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Hilton Atlanta, Grand Ballroom C
Hosted By:
American Finance Association
Information Frictions and Asset Prices
Paper Session
Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM
- Chair: Liyan Yang, University of Toronto
Trading Ahead of Treasury Auctions
Abstract
I develop and test a model explaining the gradual price decrease observed in the days leading up to anticipated asset sales such as Treasury auctions. In the model, risk-averse investors expect an uncertain increase in the net supply of a risky asset. They face a trade-off between hedging the supply uncertainty with long positions, and speculating with short positions. As a result of hedging, the equilibrium price is above the expected price. As the supply shock approaches, uncertainty decreases due to the arrival of information, investors hedge less and speculate more, and the price decreases. In line with these predictions, meetings between the Treasury and primary dealers, as well as auction announcements, explain a 2.4 bps yield increase in Italian Treasuries.Pricing Implications of Clearing a Skewed Asset from the Market
Abstract
I present a new model of how ex-ante skewness affects expected asset prices. The price that supports a given short position in a positively- (negatively-) skewed asset is further from (closer to) expected value than is the price that supports a long position of the same magnitude, even in a frictionless market. The average effect of this result, under market clearing of stochastic demand, produces the “skewness effect”---a documented negative relationship between ex-ante skewness and expected returns. The theory generates several new predictions about the cross section of expected stock returns, for which I provide empirical support.Market Power and Price Informativeness
Abstract
The asset ownership structure in financial markets worldwide has changed sig- nificantly over the last few decades. Institutional investors own a larger fraction of assets, the distribution of their ownership is more concentrated, and the own- ership by passive investors is getting increasingly more important. To study implications of these facts, we develop a general equilibrium portfolio-choice model with endogenous information acquisition and market power. We show that the size and concentration of institutional investors have opposite effects on price informativeness. Further, the introduction of passive investors has a negative effect on price informativeness, both through quantities and through changes in active investors’ learning. Finally, we show that predictions of the model with endogenous information acquisition are significantly different from those implied by models with exogenous information, such as Kyle (1985).Discussant(s)
Bradyn Breon-Drish
,
University of California-San Diego
Hongjun Yan
,
DePaul University
Diego Garcia
,
University of Colorado
Snehal Banerjee
,
University of California-San Diego
JEL Classifications
- G1 - General Financial Markets