Funding Constraints and Informational Efficiency

We analyze a tractable rational expectations equilibrium model with margin constraints. We argue that constraints affect and are affected by informational efficiency, leading to a novel amplification mechanism. A decline in wealth tightens constraints and reduces investors’ incentive to acquire information, lowering price informativeness. Lower informativeness, in turn, increases the risk borne by financiers who fund trades, leading them to further tighten constraints faced by investors. This information spiral leads to (a) significant increases in risk premium and return volatility in crises, when investors wealth declines, (b) complementarities in information acquisition in crises, and (c) complementarities in margin requirements.

On the Possibility of Informative Equilibria in Futures Markets with Feedback

We study the existence of equilibria and the information content of prices in futures markets where the probability of future payoffs can be altered by an intervening agent who acts in response to the market price, hence creating a feedback effect. We focus on the market with the simplest possible structure: traders betting on the occurrence of a future event by buying or selling Arrow-Debreu securities (one dollar claims contingent on a binary outcome). We find that in the presence of feedback: (i) a rational expectations equilibrium may not exist; (ii) the market price may decline in response to information that is ex-ante more favorable to the occurrence of the underlying event; (iii) an equilibrium that reveals no information may obtain. Thus, feedback from an intervening agent materially alters the way in which price responds to information, and potentially undermines the viability of the market itself.

Cancellable Insider Trading Plans: An Analysis of SEC Rule 10b5-1*

Rule 10b5-1 enables insiders to preplan future trades before becoming informed. Within a strategic rational expectations equilibrium framework, I characterize an insider’s unique optimal trading plan, which balances portfolio diversification against exploitation of the rule’s selective termination option. Because the rule reduces adverse selection and provides insurance against bad outcomes, the rule generally improves welfare for both the insider, who later becomes informed, and uninformed outsiders, provided there exists a sufficient degree of information asymmetry. Eliminating the rule’s selective termination option results in an even greater welfare improvement under a large subset of parametric conditions. Received March 9, 2018; editorial decision January 11, 2019 by Editor Wei Jiang.

Nominal Anchoring with Liquid Monetary Policy Assets

The chapter shows that existence of a unique Rational Expectations equilibrium can be ensured even if the Taylor Principle – stating that the policy interest rate increases by more than the increase in the expected rate of inflation – does not hold. This is shown by extending a barebones' central bank monetary model to the case in which liquidity is produced by both money and public bonds. The discussion concludes that liquidity considerations may have a critical impact on the monetary policy implications derived from the mainstream model.