scholarly journals Equilibrium in Financial Markets with Adverse Selection

2003 ◽  
Author(s):  
Tuomas Takalo ◽  
Otto Toivanen
Keyword(s):  
Financial Markets ◽  
Adverse Selection

scholarly journals Is Trading Fast Dangerous?

2018 ◽  
pp. 9-27 ◽  
Author(s):  
Thierry Foucault ◽  
Sophie Moinas
Keyword(s):  
Financial Markets ◽  
Adverse Selection ◽  
Policy Making ◽  
Information Technologies ◽  
Empirical Literature ◽  
Market Quality ◽  
Gains From Trade ◽  
Adverse Selection Costs

This chapter discusses the findings of the growing theoretical and empirical literature on trading speed in financial markets. The speed of trading has increased significantly in recent years, due to progress in information technologies and automation of the trading process. This evolution raises many questions about the effects of trading speed. It is argued that an increase in trading speed raises adverse selection costs but increases competition among liquidity providers and the rate at which gains from trade are realized. Thus, the effect of an increase in trading speed on market quality and welfare is inherently ambiguous. This observation is important for assessing empirical findings regarding the effects of trading speed and policy-making.

Cheap Talk, Fraud, and Adverse Selection in Financial Markets: Some Experimental Evidence

1999 ◽  
Vol 12 (3) ◽  
pp. 481-518 ◽  
Author(s):  
Robert Forsythe ◽  
Russell Lundholm ◽  
Thomas Rietz
Keyword(s):  
Financial Markets ◽  
Experimental Evidence ◽  
Adverse Selection ◽  
Cheap Talk

Unobservable Risk Preferences and Value of Information in Financial Markets with Adverse Selection

1996 ◽  
Vol 11 (2) ◽  
pp. 197-222 ◽  
Author(s):  
Bharat Sarath ◽  
Ramachandran Natarajan
Keyword(s):  
Financial Markets ◽  
Adverse Selection ◽  
Value Of Information ◽  
Risk Preferences ◽  
Cash Flows ◽  
Risk Characteristics ◽  
Public Signal ◽  
Empirical Implications ◽  
Separating Equilibrium ◽  
Informational Value

We demonstrate the existence of a partially separating equilibrium based on the level of equity retention when a project of unknown value is taken public by an entrepreneur whose risk preferences are unobservable. We show that any such equilibrium results in some (endogenous) strictly positive level of equity retention. The value of a second public signal corresponding to audited reports required under the 1933 Securities Act is also analyzed. We show that this second signal derives informational value from the presence of unobservable risk preferences even though it only concerns cash flows and is completely independent of risk characteristics. The paper concludes with some empirical implications.

Leverage Cycles and the Anxious Economy

2008 ◽  
Vol 98 (4) ◽  
pp. 1211-1244 ◽  
Author(s):  
Ana Fostel ◽  
John Geanakoplos
Keyword(s):  
Emerging Markets ◽  
Financial Markets ◽  
Adverse Selection ◽  
Incomplete Markets ◽  
Emerging Economies ◽  
Analytical Framework ◽  
High Yield ◽  
Yield Data ◽  
Pricing Theory ◽  
Asset Classes

We provide a pricing theory for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. We show how leverage cycles can cause contagion, flight to collateral, and issuance rationing in a frequently recurring phase we call the anxious economy. Our model provides an explanation for the volatile access of emerging economies to international financial markets, and for three stylized facts we identify in emerging markets and high yield data since the late 1990s. Our analytical framework is a general equilibrium model with heterogeneous agents, incomplete markets, and endogenous collateral, plus an extension encompassing adverse selection. (JEL D53, G12, G14, G15)

“Man to Loan $1500 and Serve as Clerk”: Trading Jobs for Loans in Mid-Nineteenth-Century San Francisco

1994 ◽  
Vol 54 (1) ◽  
pp. 34-63 ◽  
Author(s):  
F. Halsey Rogers
Keyword(s):  
Nineteenth Century ◽  
Labor Market ◽  
Moral Hazard ◽  
Financial Markets ◽  
Adverse Selection ◽  
San Francisco ◽  
Capital Market ◽  
Pacific Coast ◽  
New Employees ◽  
Capital Market Imperfections

This paper explores the phenomenon of “job-loan trading”—in which employers offered jobs in exchange for substantial loans from their new employees—as practiced in mid-nineteenth-century California. A sample of newspaper advertisements from 1857–76 reveals that despite the obvious inefficiencies of linking labor and capital markets, job-loan trading was both common and profitable. I assess labor market bonding against moral hazard or adverse selection as a possible explanation, but conclude that the job-loan trades primarily provide evidence of substantial Pacific Coast capital market imperfections. This conclusion has implications for the broader question of how financial markets develop.

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