London School of Economics
- Informational Black Holes in Financial Markets (with U. Axelson)
We study how well primary financial markets allocate capital when information about investment opportunities is dispersed across market participants. We set up a canonical capital-raising in which an entrepreneur attempts to raise financing for a new project from informed investors in a common-value auction. Information generated in the auction affects the decision of whether to start the project or not. We show that the bidding behavior of investors fails to convey their information, and that larger markets with more aggregate information may reduce efficiency. Contrary to the predictions of standard theory, the revenues of an entrepreneur can be decreasing in the size of the market, early releases of information may be suboptimal, and collusion among investors may benefit the entrepreneur.
- Deliberate Limits to Arbitrage (with G. Plantin)
This paper develops a model in which arbitrageurs are collectively unconstrained, but may still prefer to incur individual limits to arbitrage rather than make full use of their combined resources. These deliberate limits arise because the communication of an arbitrage position reveals the underlying idea, which creates future competition in the absence of relevant property rights. We allow arbitrage opportunities to vary along two dimensions: the ease with which they can be identified and the speed at which they mature. We find that deliberate limits to arbitrage arise for opportunities in the mid-range of the maturity dimension. This range widens when the opportunities are easier to find. Our results thus offer a set of theoretical predictions about the arbitrage trades that are likely to exist in the market.
- Sources of Systematic Risk (with D. Papanikolau)
Using the restrictions implied by the heteroskedasticity of stock returns, we identify four factors in the U.S. industry returns. The first correlates highly with the market portfolio; the second is a portfolio of stocks that produce investment goods minus stocks that produce consumption goods; the third differentiates between cyclical and noncyclical stocks. The fourth, a portfolio of industries that produce input goods minus the rest of the market, is a robust predictor of excess returns on the market portfolio and bond returns. The extracted factors are shown to contain significant information about future macroeconomic and financial variables.
- Rewarding Trading Skills Without Inducing Gambling
(with G. Plantin), Journal of Finance, 70, (2015).
- CDS Auctions
(with M. Chernov and A. Gorbenko), Review of Financial Studies 26, (2013).
- Equilibrium Subprime Lending
(with G. Plantin), Journal of Finance, 68, (2013).
- Forecasting the Forecasts of Others: Implications for Asset Pricing
(with O. Rytchkov), Journal of Economic Theory 147, (2012).
- The Equity Risk Premium and the Risk-free Rate in an Economy with Borrowing Constraints
(with L. Kogan and R. Uppal), Mathematics and Financial Economics 1, (2007). Lead article, inaugural issue.
- An Econometric Analysis of Serial Correlation and Illiquidity in Hedge-Fund Returns
(with M. Getmansky and A. Lo), Journal of Financial Economics 74, (2004).
- Debt Overhang and Barter in Russia
(with S. Guriev and M. Maurel), Journal of Comparative Economics, (2002).