We show how the timing of financial innovation might have contributed to the mortgage boom and then to the bust of 2007-2009. We study the effect of leverage, tranching, securitization and CDS on asset prices in a general equilibrium model with collateral. We show why tranching and leverage tend...

We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterwards. This may seem puzzling, since it implies that creating a derivative...

This paper aims at testing for time-variations in herd behavior in stock markets. In particular, we analyze how investors’ behavior differs between times of market turmoil and tranquil trading periods. Thereby, we take into account herding within a certain market as well as international...

Short sellers are routinely blamed for destabilizing stock markets by exacerbating deviations from fundamental values. In response, regulators periodically impose short sale constraints aimed at preventing excessive stock market declines. One explanation is that policy makers regard short...

This paper explores commonality in liquidity for country ETFs. Using data from 21 country ETFs, the empirical results present the strong commonality in liquidity among country ETFs. Furthermore, the paper shows that the magnitude of commonality in liquidity for country ETFs varies with the...

Financial markets are typically characterized by high (low) price level and low (high) volatility during boom (bust) periods, suggesting that price and volatility tend to move together with different market conditions/states. By proposing a simple heterogeneous agent model of fundamentalists and...

In a tractable stochastic volatility model, we identify the price of the smile as the price of the unspanned risks traded in SPX option markets. The price of the smile reflects two persistent volatility and skewness risks, which imply a downward sloping term structure of low-frequency variance...

In this work, I study the impact of high-frequency trading (HFT) on price discovery and volatility in the Bund futures market. Using a new dataset based on microseconds, the focus of the study is on the reaction of high-frequency traders (HFTs) to major macroeconomic news events. I show that...

From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the...

The present paper provides a new explanation for the dynamics of exchange rates based on conventions that prevail among market participants. The model relies on a two states Markov switching framework: a bull state and a bear state. In the bull state, agents are optimistic and put more weight on...