This dissertation consists of three independent essays on the relationship between leverage, derivatives (especially, option securities), and asset markets. Chapter 1, "Does the Tail Wag the Dog? How Options Affect Stock Price Dynamics," demonstrates empirically that the existence and trading of financial options affects the price movements of their underlying assets, due to the implicit leverage in options and the hedging behavior of options sellers. These empirical results contrast with classical asset pricing where options instead derive their value from their underlying assets. Chapter 2, "Disagreement and the Option Stock Volume Ratio," examines a variable known as the option stock volume ratio, which prior work has documented to be a negative predictor of stock returns in the cross section. I propose an alternate explanation based on the behavioral finance literature on belief disagreement between investors. I show how my disagreement model makes predictions in line with prior empirical findings and can also better explain other stylized facts, which I document. Chapter 3, "Bond Fire Sales and Government Interventions," analyzes how a government should intervene in response to a fire sale in the bond market. I contrast the policies of the government directly purchasing financial securities vs the government offering leverage to the private sector to purchase securities. / Business Economics

This thesis explores the opportunities for economic research that arise from importing empirical methods from the field of machine learning. Chapter 1 applies inductive learning to cross-sectional asset pricing. Researchers have documented over three hundred variables that can explain differences in cross-sectional stock returns. But which ones contain independent information? Chapter 1 develops a framework, deep conditional portfolio sorts, that can be used to answer this question and that is based on ideas from the machine learning literature, tailored to an asset-pricing application. The method is applied to predicting future stock returns based on past stock returns at different horizons, and short-term returns (i.e. the past six months of returns) rather than medium- or long-term returns are recovered as the variables that convey almost all information about future returns. Chapter 2 argues that machine learning techniques, although focusing on predictions, can be used to test theories. In most theory tests, researchers control for known theories. In contrast, chapter 2 develops a simple model that illustrates how machine learning can be used to conduct an inductive test that allows to control for some unknown theories, as long as they are covered in some way by the data. The method is applied to the theory that realization utility and nominal loss aversion lead to the disposition effect (the propensity to sell winners rather than losers). An inductive test finds that short-term price trends and other features of the price history are more important to predict selling decisions than returns relative to purchase price. Chapter 3 provides another perspective on the disposition effect in the more traditional spirit of behavioral finance. It assesses the implications of different theories for an investor's probability to sell a stock as a function of the stock's return and then tests those implications empirically. Three different approaches that have been used in the literature are shown to lead to the, at first sight, contradictory findings that the probability to sell a stock is either V-shaped or inverted V-shaped in the stock's return. Since these approaches compute different conditional probabilities, they can be reconciled, however, when the conditioning set is taken into account. / Economics

The tension between creditors and debtors is an integral component in finance. My dissertation focuses on two important cases where this tension has important economic implications. In my first two chapters, I focus on debtor protections in consumer finance. In chapter one, I examine the institution of consumer bankruptcy and the effect it has on consumers' access to credit and subsequent financial health. In chapter two, I study the effect of debtor protections during the recent recession, and quantify the extent to which these policies can alleviate the decline associated with debt-driven recessions. Finally, in the third chapter, I focus on the governance of firms, specifically examining a new measure capturing the extent to which foreign firms cross-listing in the United States bind to domestic governance rules. In sum, my dissertation chapters provide new perspectives on the interaction between creditors and debtors, and the extent to which policy environments can influence this interaction. / Economics

My first essay investigates the relationship between risk and return for investment projects within the firm. I focus on the film industry and find that more volatile movies have higher rates of return, even though this risk is entirely idiosyncratic. My second essay explains the high rates of return on commodity currencies in terms of the procyclicality of commodity prices. Commodity prices are procyclical because commodities are inputs, and thus demand for them is driven by the global business cycle. I also use labor market data to show that increases in labor costs during commodity booms contribute to the higher real exchange rates observed in commodity exporting countries. My final essay, co-authored with Jeffrey Frankel, studies optimal monetary policy in commodity-exporting economies facing a terms-of-trade shock. We build on the previous literature by introducing borrowing constraints, and find that currency depreciation during such a shock leads to higher welfare than either a fixed exchange rate or inflation targeting. / Business Economics

This dissertation contains three chapters. In the first chapter, which is joint work with Paul Gompers and Steven Kaplan, we survey 79 private equity (PE) investors with combined assets under management of more than $750 billion about their practices in firm valuation, capital structure, governance, and value creation. Investors rely primarily on internal rates of return and multiples to evaluate investments. Their limited partners focus more on absolute performance as opposed to risk-adjusted returns. Capital structure choice is based equally on optimal trade-off and market timing considerations. PE investors anticipate adding value to portfolio companies, with a greater focus on increasing growth than on reducing costs. We also explore how the actions that PE managers say they take group into specific firm strategies and how those strategies are related to firm founder characteristics. The second chapter, co-authored with Efraim Benmelech, Nittai Bergman, and Anna Milanez, identifies a new channel through which bankrupt firms impose negative externalities on non-bankrupt peers. The bankruptcy and liquidation of a retail chain weakens the economies of agglomeration in any given local area, reducing the attractiveness of retail centers for remaining stores leading to contagion of financial distress. We find that companies with greater geographic exposure to bankrupt retailers are more likely to close stores in affected areas. We further show that the effect of these externalities on non-bankrupt peers is higher when the affected stores are smaller and are operated by firms with poor financial health. In the third chapter, using a novel dataset that allows me to capture the education and career trajectories of over 250,000 employees of 224 bank holding companies, I find that banks with shorter employee tenures and higher fractions of MBAs, top school graduates, and job jumpers performed more poorly during the Great Recession. This relationship is driven by the predisposition of these banks to take on greater risk. These same workforce measures also explain banks’ performance in the 1998 crisis. Taken together, my results suggest that investigating workforce measures could be a step towards quantifying components of risk culture or strategy that contribute to financial institutions’ vulnerability to crisis. / Economics

The chapters in this dissertation study the incidence of risk, risk taking, and the role of markets used to trade risk, with a focus on interest-rate risk. In Chapter 1, I ask why bank-dependent firms bear interest-rate risk. I argue that the short-term nature of banks’ own financing drives the extent to which bank-dependent firms bear interest-rate risk. In Chapter 2, I examine the implications of life insurers’ risk taking for theories of why financial institutions take risk. In Chapter 3, I argue that reference rates mitigate contractual incompleteness and facilitate risk sharing. / Economics

My dissertation is composed of three chapters that are unified by their exploration of asset prices and macroeconomic news announcements. With respect to asset prices, my main focus is on the price discovery process: how do asset prices reveal information relevant for asset fundamentals? Through my research, I provide new answers to this question. My work gets at core issues in asset pricing: whether financial markets are informationally efficient; why some assets earn unconditionally high premia; and how the sensitivity of prices to information varies over time and across assets. Specifically, chapter one shows evidence that sophisticated traders with an informational advantage inefficiently impound their edge into the aggregate U.S. stock market and U.S. Treasury bonds. In chapter two, I explore a model in which investors are averse to ambiguity (Knightian uncertainty) to explain why the equity premium is concentrated around specific events. Finally, chapter three investigates how the Federal Reserve's zero lower bound affects the response of asset prices, in particular interest rates, to information. Each of the three chapters explores the price discovery process using the unique setting of U.S. macroeconomic news announcements, which are made by government agencies and private-sector organizations and cover macroeconomic data on inflation, output, and unemployment. Analyzing financial markets in this setting deepens our understanding of how asset prices reflect information about macroeconomic fundamentals. At the same time, the results have macroeconomic implications; for example, the assumptions of monetary policy models in theory and the effectiveness of unconventional monetary policy in practice. / Business Economics

These essays explore the risks and real effects of various non-bank financial institutions, such as open-end mutual funds, hedge funds, and venture capital. In the first essay, “A Dynamic Theory of Mutual Fund Runs and Liquidity Management,” I show that mutual funds are subject to bank-run-like risks, but the underlying mechanism is different. In the second essay, "Investment Exuberance under Cross Learning,” written with Shiyang Wang, we argue that firm cross learning can lead to inefficient investment exuberance, in which institutional investors’ (like hedge funds) play a key role. In the third essay, “Financing Entrepreneurial Production: Security Design with Flexible Information Acquisition," written with Ming Yang, we explores the optimal security design when the investor (like venture capital) can acquire information to help the entrepreneur make better investment decisions. / Economics

Macroeconomic and institutional shocks are important drivers of firms' activities. In chapter one, I examine the role of patent litigation in affecting companies’ innovation. Studying a landmark Supreme Court decision, I show that an improvement in patent enforcement positively affects the innovation activity of corporations. In chapter two, I study the role of private equity in period of large financial turmoil. In the context of the 2008 crisis in United Kingdom, I show that private equity backed companies experienced a lower decline in investment than a control group of similar companies that were not related to private equity. This effect is explained by the ability of private equity to relax the financing constraints of the portfolio companies when access to credit markets is limited. In chapter three, I explore the role of sovereign securities held by banks in the propagation of a financial shock to the economy. Using detailed loan level data matching firms and banks in Italy, the paper finds that the shock to banks' sovereign portfolio caused by the Greek bailout (2010) was passed on to firms through a contraction in credit. The effects of this shock were particularly disruptive for smaller companies. / Business Economics

L'objectif de cette recherche est d'évaluer l'importance des phénomènes monétaires dans la détermination du niveau de la dépense d'investissement des agents économiques. Pour ce faire, l'analyse s'organise autour des phénomènes liés au financement. Les Comptes des flux financiers forment l'instrument à partir duquel on examinera à la fois les circuits empruntent par les agents pour assurer le financement de la dépense et l'usage qui est fait des ressources disponibles. L'utilisation de cette composante du système de comptabilité nationale permet de suivre la circulation des flux dans le processus de financement en vue de l'acquisition d'actifs financiers aussi bien que non financiers. Pour ce faire, elle partitionne l'ensemble des agents économiques en treize secteurs et définit, pour chacun de ceux-ci, la composition de son portefeuille de titres financiers. De plus, elle lie les activités financières et la formation de l'épargne et de l'investissement sur une base sectorielle. (Abstract shortened by UMI.)