This paper shows that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run. Bank runs in the model cause real economic damage, rather than simply reflecting other problems. Contracts which can prevent runs are studied, and the analysis shows that there are circumstances when government provision of deposit insurance can produce superior contracts.

/pdf/bank-runs-deposit-insurance-and-liquidity-5acmze0roa.pdf

Bank Runs, Deposit Insurance, and Liquidity

An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1405027_code2024.pdf?abstractid=1286306&mirid=1&type=2

A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades

/pdf/a-theory-of-fads-fashion-custom-and-cultural-change-as-3s4j8rv8xm.pdf

There are often benefits to consumers and to firms from standardization of a product. We examine whether these standardization benefits can "trap" an industry in an obsolete or inferior standard when there is a better alternative available. With complete information and identical preferences among firms the answer is no; but when information is incomplete this "excess inertia" can occur. We also discuss the extent to which the problem can be overcome by communication.

/pdf/standardization-compatibility-and-innovation-1e0gxf7gid.pdf

Standardization, compatibility, and innovation

This paper discusses firm behavior, market performance, and the public and private institutions that arise in systems markets, i.e., markets where consumers use compatible components together to generate benefits. In such markets, which include communications networks and 'hardware/software' networks, popular products are inherently more valuable. These 'network effects' can drive corporate strategies and are critical in understanding innovation in many high-technology markets. The discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects, competition between incompatible systems, and how suppliers choose which components are compatible and which are not.

/pdf/systems-competition-and-network-effects-3pvofkkx4p.pdf

Systems Competition and Network Effects

As a centralized, computerized, limit order market, the Paris Bourse is particularly appropriate for studying the interaction between the order book and order flow. Descriptive methods capture the richness of the data and distinctive aspects of the market structure. Order flow is concentrated near the quote, while the depth of the book is somewhat larger at nearby valuations. We analyze the supply and demand of liquidity. For example, thin books elicit orders and thick books result in trades. To gain price and time priority, investors quickly place orders within the quotes when the depth at the quotes or the spread is large. Consistent with information effects, downward (upward) shifts in both bid and ask quotes occur after large sales (purchases). MANY OF THE WORLD'S major stock exchanges, such as the New York and Tokyo Stock Exchanges, rely at least partially upon limit orders for the provision of liquidity. Therefore, it is important to understand the placement of limit orders and their contribution to liquidity and price formation. There is a complex relationship between investor order strategies and the short-term dynamics of asset prices, the transmission of information in security markets, the costliness of trading, and the nature of the liquidity available from the market. We are interested in understanding the intertwined dynamics of the order flow and order book: how the order flow reacts to the state of the order book and informational events in the marketplace, mechanically updates the

https://www.jstor.org/stable/pdfplus/2329330.pdf

An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse

We develop an equilibrium model of the term structure of forward prices for storable commodities. As a consequence of a nonnegativity constraint on inventory, the spot commodity has an embedded timing option that is absent in forward contracts. This option’s value changes over time due to both endogenous inventory and exogenous transitory shocks to supply and demand. Our model makes predictions about volatilities of forward prices at different horizons and shows how conditional violations of the “Samuelson effect” occur. We extend the model to incorporate a permanent second factor and calibrate the model to crude oil futures data. COMMODITY MARKETS IN RECENT YEARS have experienced dramatic growth in trading volume, the variety of contracts, and the range of underlying commodities. Market participants are also increasingly sophisticated about recognizing and exercising operational contingencies embedded in delivery contracts. 1 For all of these reasons, there is a widespread interest in models for pricing and hedging commodity-linked contingent claims. In this paper we present an equilibrium model of commodity spot and forward prices. By explicitly incorporating the microeconomics of supply, demand, and storage, our model captures some fundamental differences between commodities and financial assets. Empirically, commodities are strikingly different from stocks, bonds and other conventional financial assets. Among these differences are:

/pdf/equilibrium-forward-curves-for-commodities-3dsau99dcm.pdf

Equilibrium Forward Curves for Commodities

https://www.cis.upenn.edu/~mkearns/finread/bias-spatt-survey.pdf

Market microstructure: A survey of microfoundations, empirical results, and policy implications

Before the opening of the Paris Bourse, traders place orders and indicative prices are set. This offers a laboratory to study empirically the tâtonnement process through which markets discover equilibrium prices. Since preopening orders can be revised or canceled before the opening, indicative prices could be noise. We test this against the hypothesis that preopening prices reflect learning. Early in the preopening the noise hypothesis is not rejected. As the opening gets closer, the informational content and efficiency of prices increase and the learning hypothesis is not rejected. We also propose a GMM‐based estimate of the speed of learning.

Price Discovery and Learning during the Preopening Period in the Paris Bourse

We investigate the optimal intertemporal asset allocation and location decisions for an investor with both taxable and tax-deferred investment opportunities. With unrestricted borrowing opportunities, the investor optimally allocates his entire tax-deferred wealth to taxable bonds and combines either borrowing or lending with investment in equity in the taxable account to achieve his optimal overall risk exposure. When the investor is prohibited from borrowing, the optimal asset allocation in his tax-deferred account may consist of both bonds and stocks, but only if the wealth in his taxable account is allocated entirely to equity. The preference for holding taxable bonds in the tax-deferred account and equity in the taxable account reflects the higher ordinary income on bonds and the tax avoidance strategies available on equity. The effect of liquidity shocks on the optimal asset location policy is also examined. Our results are in striking contrast to the asset location choices observed in practice.

https://papers.ssrn.com/sol3/Delivery.cfm?delivery_id=281681

Chester S. Spatt

Papers

An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse

Equilibrium Forward Curves for Commodities

Market microstructure: A survey of microfoundations, empirical results, and policy implications

Price Discovery and Learning during the Preopening Period in the Paris Bourse

Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing