Working Papers

These papers are working drafts of research which often appear in final form in academic journals. The published versions may differ from the working versions provided here.

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Darrell Duffie
July 23, 2020

This note presents a preliminary approach to the design of an across-the-curve credit spread index (AXI). The index is a measure of the recent average cost of wholesale unsecured debt funding for publicly listed U.S....

Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh, Mindy Z. Xiaolan
July 2020

When debt is priced fairly, governments face a trade-off between insuring bondholders and taxpayers. If the government decides to fully insure bondholders by manufacturing risk-free debt, then it cannot insure taxpayers against permanent macro-economic shocks...

Darrell Duffie, Samuel Antill
June 16, 2020

We explain how the common practice of size-discovery trade detracts from overall financial market efficiency. At each of a series of size-discovery sessions, traders report their desired trades, generating allocations of the asset and cash...

Arvind Krishnamurthy, Markus Brunnermeier
June 2020
Arvind Krishnamurthy, Wenhao Li
June 2020

We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on...

Zhengyang Jiang, Arvind Krishnamurthy, Hanno Lustig
June 2020

We develop a theory that links the U.S. dollar’s valuation in FX markets to foreign investors’ demand for U.S. safe assets. When the convenience yield that foreign investors derive from holding U.S. safe assets increases,...

Eduardo Davila, Benjamin Hébert
June 2020

This paper studies the optimal design of corporate taxes when firms are financially constrained. We identify a corporate taxation principle: taxes should be levied on unconstrained firms,

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Darrell Duffie
May 18, 2020

I explain the meaning of an interoperable payment system and why interoperability is crucial for efficiency. I review some alternative approaches to interoperability, including central bank digital currencies (CBDCs), hybrid CBDCs, and two-ledger upgrades of...

Benjamin Hébert, Michael Woodford
March 25, 2020

Decisions take time, and the time taken to reach a decision is likely to be informative about the cost of more precise judgments. We formalize this insight in the context of a dynamic rational inattention...

Daniel Chen, Darrell Duffie
February 19, 2020

We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of price-impact avoidance on order submission. Although fragmentation reduces...

Benjamin Hébert, Jennifer La'O...
February 7, 2020

This paper analyzes non-fundamental volatility and efficiency in a class of large games (including e.g. linear-quadratic beauty contests) that feature strategic interaction and endogenous information acquisition. We adopt the rational inattention approach to information acquisition...

Benjamin Hébert, Michael Woodford
January 31, 2020

We derive a new cost of information in rational inattention problems, the neighborhood-based cost functions, starting from the observation that many applications involve exogenous states with a

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Anat R. Admati
January 5, 2020

A healthy and stable financial system enables efficient resource allocation and risk sharing. A reckless and distorted system, however, causes enormous harm. The cycles of boom, bust, and crisis that repeatedly plague banking and finance...

Charles M. C. Lee, Eric C. So, Charles C. Y. Wang
December 30, 2019

We introduce a parsimonious framework for choosing among alternative expected-return proxies (ERPs) when estimating treatment effects. By comparing ERPs’ measurement-error variances in the cross-section and time series, we provide new evidence on the relative performance...

Jung Ho Choi, Brandon Gipper, Sara Malik
November 2019

We examine whether financial reporting quality influences employee turnover and wages using employer-employee matched data in the U.S. We find that low financial reporting quality is associated with high employee turnover risk, so workers demand...

Mark J. Garmaise, Yaron Levi, Hanno Lustig
October 17, 2019

We show that household consumption displays excess sensitivity to salient macro-economic news. When the announced local unemployment rate reaches a 12-month maximum, local consumers in that area reduce discretionary spending by 2% relative to consumers...

Joshua D. Rauh, Ryan Shyu
October 8, 2019

Drawing on the universe of California income tax filings and the variation imposed by a 2012 tax increase of up to 3 percentage points for high-income households, we present new findings about the effects of...

Charles M. C. Lee, Yuanyu Qu, Tao Shen
October 2019

We study firms that go public through reverse mergers (RMs) versus initial public offerings (IPOs) in China. Using a manually assembled data set, we show...

Zhengyang Jiang, Arvind Krishnamurthy, Hanno Lustig
September 24, 2019

US monetary policy has an outsized impact on the world economy, a phenomenon that Rey (2013) dubs the global financial cycle. Changes in the US dollar also have an outsized impact on the world economy,...