Research

Publications

Liquidity and Asset Prices under Asymmetric Information and Imperfect Competition, Review of Financial Studies, forthcoming. (With Jiang Wang)
Previously circulated under the title: Liquidity and Asset Prices: A Unified Framework.
Asymmetric information raises expected asset returns, while imperfect competition can lower them. Both frictions can move common measures of illiquidity in opposite directions.
The previous version studies also the effects of participation costs, transaction costs, leverage constraints, and search frictions.

Limits of Arbitrage: The State of the Theory, Annual Review of Financial Economics, 2010, 2, 251-275. (With Denis Gromb)
Survey of theoretical work on the limits of arbitrage. Research in this area is evolving into a broader agenda emphasizing the role of financial institutions for asset prices
In the Press: VoxEU 10/04/2010, A version in French, in "La Jaune et La Rouge," the magazine of the alumni of Ecole Polytechnique, Insead Knowledge 09/11/2010.

Price Pressure in the Government Bond Market, American Economic Review, P&P, 2010, 585-590. (With Robin Greenwood)
Two case studies where shocks to institutional demand and supply for bonds affected the term structure: UK pension reform of 2004 and US Treasury buybacks of 2000-2002.

A Model of Financial Market Liquidity Based on Intermediary Capital, Journal of the European Economic Association, P&P, 2010, 456-466. (With Denis Gromb)
Two-period version of "Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs" -- with new results on when arbitrage stabilizes or destabilizes prices.

The Gambler's and Hot-Hand Fallacies: Theory and Applications, Review of Economic Studies, 2010, 77, 730-778. (With Matthew Rabin)
People's belief that luck should balance out in small samples (gambler's fallacy) causes them to also believe that long streaks of similar outcomes are overly likely to continue (hot-hand fallacy).

Strong-Form Efficiency with Monopolistic Insiders, Review of Financial Studies, 2008, 21, 2275-2306. (With Minh Chau)
Previously circulated under the title: Positive Profits when Prices are Strongly Efficient.
A monopolistic insider who receives a smooth flow of private information reveals it infinitely fast in continuous time, and yet earns positive profits.

A Search-Based Theory of the On-the-Run Phenomenon, Journal of Finance, 2008, 63, 1361-1398. (With Pierre-Olivier Weill) Appendix
Short-sellers concentrate into one asset because of its higher liquidity relative to an identical-payoff counterpart. This causes the higher liquidity, as well as repo specialness and a price premium.

Search and Endogenous Concentration of Liquidity in Asset Markets, Journal of Economic Theory, 2007, 136, 66-104. (With Tan Wang)
High-turnover investors concentrate into one asset because of its higher liquidity relative to an identical-payoff counterpart. This causes the higher liquidity as well as a price premium.

Persuasion Bias, Social Influence, and Uni-Dimensional Opinions, Quarterly Journal of Economics, 2003, 118, 909-968. (With Peter DeMarzo and Jeff Zwiebel)
Belief dynamics in a social network when agents fail to adjust for repetitions of information. Agents' influence depends on network position rather than information accuracy, and their position ("left-right") on one issue predicts perfectly that on all other issues.

Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs, Journal of Financial Economics, 2002, 66, 361-407. (With Denis Gromb)
Market liquidity increases in the capital of margin-constrained arbitrageurs. Arbitrageurs can take too much risk, not internalizing that their fire sales tighten margin constraints of other arbitrageurs.

(Papers revised more recently are listed first)

A Theoretical Analysis of Momentum and Value Strategies. (With Paul Woolley)
Closed-form Sharpe ratios of momentum and value, and of their combinations. Momentum dominates value over short investment horizons, but the reverse is true over long horizons.

An Institutional Theory of Momentum and Reversal. (With Paul Woolley) Non-Technical Summary
Fund flows generate momentum, reversal, amplification, comovement and lead-lag effects. Larger effects for high idiosyncratic-risk assets. Sizeable Sharpe ratios of momentum and value in a calibration.
In the Press: Economist (Buttonwood) 20/11/2008, Financial Times (Tony Jackson) 31/08/2009, VoxEU 05/10/2009.

Fund Flows and Asset Prices: A Baseline Model. (With Paul Woolley)
Two-period version of "An Institutional Theory of Momentum and Reversal" -- with new results on how index re-balancings affect price levels and comovement.

Bond Market Clienteles, the Yield Curve and the Optimal Maturity Structure of Government Debt. (With Stephane Guibaud and Yves Nosbusch)
A welfare-maximizing government should cater the maturity structure of its debt to the mix of investor clienteles. In doing so, it reduces but does not minimize its expected interest costs.

Bond Supply and Excess Bond Returns. (With Robin Greenwood) Previous Version
Longer average maturity of government debt predicts, theoretically and empirically, higher excess returns of long- over short-term bonds, especially when arbitrageur risk aversion is high.

A Preferred-Habitat Model of the Term Structure of Interest Rates. (With Jean-Luc Vila)
Investors with preferences for specific maturities trade with risk-averse arbitrageurs. Implications for bond risk premia and for how shocks to bond demand and supply affect the term structure.

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