Research Interests

Market Microstructure



Market Design


Network position and productivity:  Evidence from journal editor rotations (with Joseph Engelberg and Christopher Parsons). 2014. Journal of Financial Economics, 111(1): 251-270. Abstract

Using detailed publication and citation data for over 50,000 articles from 30 major economics and finance journals, we investigate whether network proximity to an editor influences research productivity. During an editor's tenure, his current university colleagues publish about 100% more papers in the editor's journal, compared to years when he is not editor. In contrast to editorial nepotism, such “inside” articles have significantly higher ex post citation counts, even when same-journal and self-cites are excluded. Our results thus suggest that despite potential conflicts of interest faced by editors, personal associations are used to improve selection decisions.

High frequency trading and price discovery (with Terrence Hendershott and Ryan Riordan). 2014. Review of Financial Studies, 27(8): 2267-2306 (Lead Article and Winner of the Michael J. Brennan Best Paper Award). Abstract

We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs' liquidity supplying orders are adversely selected. The direction of HFTs' trading predicts price changes over short horizons measured in seconds. The direction of HFTs' trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.

High-frequency trading and the execution costs of institutional investors (with Terrence Hendershott, Stefan Hunt, and Carla Ysusi). 2014. Financial Review, 49(2): 345-369 (Winner of the Outstanding Publication Award). Abstract

This paper studies whether high-frequency trading (HFT) increases the execution costs of institutional investors. We use technology upgrades that lower the latency of the London Stock Exchange to obtain variation in the level of HFT over time. Following upgrades, the level of HFT increases. Around these shocks to HFT institutional traders’ costs remain unchanged. We find no clear evidence that HFT impacts institutional execution costs.

The asset pricing implications of government economic policy uncertainty (with Andrew Detzel). 2015. Management Science, 61(1): 3-18 (Lead Article). Abstract

Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ (2013) Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns. An increase of one standard deviation in EPU is associated with a 1.5% increase in forecasted three-month abnormal returns (6.1% annualized). Furthermore, innovations in EPU earn a significant negative risk premium in the Fama–French 25 size–momentum portfolios. Among the Fama–French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities.

Trading fast and slow: Colocation and liquidity (with Bjorn Hagstromer, Lars Norden, and Ryan Riordan). 2015. Review of Financial Studies, 28(12): 3407-3443. Abstract

We exploit an optional colocation upgrade at NASDAQ OMX Stockholm to assess how speed affects market liquidity. Liquidity improves for the overall market and even for noncolocated trading entities. We find that the upgrade is pursued mainly by participants who engage in market making. Those that upgrade use their enhanced speed to reduce their exposure to adverse selection and to relax their inventory constraints. In particular, the upgraded trading entities remain competitive at the best bid and offer even when their inventories are in their top decile. Our results suggest that increasing the speed of market-making participants benefits market liquidity.

High frequency trading and the 2008 short sale ban (with Terrence Hendershott and Ryan Riordan). 2017. Journal of Financial Economics, 124(1): 22-42. Abstract

We examine the effects of high-frequency traders (HFTs) on liquidity using the September 2008 short sale-ban. To disentangle the separate impacts of short selling by HFTs and non-HFTs, we use an instrumental variables approach exploiting differences in the ban’s cross-sectional impact on HFTs and non-HFTs. Non-HFTs’ short selling improves liquidity, as measured by bid-ask spreads. HFTs’ short selling has the opposite effect by adversely selecting limit orders, which can decrease liquidity supplier competition and reduce trading by non-HFTs. The results highlight that some HFTs’ activities are harmful to liquidity during the extremely volatile short-sale ban period.

Stock liquidity and default risk (with Dan Li and Ying Xia). 2017. Journal of Financial Economics, 124(3): 486-502. Abstract

This paper examines the impact of stock liquidity on firm bankruptcy risk. Using the Securities and Exchange Commission’s decimalization regulation as a shock to stock liquidity, we establish that enhanced liquidity decreases default risk. Stocks with the highest default risk experience the largest improvements. We find two mechanisms through which stock liquidity reduces firm default risk: through improving stock price informational efficiency and facilitating corporate governance by blockholders. Of the two mechanisms, the informational efficiency channel has higher explanatory power than the corporate governance channel.

High frequency trading and extreme price movements (with Ryan Riordan, Andriy Shkilko, Konstantin Sokolov, Allen Carrion, and Thibaut Moyaert) 2017. Journal of Financial Economics, 128(2): 253-265. Abstract

Are endogenous liquidity providers (ELPs) reliable in times of market stress? We examine the activity of a common ELP type – high frequency traders (HFTs) – around extreme price movements (EPMs). We find that on average HFTs provide liquidity during EPMs by absorbing imbalances created by non-high frequency traders (nHFTs). Yet HFT liquidity provision is limited to EPMs in single stocks. When several stocks experience simultaneous EPMs, HFT liquidity demand dominates their supply. There is little evidence of HFTs causing EPMs.

Do economists swing for the fences after tenure? (with Joseph Engelberg and Ed van Wesep) 2018. Journal of Economic Perspectives, 32(1): 179-194. Abstract

Using a sample of all academics who pass through top 50 economics and finance departments from 1996 through 2014, we study whether the granting of tenure leads faculty to pursue riskier ideas.  We use the extreme tails of ex-post citations as our measure of risk and find that both the number of publications and the portion consisting of “home runs” peak at tenure and fall steadily for a decade thereafter.  Similar patterns hold for faculty at elite (top 10) institutions and for faculty who take differing time to tenure.  We find the opposite pattern among poorly-cited publications: their numbers rise post-tenure.

Institutions and deposit insurance: Empirical evidence (with Kathryn Dewenter and Alan Hess) 2017. Journal of Financial Services Research, forthcoming. Abstract

Do banks’ responses to changes in deposit insurance vary across countries even if the countries have comparable institutions? If so, by how much? Using data on the financial performance of large banks in 15 financially and economically developed countries, we find that where deposit insurance has an effect, it is large and varies depending on the level of economic freedom, rule of law and corruption in the bank’s home country. As in prior papers, we show that during stable economic periods, increases in deposit insurance are associated with higher bank risk, both problem loans and leverage. In most, but not all cases, stronger institutions temper these effects. The institutions’ effects are substantial. For example, average changes in the Rule of Law double the impact of a change in deposit insurance on bank leverage. We contribute to the substantial literature in this area by showing that the institutional effects are significant even across a set of countries with comparable institutions; by conducting a careful calibration of the economic significance of the effects; by providing evidence that during stable periods changes in deposit insurance only affect bank risk and not other measures of performance; and finally by showing that the effects of both deposit insurance and institutions vary across stable and crisis economic periods. The stable period results are consistent with the moral hazard effects of deposit insurance, while the crisis period results are consistent with endogeneity concerns that poor bank performance could drive changes in regulations.

High frequency trading competition (with Corey Garriott) 2018. Journal of Financial and Quantitative Analysis, forthcoming.Abstract

Theory on high-frequency traders (HFT) predicts that market liquidity for a security decreases in the number of HFT trading the security. We test this prediction by studying a new Canadian stock exchange, Alpha, that experienced the entry of 11 HFT firms over four years. Bid-ask spreads on Alpha converge to those at the Toronto Stock Exchange as more HFT trade on Alpha. Effective and realized spreads for nonHFT improve as HFT firms enter the market. To explain the contrast with theoretical predictions we test the model assumption of price competition and reject it in favor of quantity competition.

Risk and return in high frequency trading (with Matthew Baron, Bjorn Hagstromer and Andrei Kirilenko) 2018. Journal of Financial and Quantitative Analysis, forthcoming.Abstract

We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs’ trading performance. HFTs that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for a variety of strategies including market making and cross-market arbitrage. We explore implications of competition on relative latency and find support for various theoretical predictions.

Do upgrade matter?: Evidence from trading volume (with Jennifer Koski and Andrew Siegel) 2018. Journal of Financial Markets, forthcoming.Abstract

Prior research documents no significant abnormal returns around upgrades of credit ratings, suggesting that upgrades do not convey new information. These tests are limited by lack of data, liquidity screens, and ambiguous predictions. We extend prior research using trading volume. Because volume is highly non-normally distributed (especially in the bond market), we derive a new, more powerful nonparametric test statistic that can be used in other applications. Our results show significant abnormal volume in both stock and bond markets around both upgrades and downgrades. Some of this volume is attributable to credit-ratings-based regulations and other factors. Controlling for other effects, we also find evidence that upgrade announcements contain information.

Price discovery without trading: Evidence from limit orders (with Terrence Hendershott and Ryan Riordan) 2018. Journal of Finance, conditionally accepted. Abstract

Adverse selection in financial markets is traditionally measured by the correlation between the direction of market order trading and price movements. We show this relationship has weakened dramatically with limit orders playing a larger role in price discovery and with high-frequency traders’ (HFTs) limit orders playing the largest role. HFTs are responsible for 60–80% of price discovery, primarily through their limit orders. HFTs’ limit orders have 50% larger price impact than non-HFTs’ limit orders, and HFTs submit limit orders 50% more frequently. HFTs react more to activity by non-HFTs than the reverse. HFTs react more to messages both within and across stock exchanges.

The economic impact of index investing (with Matthew Ringgenberg and David Sovich) 2018. Review of Financial Studies, conditionally accepted. Abstract

We study the impact of index investing on firm performance by examining the link between commodity indices and firms that use index commodities. Starting in 2004, there was a dramatic increase in commodity index investing, an event referred to as the financialization of commodity markets. Following financialization, firms that use index commodities make worse production decisions and earn lower profits. Consistent with a feedback channel in which market participants learn from prices, our results suggest that index investing in financial markets distorts the price signal thereby generating a negative externality that impedes firms' ability to make production decisions.

Revise & Resubmit

The world price of political uncertainty (with Lili Dai, Phong Ngo, and Bohui Zhang) Abstract

We examine the effect of global political uncertainty on equity prices. Using a large sample of country- or firm-month observations across 50 non-U.S. countries over the 1990-2010 period, we document that global political uncertainty, measured by the U.S. presidential election cycle, is positively associated with the cost of equity capital. The magnitude of this effect rises as we approach the U.S. presidential election date and reverses thereafter. Furthermore, countries (firms) that are more economically and financially integrated suffer a higher pricing impact from global political uncertainty. These findings highlight the significance of a global political risk premium.

Working Papers

A BIT goes a long way: Bilateral investment treaties and cross-border mergers (with Vineet Bhagwat and Brandon Julio) Abstract

We examine whether an external governance mechanism, Bilateral Investment Treaties (BITs), remove impediments to cross-border mergers by protecting the property rights of foreign acquirers. We find that BITs have a large, positive effect on cross-border mergers. The probability and dollar volume of mergers between two given countries more than doubles after the signing of a BIT. Most of this increase is driven by deals flowing from developed economies to developing economies. The effect of BITs is concentrated in target countries with medium levels of political risk, consistent with views that BITs are ineffective for countries with very high country risk and unnecessary for countries with low country risk. Overall the results suggest that some countries outsource legal protection when institutions are not fully developed. 

Prices and price limits (with Kevin Roshak) Abstract

This paper studies the effects of price limits implemented by the Securities and Exchange Commission (SEC) after the May 2010 ‘Flash Crash.’ The security-level price limits halt trading after a security’s price experiences a sudden and large movement. The difference-in-difference design exploits the staggered introduction of the limits to address omitted variable concerns. The data show that price limits reduce the frequency and severity of extreme price movements, but induce price underreaction. The results are consistent with Subrahmanyam’s (1997) theory that price limits cause informed traders to be less aggressive.

What moves stock prices? The role of news, noise, and information (with Thanh Huong Nguyen, Talis Putnins, and Eliza Wu) Abstract

 We develop a return variance decomposition model to separate the role of different types of information and noise in stock price movements. We disentangle four components: market-wide information, private firm-specific information revealed through trading, firm-specific information revealed through public sources, and noise. 31% of the return variance is from noise, 37% from public firm-specific information, 24% from private firm-specific information and 8% from market-wide information. Since the mid 1990s there has been a dramatic decline in noise. During this period firm-specific information is increasing, consistent with increasing market efficiency. Our findings help reconcile the mixed results in the R^2 literature.