Essays in financial economics
- This dissertation consists of three essays which examine how asset prices are impacted by the behavior and constraints of financial market participants. Chapter 2 shows evidence that slow asset price reaction to information can be driven by constraints in investors' information processing, rather than by illiquidity and transaction costs, which are the current dominant explanations in academia. My core hypothesis is that investors cannot immediately read and understand all value-relevant information, so they have to choose where to allocate their attention, and that drives variation in price underreaction to information. The key testable prediction is that price underreaction will be information source-specific, with lower underreaction to sources that are more value-relevant. Corporate bond and stock return data are strongly supportive of this view. For instance, corporate bonds with higher credit risk respond more quickly to default-relevant news, and bonds with longer duration respond more quickly to interest rate news. These facts cannot be explained by traditional illiquidity mechanisms which only explain security-level variation. Chapter 3 shows that mutual fund flow-induced price pressures explain around 30% of Fama-French size and value factor movements. Throughout 1965 to 2015, mutual fund investors frequently made very large size and value style-level capital reallocations that amount to a few percentage points of the total equity market value. These flows induce fund man- agers to conduct corresponding trading in those factors, and such factor-level trading pressure creates price pressures that revert very slowly. Because size and value are major return factors, this means that price pressures can explain a significant fraction over overall price movements. Chapter 4, which is a joint project with Wenhao Li, examines the intermediation arrangements in institutional trading. When executing trades for institutional investors, intermediaries sometimes act as brokers (e.g. in equities) and earn commissions, and other times (e.g. in currencies) as dealers, taking risks and earning markups. What explains this variation in intermediation style? To this end, we propose a theory based on the trade-off between the cost of monitoring brokers and paying dealers for holding inventory. Brokers have incentives to misbehave so they need to be monitored. In contrast, dealers have aligned incentives, but charge customers for inventory costs. Consistent with our theoretical predictions, broker intermediation is more prevalent in liquid and transparent markets where monitoring is easier, and when intermediary inventory costs are higher.
|Type of resource
|electronic resource; remote; computer; online resource
|1 online resource.
|Berk, Jonathan B, 1962-
|Berk, Jonathan B, 1962-
|Degree committee member
|Stanford University, Graduate School of Business.
|Statement of responsibility
|Submitted to the Graduate School of Business.
|Thesis Ph.D. Stanford University 2019.
- © 2019 by Jiacui Li
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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