General
Featured Piece
“Regulation of Fair Disclosure and Credit Markets,” by Professors Anthony Saunders, Yutao Li, Pei Shao, SSRN, Working Paper, (March 23, 2012)This paper studies how the implementation of Regulation of Fair Disclosure (Reg FD) affects the credit market. We argue that, although disclosing private information to lenders is exempt from Reg FD, this regulation imposes an additional disclosure risk on borrowers. We expect that borrowers will reduce information disclosure and increasingly rely on relationship lenders who have produced proprietary information about borrowers from their prior interactions. Our empirical results show that switching to new (non-relationship) lenders become more expensive after Reg FD because non-relationship lenders face higher information production costs when firms reduce information disclosure. In addition, we also find that borrowers are more dependent on relationship banking; lead lenders retain a larger fraction of the loans they syndicate; the secondary loan bid-ask spread significantly increases following the implementation of Reg FD. We interpret these findings as evidence of increased level of information asymmetry in the credit market.
In the Media
“Taxing Stock Trades will Hurt Main Street,” by Professors Yakov Amihud, Haim Mendelson, The Wall Street Journal, November 11, 2011.
"Circuit Breakers Don't Hold Answer To Market Glitches", by Professor Menachem Brenner, Forbes.com, May 12, 2010.
“Financial Regs are Good for Growth: We Need Strong Protections to Get the Economy Moving Again,” by Professors Nouriel Roubini, Matthew Richardson, Daily News, April 21, 2010.
"Viewpoint: Tax Proposal Is as Bad as It Ever Was", by Professor Menachem Brenner, American Banker, January 22, 2010.
“Saving free markets from market failure: institutions and liquidity are crucial,” by Professor Lasse Pedersen, Forbes.com, September 29, 2009.
“Concorde’s Fate Offers a Lesson for Financie,” by Professors Viral Acharya, Matthew Richardson, Nouriel Roubini, Financial Times, April 15, 2009.
Books
Real Time Solutions for Financial Reform, Viral Acharya, Thomas Cooley, Matthew Richardson, Ingo Walter, eds., December 2009.
Public Appearances
“Process Responsibility and Myron’s Law,” by Paul Romer, March 29, 2012 (Presentation).
Papers
ABSTRACT (Click Here for Paper)
Regulations that require asset issuers to disclose payoff-relevant information to potential buyers sound like obvious measures to increase investor welfare. But in many cases, such regulations harm investors. In an equilibrium model, asset returns compensate investors for risk. By making payoffs less uncertain, disclosure reduces risk and therefore reduces return. As high-risk, high-return investments disappear, investor welfare falls. Of course, information is still valuable to each individual investor. But acquiring information is like a prisoners' dilemma. Each investor is better off with the information, but collectively investors are better off if they remain uninformed. The two cases in which providing information improves investors' welfare are 1) where there would otherwise be severe asymmetric information, and 2) where the information induces firms to take on riskier investments. Using a model of information markets, the paper explores when such outcomes are likely to arise. When financial markets with information allocate the real capital stock more efficiently, disclosure improves efficiency, but more efficient firms do not offer investors higher returns. Investors only benefit when disclosure induces firms to take on riskier investments. Since the efficiency gains are fully captured by asset issuers, who can choose to disclose without disclosure being mandatory, the efficiency argument is not a logical rationale for regulation.
Regulations that require asset issuers to disclose payoff-relevant information to potential buyers sound like obvious measures to increase investor welfare. But in many cases, such regulations harm investors. In an equilibrium model, asset returns compensate investors for risk. By making payoffs less uncertain, disclosure reduces risk and therefore reduces return. As high-risk, high-return investments disappear, investor welfare falls. Of course, information is still valuable to each individual investor. But acquiring information is like a prisoners' dilemma. Each investor is better off with the information, but collectively investors are better off if they remain uninformed. The two cases in which providing information improves investors' welfare are 1) where there would otherwise be severe asymmetric information, and 2) where the information induces firms to take on riskier investments. Using a model of information markets, the paper explores when such outcomes are likely to arise. When financial markets with information allocate the real capital stock more efficiently, disclosure improves efficiency, but more efficient firms do not offer investors higher returns. Investors only benefit when disclosure induces firms to take on riskier investments. Since the efficiency gains are fully captured by asset issuers, who can choose to disclose without disclosure being mandatory, the efficiency argument is not a logical rationale for regulation.
ABSTRACT (Click Here for Paper)
The London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) are two key market benchmark interest rates used in a plethora of financial contracts with notional amounts running into the hundreds of trillions of dollars. The integrity of the rate-setting process for these benchmarks has been under intense scrutiny ever since the first reports of attempts to manipulate these rates surfaced in 2007. In this paper, we analyze Libor and Euribor rate submissions by the individual panel banks and shed light on the underlying manipulation incentives by quantifying their potential effects on the final rate set (the “fixing”). Furthermore, we explicitly take into account the possibility of collusion between several market participants. Our setup allows us to quantify such effects for the actual rate-setting process that is in place at present, and compare it to several alternative rate-setting procedures. We find that such alternative rate fixings, and larger sample sizes, could significantly reduce the effect of manipulation. Furthermore, we discuss the role of the particular questions asked of the panel banks, which are different for Libor and Euribor, and examine the need for a transaction database to validate individual submissions.
The London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) are two key market benchmark interest rates used in a plethora of financial contracts with notional amounts running into the hundreds of trillions of dollars. The integrity of the rate-setting process for these benchmarks has been under intense scrutiny ever since the first reports of attempts to manipulate these rates surfaced in 2007. In this paper, we analyze Libor and Euribor rate submissions by the individual panel banks and shed light on the underlying manipulation incentives by quantifying their potential effects on the final rate set (the “fixing”). Furthermore, we explicitly take into account the possibility of collusion between several market participants. Our setup allows us to quantify such effects for the actual rate-setting process that is in place at present, and compare it to several alternative rate-setting procedures. We find that such alternative rate fixings, and larger sample sizes, could significantly reduce the effect of manipulation. Furthermore, we discuss the role of the particular questions asked of the panel banks, which are different for Libor and Euribor, and examine the need for a transaction database to validate individual submissions.
ABSTRACT (Click Here for Paper)
This paper studies how the implementation of Regulation of Fair Disclosure (Reg FD) affects the credit market. We argue that, although disclosing private information to lenders is exempt from Reg FD, this regulation imposes an additional disclosure risk on borrowers. We expect that borrowers will reduce information disclosure and increasingly rely on relationship lenders who have produced proprietary information about borrowers from their prior interactions. Our empirical results show that switching to new (non-relationship) lenders become more expensive after Reg FD because non-relationship lenders face higher information production costs when firms reduce information disclosure. In addition, we also find that borrowers are more dependent on relationship banking; lead lenders retain a larger fraction of the loans they syndicate; the secondary loan bid-ask spread significantly increases following the implementation of Reg FD. We interpret these findings as evidence of increased level of information asymmetry in the credit market.
This paper studies how the implementation of Regulation of Fair Disclosure (Reg FD) affects the credit market. We argue that, although disclosing private information to lenders is exempt from Reg FD, this regulation imposes an additional disclosure risk on borrowers. We expect that borrowers will reduce information disclosure and increasingly rely on relationship lenders who have produced proprietary information about borrowers from their prior interactions. Our empirical results show that switching to new (non-relationship) lenders become more expensive after Reg FD because non-relationship lenders face higher information production costs when firms reduce information disclosure. In addition, we also find that borrowers are more dependent on relationship banking; lead lenders retain a larger fraction of the loans they syndicate; the secondary loan bid-ask spread significantly increases following the implementation of Reg FD. We interpret these findings as evidence of increased level of information asymmetry in the credit market.
ABSTRACT (Click Here for Paper)
Two forces have reshaped global securities markets in the last decade:Exchanges operate at much faster speeds and the trading landscape hasbecome more fragmented. In order to analyze the positive and normativeimplications of these evolutions, we study a framework that captures (i)exchanges' incentives to invest in faster trading technologies and(ii) investors' trading and participation decisions. Our modelpredicts that regulations that protect prices will lead to fragmentationand faster trading speed. Asset prices decrease when there isintermediation competition and are further depressed by priceprotection. Endogenizing speed can also change the slope of asset demandcurves. On normative side, we find that for a given number of exchanges,faster trading is in general socially desirable. Similarly, for a giventrading speed, competition among exchange increases participation andwelfare. However, when speed is endogenous, competition betweenexchanges is not necessarily desirable. In particular, speed can beinefficiently high. Our model sheds light on important features of theexperience of European and U.S. markets since the implementation ofMiFID and Reg. NMS, and provides some guidance for optimal regulations.
Two forces have reshaped global securities markets in the last decade:Exchanges operate at much faster speeds and the trading landscape hasbecome more fragmented. In order to analyze the positive and normativeimplications of these evolutions, we study a framework that captures (i)exchanges' incentives to invest in faster trading technologies and(ii) investors' trading and participation decisions. Our modelpredicts that regulations that protect prices will lead to fragmentationand faster trading speed. Asset prices decrease when there isintermediation competition and are further depressed by priceprotection. Endogenizing speed can also change the slope of asset demandcurves. On normative side, we find that for a given number of exchanges,faster trading is in general socially desirable. Similarly, for a giventrading speed, competition among exchange increases participation andwelfare. However, when speed is endogenous, competition betweenexchanges is not necessarily desirable. In particular, speed can beinefficiently high. Our model sheds light on important features of theexperience of European and U.S. markets since the implementation ofMiFID and Reg. NMS, and provides some guidance for optimal regulations.
ABSTRACT (Click Here for Paper)
In the wake of the U.S. housing bubble and collapse and the consequent financial collapse of 2007-2009 and its severe consequences for the U.S. economy, it is unsurprising that there have been calls for policy makers to prevent future asset price bubbles - through the better exercise of monetary policy and/or financial regulatory policy. This essay focuses on financial regulation and argues that such efforts would, at best, be ineffective and, at worst, could squelch productive and efficient asset pricing. Instead, policy makers should focus on better regulatory efforts - better prudential regulation - to ameliorate the consequences of asset bubble deflations on the financial sector.
In the wake of the U.S. housing bubble and collapse and the consequent financial collapse of 2007-2009 and its severe consequences for the U.S. economy, it is unsurprising that there have been calls for policy makers to prevent future asset price bubbles - through the better exercise of monetary policy and/or financial regulatory policy. This essay focuses on financial regulation and argues that such efforts would, at best, be ineffective and, at worst, could squelch productive and efficient asset pricing. Instead, policy makers should focus on better regulatory efforts - better prudential regulation - to ameliorate the consequences of asset bubble deflations on the financial sector.
ABSTRACT (Click Here for Paper)
The U.S. financial crisis of 2007-2008 has been a searing experience. The popping of a housing bubble exposed the subprime lending debacle, which in turn created a wider financial crisis. In its response to this crisis, the federal government has provided financial assistance to a number of financial institutions that are often described as “too big to fail” (TBTF) - which, to those who associate antitrust with size, seems to bring antitrust potentially into the picture. This paper will offer a guide to the antitrust community that will cover the U.S. financial sector, financial regulation, and the debacle and subsequent financial crisis. The tensions that can arise between financial regulation and antitrust will be highlighted. TBTF is not one of them, however, because TBTF is about size and interconnectedness, but not about competition and market power. Although much progress has been made in removing anti competitive elements from financial regulation over the past three to four decades, there are still important advances that can be made. The paper concludes by offering a set of policy recommendations for the removal of some of the important remaining elements of financial regulation that impede competition.
The U.S. financial crisis of 2007-2008 has been a searing experience. The popping of a housing bubble exposed the subprime lending debacle, which in turn created a wider financial crisis. In its response to this crisis, the federal government has provided financial assistance to a number of financial institutions that are often described as “too big to fail” (TBTF) - which, to those who associate antitrust with size, seems to bring antitrust potentially into the picture. This paper will offer a guide to the antitrust community that will cover the U.S. financial sector, financial regulation, and the debacle and subsequent financial crisis. The tensions that can arise between financial regulation and antitrust will be highlighted. TBTF is not one of them, however, because TBTF is about size and interconnectedness, but not about competition and market power. Although much progress has been made in removing anti competitive elements from financial regulation over the past three to four decades, there are still important advances that can be made. The paper concludes by offering a set of policy recommendations for the removal of some of the important remaining elements of financial regulation that impede competition.
ABSTRACT (Click Here for Paper)
This paper investigates the short selling of financial company stocks around the time of the SEC September 2008 short-selling ban. More specifically, this paper examines whether this short selling, mainly by hedge funds and other types of sophisticated investors, was purely speculative or whether it was driven by rational behavior in response to a financial company's risk exposure, such as its holdings of subprime-related assets and its credit risk exposure. Our results show that during the crisis period the short-selling of financial firms stock was not significantly greater than that of non-financial firms, even after controlling for size and risk. More importantly, our results show that short sellers rationally short sold those financial company stocks with the greatest subprime and insolvency risk exposures. This finding has important implications regarding banning short selling, since it suggests that such a regulation may mute the disciplining effects of investors in the financial market on those financial companies with the greatest risk exposures and would be contrary to the intentions of bank regulators who have emphasized an increased reliance on market discipline.
This paper investigates the short selling of financial company stocks around the time of the SEC September 2008 short-selling ban. More specifically, this paper examines whether this short selling, mainly by hedge funds and other types of sophisticated investors, was purely speculative or whether it was driven by rational behavior in response to a financial company's risk exposure, such as its holdings of subprime-related assets and its credit risk exposure. Our results show that during the crisis period the short-selling of financial firms stock was not significantly greater than that of non-financial firms, even after controlling for size and risk. More importantly, our results show that short sellers rationally short sold those financial company stocks with the greatest subprime and insolvency risk exposures. This finding has important implications regarding banning short selling, since it suggests that such a regulation may mute the disciplining effects of investors in the financial market on those financial companies with the greatest risk exposures and would be contrary to the intentions of bank regulators who have emphasized an increased reliance on market discipline.
ABSTRACT (Click Here for Paper)
If someone had shouted “financial regulation” in a crowded auditorium a year ago, nary a soul would have stirred. No more, of course. An overhaul of the rules that Wall Street and its friends must live by is near the top of the Obama administration's must-do list. To paraphrase Rahm Emanuel, the presidentelect's choice for White House chief of staff, the country's new leaders aren't about to let a perfectly good debacle go to waste. But with the fate of what has become America's vanguard industry at stake, untangling the web we've been weaving and reweaving since the 1930s isn't a matter to be done casually. Herewith, a primer on what to hope for.
If someone had shouted “financial regulation” in a crowded auditorium a year ago, nary a soul would have stirred. No more, of course. An overhaul of the rules that Wall Street and its friends must live by is near the top of the Obama administration's must-do list. To paraphrase Rahm Emanuel, the presidentelect's choice for White House chief of staff, the country's new leaders aren't about to let a perfectly good debacle go to waste. But with the fate of what has become America's vanguard industry at stake, untangling the web we've been weaving and reweaving since the 1930s isn't a matter to be done casually. Herewith, a primer on what to hope for.
ABSTRACT (Click here for Paper)
This paper draws on the progress that has occurred in other areas of regulation specifically, the "cap-and-trade" program to control SO2 emissions; spectrum auctions; and "dedicated-access-privilege" programs for fisheries to suggest that financial regulation would benefit from an expanded focus on outputs and on markets.
This paper draws on the progress that has occurred in other areas of regulation specifically, the "cap-and-trade" program to control SO2 emissions; spectrum auctions; and "dedicated-access-privilege" programs for fisheries to suggest that financial regulation would benefit from an expanded focus on outputs and on markets.
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