppp never holds or essentially complete this paper generates these stylized facts theoretically by synthesizing a simple intertemporal open economy model with the elasticities approach to the current account a central feature of the model is the existence of non traded goods the model can generate partial or approximately complete mean reversion for the real exchange rate depending on parameter values if innovations in output are made up of permanent and temporary components in addition temporary output shocks generate a type of hysteresis wherein the short run path for the exchange rate permanently alters its long run equilibrium value

who follows the crowd groups or individuals abstract in games of social learning individuals tend to give too much weight to their own private information relative to the information that is conveyed by the choices of others weizsacker 2010 in this paper we investigate differences between individuals and small groups as decision makers in information cascade situations in line with results from social psychology as well as results on bayesian decision making charness et al 2006 we find that groups behave more rationally than individuals groups in particular are able to abandon their own private signals more often than individuals when it is rational to do so our results indicate that the intellective part of the decision task contributes slightly more to the superior performance of groups than the judgmental part our findings have potential implications for the design of decision making processes in organisations finance and other economic settings

local discouragement and global collapse a theory of coordination avalanches abstract we study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity eventually players with a long string of bad experiences become inactive this prospect can cause a coordination avalanche in which all activity in the population stops coordination avalanches are part of pareto efficient equilibria they can occur at any point in the game their occurrence does not depend on the true state of nature and allowing players to exchange information may merely hasten their onset we present applications to search markets organizational meltdown and inefficient computer upgrades jel d83

observational learning under imperfect information abstract we explore bayes rational sequential decision making in a game with pure information externalities where each decision maker observes only her predecessor s binary action under perfect information the martingale property of the stochastic learning process is used to establish convergence of beliefs and actions under imperfect information in contrast beliefs and actions cycle forever however despite the stochastic instability over time the private information is ignored and decision makers become increasingly likely to imitate their predecessors consequently we observe longer and longer periods of uniform behavior punctuated by increasingly rare switches

information cascades in the laboratory when a series of individuals with private information announce public predictions initial conformity can create an information cascade in which later predictions match the early announcements this paper reports an experiment in which private signals are draws from an unobserved urn subjects make predictions in sequence and are paid if they correctly guess which of two urns was used for the draws if initial decisions coincide then it is rational for subsequent decisionmakers to follow the established pattern regardless of their private information rational cascades formed in most periods in which such an imbalance occurred copyright 1997 by american economic association

rational herding toward the poor evidence from location decisions of microfinance institutions within pakistan analyzing the geographical location of almost all the microfinance institutions mfis within pakistan this paper gives further evidence that microfinance activities do not reach the poorest rural areas especially we explore how this result is driven by the uncertainty faced by mfis in their location decision i e they can hardly predict accurately whether or not they will perform financially furthermore we find that mfis are spatially clustered and identify three main reasons for this common attraction factors i e the characteristics of one area fits to the preferences of all mfis so that they are all located in the same areas payoff externalities to be collocated and herd behavior i e mfis follow one another most importantly we find that a significant part of this herding process is rational i e early locations of mfis convey information used by later ones such that it reverses or neutralizes the negative impact of uncertainty resulting then in more locations in needier areas since it allows them to be located in poorer areas mfis improve the achievement of their social goal this latter result is rather good news for those who reckon that a better access to financial services enhances economic growth and fosters poverty alleviation indeed rational herding constitutes an endogenous moderator effect to the big issue that financial services penetration is too weak in the poorest rural areas

trading fees and efficiency in limit order markets competition among trading platforms has considerably reduced trading fees in stock markets we show that this evolution is not necessarily beneficial to investors although they increase gains from trade when a trade happens lower trading costs can induce investors to post limit orders with a smaller execution probability in this case gains from trade are realized less frequently and investors can be worse off our model has testable implications for the effects of trading fees and their breakdown between liquidity suppliers and liquidity demanders on limit order fill rates and bid ask spreads

fiscal policy the terms of trade and the external balance abstract the effects of fiscal policies on the terms of trade and the external balance are analysed the external balance is decomposed into changes in the ownership of world wealth across residents of each country and changes in the distribution of world wealth represented by assets located in each country it is shown that a rise of government expenditure on the foreign good deteriorates the home country s terms of trade but improves its net foreign asset position whether a reduction in equity taxes improves or deteriorates the external balance depends upon the magnitude of a fiscal transmission effect

monetary growth innovations in a simple cash in advance asset pricing model abstract this paper contributes to the existing literature in the rational expectations cash in advance asset pricing general equilibrium model in two directions first we show that by allowing a variable velocity of circulation an increase in the conditional variance of the money growth process triggers an increase in the demand for money relative to stocks and bonds with a consequent reduction in stock and bond prices which is the opposite of the current result in the literature with constant unitary velocity second we explicitly show how the sequential markets and specific timing of information fits exactly into the notion of irreversibility in the sense that when faced with uncertainty agents might find optimal to delay decisions in order to wait for the arrival of new information

wishes expectations and actions a survey on price formation in election stock markets abstract with error prone and biased individual traders can markets aggregate trader information and produce efficient outcomes we review election stock market evidence that suggests this does happen individual traders appear biased and error prone consistently yet these markets prove quite efficient in predicting election outcomes we also review work which documents comparable but substantially different phenomena in related laboratory markets in addition we report the results from a new laboratory session which shows how we can create particular biases that mirror those in election stock markets finally we discuss how combined laboratory and field experiments can help us understand trader market interactions

the role of saving and investment in exchange rate determination under alternative monetary mechanisms abstract we argue that the demand for national currencies depends on existing payment arrangements for imports and exports therefore exchange rate movements depend on these arrangement as a result the relationship between exchange rate movements and various macroeconomic aggregates like saving and investment depend on what we call the monetary mechanism these points are explicitly demonstrated by studying two extreme monetary mechanisms one in which all payments are done with the seller s currency and one in which all payments are done with the buyer s currency

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

informed traders and limit order markets abstract we consider a dynamic limit order market in which traders optimally choose whether to acquire information about the asset and the type of order to submit we numerically solve for the equilibrium and demonstrate that the market is a volatility multiplier prices are more volatile than the fundamental value of the asset this effect increases when the fundamental value has high volatility and with asymmetric information across traders changes in the microstructure noise are negatively correlated with changes in the estimated fundamental value implying that asset betas estimated from high frequency data will be incorrect

sufficient and necessary conditions for information to have social value in pure exchange this paper extends corrects and unifies earlier statements concerning the social value of public information as well as the no trading conditions in pure exchange sufficient and necessary conditions are provided for both the single period and two period cases in a postsignal trading model the social value of information is shown to be closely linked to the allocational efficiency of the market the degree of homogeneity of prior beliefs and of information structures the time additivity of preferences and the efficiency of endowments we conclude that the case in favor of public information is much stronger than previously suggested

information acquisition in financial markets tions agents have exponential utility and random variables are normally distributed these assumptions are often necessary to obtain closed form solutions we present an example with alternative assumptions and demonstrate that some of the conclusions from previous literature fail to hold in particular we show that in our example as more agents acquire information prices do not necessarily become more informative and agents may have greater incentive to acquire informatioln learning can therefore be a strategic complement allowing for the possibility of multiple equilibria

frictional intermediation in over the counter markets we extend duffie et al s 2005 search theoretic model of over the counter otc asset markets allowing for a decentralized inter dealer market with arbitrary heterogeneity in dealers valuations or equivalently inventory costs we develop a solution technique that makes the model fully tractable and allows us to derive in closed form theoretical formulas for key statistics analysed in empirical studies of the intermediation process in otc markets a calibration to the market for municipal bonds allows us to quantify important unobservable characteristics of this market including the severity of search and bargaining frictions and the nature of heterogeneity across dealers we use our calibrated model to study the effect of these market characteristics on total welfare and the distribution of gains from trade across customers and dealers

long lived private information and imperfect competition we develop a multi period auction model in which multiple privately informed agents strategically exploit their long lived information we show that such traders compete aggressively and cause most of their common private information to be revealed very rapidly in the limit as the interval between auctions approaches zero market depth becomes infinite and all private information is revealed immediately these results are in contrast to those of kyle 1985 in which the monopolistic informed trader causes his information to be incorporated into prices gradually and when the interval between auctions is vanishingly small market depth is constant over time fama 1970 defines a strong form efficient market as one in which security prices fully reflect all available information including both publicly and privately held information in a pioneering and influential article kyle 1985 develops a model in which a single privately informed trader with long lived information optimally exploits his monopoly power over time kyle s 1985 main results are i the informed trader trades in a gradual manner so that his information is incorporated into prices at a slow almost linear rate and ii when auctions are held continuously the depth of the market is constant over time however kyle s 1985 assumption of a single informed trader is strong in the sense that in actual financial markets it is reasonable to expect that at least a few players will have access to private information and will trade in the knowledge that they will face competition with other informed agents in the market 1 we develop a multi period auction model in which multiple strategic informed traders optimally exploit their long lived informational advantage we thus explore the restrictiveness of kyle s assumption of a single informed trader and also examine

debt and distortionary taxation in a simple perfect foresight model abstract we examine the real effects of a temporary substitution of debt for distortionary income taxation we find that such a policy may reduce consumption increase investment and reduce interest rates these results arise even though we examine the same model used by barro where temporary substitution of debt for lump sum taxes was shown to have no real effects we show that these anti keynesian effects on consumption are as significant as various pro keynesian effects such as finite lives hence the impact of debt is an empirical issue and ricardian neutrality appears to be a reasonable benchmark

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

trade in nominal assets monetary policy and price level and exchange rate risk in a previous paper trade in risky assets i have analyzed the pattern of international trade in risky real assets between barter economies relying on the law of comparative advantage and using autarky asset price differences to predict the pattern of asset trade in this paper the analysis is extended to international trade in nominal assets assets with returns paid in currencies between monetary economies the risk chracteristics of real returns on nominal assets depend on price level and exchange rate risk and therefore on monetary policy it is examined how different combinations of monetary policies and exchange rate regimes affect nominal assets return risk characteristics their autarky perices and hence their trade pattern when countries differ with respect to their outputs or their attitudes towards risk when world asset markets are incomplete different monetary policies and exchange rate regimes have dramatic effects on risk characteristics of home and foreign currency bonds and on the trade pattern in these assets as well as on aggregate capital and current accounts

averting economic collapse and the solipsism bias we study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities subjects follow a simple heuristic investing after positive experiences and reducing their propensity to invest after a failure this result contrasts with the theoretical findings of jeitschko and taylor jeitschko t d taylor c 2001 local discouragement and global collapse a theory of coordination avalanches amer econ rev 91 1 208 224 in which even agents who have only good experiences eventually stop investing because they account for the fact that others with worse experiences will quit this can trigger sudden economic collapse a coordination avalanche even in the most efficient bayesian equilibrium in the experiment subjects follow their own experiences and disregard the possible bad experiences of others thus exhibiting behavior that we term solipsism bias solipsism results in sustained investment activity and thus averts complete collapse

effects of unilateral climate policy on terms of trade capital accumulation and welfare in a world economy we present a two good two country overlapping generations model where emissions arise from production and each country has a domestic emission permit system when one country unilaterally reduces her cap on emissions her output available for domestic and foreign consumption diminishes more than in the other country with unchanged consumption expenditure shares for both goods the domestic terms of trade improve while capital stocks decline in the reducing and less strongly in the non reducing country improving terms of trade in the reducing country and falling capital stocks lead in total to welfare losses in both countries however if the country which unilaterally reduces her emission permits is a net creditor to the world economy and the golden rule applies her own welfare loss remains below that of the non reducing country

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

savings investment and international capital flows abstract the high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile this paper surveys the theory and evidence on the relationship between savings and investment in a sample of 23 oecd countries a positive correlation between savings and investment rates is found in both the short and long runs however a wide variety of models generate such co movements in savings and investment in response to exogenous disturbances even under conditions of complete financial markets thus the savings investment correlation provides little evidence on the question of international capital mobility

trade interdependence and the international business cycle a stochastic general equilibrium model of the world economy is developed to analyze the contribution of trade interdependence to international business cycles we test some of the implications of the model using data from ten major industrial countries and a variety of detrending techniques to calculate the cyclical component of output we find that the significance of trade in the transmission of economic disturbances across countries is not robust to the choice of the detrending method in general the role of trade interdependence is moderate and seem to have been stronger in the period before 1973

information cascades replication and an extension to majority rule and conformity rewarding institutions in a randomly determined order each agent was given an independent private signal about which of two states was selected by a random draw after receiving the private signal each agent made a publicly announced decision about the state thus at the time of personal decision each agent had a private signal and also knew the decisions of all preceding agents the experiments focused on three different types of organization 1 agents were rewarded according to whether their announced decision was right or wrong this individualistic institution is the one studied by anderson and holt aer 1997 their discovery of information cascades is replicated 2 agents were rewarded according to whether a majority of announced decisions were right or wrong under this majority rule institution the instance of information cascades is sharply reduced 3 agents are rewarded more according to whether their personal announced decision was the same as the majority decision than they were rewarded if their decision was correct this conformity rewarding institution is motivated by proceedings in which there is incentive to produce reports that conform to the reports of others substantial information cascades are observed

incentives for subjects in internet experiments abstract providing incentives to subjects in internet experiments can be tricky one simple method is a high score as in computer games we test whether high scores provide adequate incentives in comparison to the usual performance based incentives we find significant differences

on the european monetary system the spillover effects of german shocks and disinflation we analyse the disinflationary experience between 1979 93 for two traditionally inflationary countries of the european monetary system france and italy for each country a vector autoregressive model is estimated shocks in the model combine domestic and foreign sources the latter capture the world oil price shocks as well as nominal and real shocks originating in germany under investigation is the hypothesis that shocks originating in germany have a spillover disinflationary effect in france and italy the empirical evidence provides support to the validity of this hypothesis furthermore german shocks account for an important share of the total price variance in france and italy these results indicate that the interaction between countries of the european monetary system has contributed to the success of the disinflationary experiences of the 1980s the evidence sheds therefore some light on potential benefits that may be further realized as countries of the european monetary system move towards

dynamics of a floating exchange rate regime we study the full equilibrium dynamics of a two country world economy with a floating exchange rate traded and nontraded goods and explicit modeling of the use of money the resulting exchange rate equation depends on several details of the economic structure such as the supply structure and propensities to spend on various goods although real exchange rate movements have the usual association with the current account the ordinary exchange rate may appreciate or depreciate when there are deficits on current account even when the quantities of money do not change deviations from purchasing power parity and the fisher equation are shown to be the rule rather than the exception

an experiment on behavior in social learning games with collective preferences abstract many environments with social learning involve payoff interdependencies until recently few studies have examined sequentially observational social learning environments with externalities this paper presents the results of an experiment that examines the theoretical predictions of a simple model of observational learning where individuals care about their own actions and the actions of others ali and kartik 2012 consistent with theory i find that behavior does not change with this class of payoff interdependencies however behavior deviates from equilibrium predictions in the same manner both with and without these interdependencies

competition signaling and non walking through the book effects on order choice abstract we investigate the effects of competition and signaling in a pure order driven market and examine the trading patterns of agents when walking through the book is not allowed our results suggest that the variables capturing the cost of a large market order are not informative for an impatient trader under this market mechanism we also document that the competition effect is not present only at the top of the book but persistent beyond the best quotes moreover it dominates the signaling effect for both a limit order and a market order trader finally we show that institutional investors order submission strategies are characterized by only a few pieces of the limit order book information this is consistent with informed traders placing orders based on their own private valuations rather than the state of the book

currency preferences purchasing power risks and the determination of exchange rates in an optimizing model most recent research on the theory of exchange rate determination treats the exchange rate as the relative price of two assets domestic money and foreign money the value of an asset depends on the distribution of its return however most of the research has dealt with models in which there is no uncertainty the present paper focuses on questions that cannot be addressed in a world of certainty because in such a world an asset is never risky it investigates how purchasing power risks affect the determination of exchange rates this investigation is pursued in a fairly general optimizing model the present research is related to some recent work in international economics and in financial economics it follows the approach of obstfeld 1981 and stockman 1980 in that it uses an optimizing model and takes into account the role of government transfers in the flow budget constraint of individuals as in calvo and rodriguez 1977 stockman 1980 and others the fact that holdings of foreign monies are useful to domestic individuals is taken into account finally the paper uses techniques developed in papers in the finance literature which build on merton s 1973 asset pricing model and use a concept of equilibrium developed in

on the interplay of informational spillovers and payoff externalities this thesis consists of four independent essays which consider different topics in information economics and political economy the first two papers are variants of the same idea an uninformed principal e g a government will make a decision in order to gain more information it may consult two experts however these experts have a private interest in certain policies being implemented the question is to gain as much information as possible should the principal consult experts who are biased in the same direction or experts who prefer different decisions the main result is that as long as collusion between experts can be prevented homogeneous panels are superior to heterogeneous ones and this advantage increases with the experts informational precision in the third paper two firms consider entry in a new product market and must decide when to enter the market and how to design their product firms do not know for certain what the best design is so both firms want to outwait the other s decision in order to gain more information the focus of the paper is on which firm will make the first decision the main result is that if products are strong strategic substitutes the worst informed firm makes the first decision in equilibrium the analysis should apply to a range of other contexts such as investors trading decisions or the policy choices of political candidates the final paper asks the following question could it be that parties in a two party system may benefit from using several candidates in the same election to promote the use of multiple candidates i assume that a party never runs the risk of having its votes split up among its candidates despite this it turns out that parties have a strong incentive to restrict their number of nominees paradoxically it seems that the more uncertain parties are about voter opinion the fewer candidates they want to use in particular with a uniform voter distribution the optimal number of candidates is one

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed