We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking a minimize trading costs. We find that exchanges competing for trading volume engage in a ¶race...

We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to...

This paper describes the relationship between bounded rationality and risk aversion. It shows athat bounded rationality increases risk aversion at the reference income level and that there exists an income level below the reference income level where bounded rationality reduces risk aversion and...

This survey summarises the recent theoretical developments in understanding price processes. After introducing the rational expectations equilibria (REE) concept the limitations of this approach are shown. We illustrate the relationship between partially-revealing REE and incomplete markets and...

This paper considers a two country economy similar to that in Obstfeld and Rogoff (1995). We build on their model by distinguishing between sticky retail prices, sticky wholesale prices and sticky wages. We find that conclusions about whether monetary shocks lead to exchange rate overshooting...

This paper studies predatory trading: trading that induces and/or exploits other investors' need to reduce their positions. We show that if one trader needs to sell, others also sell and subsequently buy back the asset. This leads to price overshooting, and a reduced liquidation value for the...

Timing is crucial in situations ranging from product introductions, to currency attacks, to starting a revolution. These settings share the feature that payoffs depend critically on the timing of moves of a few other key players—and these are uncertain. To capture this, we introduce the...

This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too...

A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account that inflation lowers future real mortgage costs. We...

We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding....