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We offer a general equilibrium analysis of cryptocurrency pricing. The fundamental value of the cryptocurrency is its stream of net transactional benefits, which depend on its future prices. This implies that, in addition to fundamentals, equilibrium prices reflect sunspots. This in turn implies multiple equilibria and extrinsic volatility, that is, cryptocurrency prices fluctuate even when fundamentals are constant. To match our model to the data, we construct indices measuring the net transactional benefits of Bitcoin. In our calibration, part of the variations in Bitcoin returns reflects changes in net transactional benefits, but a larger share reflects extrinsic volatility. Article Note: Bruno Biais is at HEC Paris. Christophe Bisière, Matthieu Bouvard, and Catherine Casamatta are at Toulouse School of Economics, Université Toulouse Capitole (TSM-Research). Albert J. Menkveld is at Vrije Universiteit Amsterdam. Many thanks for helpful comments to the editor, Stefan Nagel, the Associate Editor, two referees, as well as Will Cong, Patrick Fève, René Garcia, Co-Pier Georg, Alexander Guembel, Zhiguo He, Michael Kumhof, Nour Meddahi, Eric Mengus, Julien Prat, George Tauchen, Harald Uhlig, Boris Vallée, Stefan Voigt, Yu Wang and conference and seminar participants in the 2018 BIS Research Network meeting, the 2018 Becker Friedman Institute Conference on Blockchains and Cryptocurrencies, the 2018 Ridge Forum, the 2018 EuroFIT Conference at UCL, the 2019 WEF Davos, the 2019 Toronto FinTech Conference, the 2019 Tokenomics Conference, the 2019 Sustainable Finance Center Conference and Financial Econometrics Conference at TSE, the 2019 ESSFM in Gerzensee, the 2019 CEBRA Annual Meeting, the 2019 EFA Meeting, the 2020 AFA meeting, the 2021 AFFI meeting, Autorité des Marchés Financiers, Banque Centrale du Luxembourg, Banque de France, Cambridge University, CEIBS Shanghai, Central European University, Fudan University, HEC Paris, HEC Liège, Imperial College, Said Business School, University of Chile FEB, University of New South Wales, University Paris Dauphine, University of Technology Sydney and University of Vienna. We gratefully acknowledge support from the Jean-Jacques Laffont Digital Chair, the Norwegian Finance Initiative (NFI), the Netherlands Organization for Scientific Research (NWO Vici grant), the ANR (grant ANR-17-EURE-0010), EconPol Europe, and the European Research Council (grant 882375, WIDE). We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose. CAPTION(S): Appendix S1: Internet Appendix. Replication Code. Byline: BRUNO BIAIS, CHRISTOPHE BISIÈRE, MATTHIEU BOUVARD, CATHERINE CASAMATTA, ALBERT J. MENKVELD

Byline: BRUNO BIAIS, FLORIAN HEIDER, MARIE HOEROVA ABSTRACT Derivatives activity, motivated by risk-sharing, can breed risk-taking. Bad news about the risk of an asset underlying a derivative increases protection sellers' expected liability and undermines their risk-prevention incentives. This limits risk-sharing, creates endogenous counterparty risk, and can lead to contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers' incentives and in turn enhance risk-sharing. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk-prevention incentives. Article Note: Biais is with the Toulouse School of Economics (CRM/CNRS IDEI). Heider and Hoerova are with the European Central Bank and CEPR. We would like to thank the Acting Editor (Markus Brunnermeier), an Associate Editor, two anonymous referees, our discussants Ulf Axelson, Jonathan Berk, Sugato Bhattacharyya, Bruce Carlin, Simon Gervais, Artashes Karapetyan, Christine Parlour, Alp Simsek, and Lauri Vilmi, as well as numerous seminar and conference participants for their comments and suggestions. The views expressed do not necessarily reflect those of the European Central Bank or the Eurosystem. Biais gratefully acknowledges the support of the European Research Council (Grant 295484-TAP). We have read the Journal of Finance's disclosure policy and have no conflicts of interest to disclose. CAPTION(S): Appendix S1: Internet Appendix.

Byline: KENNETH J. SINGLETON, BRUNO BIAIS, MICHAEL ROBERTS ***** No abstract is available for this article. *****

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2015.03.004 Byline: Bruno Biais, Thierry Foucault, Sophie Moinas Abstract: High speed market connections improve investors' ability to search for attractive quotes in fragmented markets, raising gains from trade. They also enable fast traders to obtain information before slow traders, generating adverse selection, and thus negative externalities. When investing in fast trading technologies, institutions do not internalize these externalities. Accordingly, they overinvest in equilibrium. Completely banning fast trading is dominated by offering two types of markets: one accepting fast traders, the other banning them. Utilitarian welfare is maximized with (i) a single market type on which fast and slow traders coexist and (ii) Pigovian taxes on investment in the fast trading technology. Author Affiliation: (a) Toulouse School of Economics (CNRS-CRM and FBF IDEI Chair on Investment Banking and Financial markets), Manufacture des Tabacs, 21 allees de Brienne, 31000 Toulouse, France (b) HEC, Paris, 1 rue de la Liberation, 78351 Jouy en Josas, France (c) Toulouse School of Economics, University of Toulouse 1 Capitole and FBF IDEI Chair on Investment Banking and Financial markets, Manufacture des Tabacs, 21 allees de Brienne, 31000 Toulouse, France Article History: Received 8 February 2013; Revised 3 September 2014; Accepted 23 September 2014 Article Note: (footnote) [star] Many thanks for helpful comments to the referee, Alex Guembel, Terrence Hendershott, Carolina Manzano, Albert Menkveld, Anna Obizhaeva, Emiliano Pagnotta, Rafael Repullo, Ailsa Roell, Xavier Vives and participants in the High Frequency Conference (Madrid, 2012), the 2012 SFS Cavalcade, the 2013 AFA meeting, and the 2014 SED meeting. Moinas acknowledges the support of the ANR (Grant 09-JCJC-0139-01). Biais acknowledges the support of the ERC (Grant 295484 - TAP).

We experimentally analyze how to design preopening mechanisms facilitating coordination on high equilibrium liquidity and gains from trade. We allow a call auction to be preceded by a preopening or not, preopening orders to be binding or not, and the opening time to be deterministic or random. When the preopening is nonbinding, traders place manipulative orders, reducing the credibility of preplay communication. Random market opening deters manipulation, but also hinders communication by making it costly. Gains from trade are maximized when preopening orders are binding. This enables some traders to place early limit orders, attracting further liquidity. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1787. Keywords: cheap talk; experimental markets; equilibrium discovery; preopening period; preplay communication History: Received October 10, 2011; accepted May 22, 2013, by Wei Xiong, finance. Published online in Articles in Advance October 23, 2013., 1. Introduction At the opening of the market, there is large uncertainty about supply, demand, and valuations. Market openings can, therefore, be plagued by informational problems and coordination failures. Abstracting [...]

To purchase or authenticate to the full-text of this article, please visit this link: http://onlinelibrary.wiley.com/doi/10.1111/jofi.12071/abstract Byline: KENNETH J. SINGLETON, BRUNO BIAIS, MICHAEL ROBERTS ***** No abstract is available for this article.

The competition between Island and Nasdaq at the beginning of the century offers a natural laboratory to study competition between and within trading platforms and its consequences for liquidity supply. Our empirical strategy takes advantage of the difference between the pricing grids used on Island and Nasdaq, as well as of the decline in the Nasdaq tick. Using the finer grid prevailing on their market, Island limit order traders undercut Nasdaq quotes, much more than they undercut one another. The drop in the Nasdaq tick size triggered a drop in Island spreads, despite the Island tick already being very thin before Nasdaq decimalization. We also estimate a structural model of liquidity supply and find that Island limit order traders earned rents before Nasdaq decimalization. Our results suggest that perfect competition cannot be taken for granted, even on transparent open limit order books with a very thin pricing grid. Key words: competition in financial markets; liquidity supply; trading mechanisms; different tick sizes History: Received December 4, 2008; accepted May 26, 2010, by Wei Xiong, finance., 1. Introduction Exchanges and trading mechanisms increasingly compete for orders. Regulators, such as the Securities and Exchange Commission (SEC) and the European Commission, have encouraged this competition. In the United [...]

Once they have observed information, hindsight-biased agents fail to remember how ignorant they were initially; "they knew it all along." We formulate a theoretical model of this bias, providing a foundation for empirical measures and implying that hindsight-biased agents learning about volatility will underestimate it. In an experiment involving 66 students from Mannheim University, we find that hindsight bias reduces volatility estimates. In another experiment, involving 85 investment bankers in London and Frankfurt, we find that more biased agents have lower performance. These findings are robust to differences in location, information, overconfidence, and experience. Key words: decision analysis; forecasting; finance; hindsight bias History: Received July 24, 2007; accepted December 23, 2008, by George Wu, decision analysis. Published online in Articles in Advance April 23, 2009., 1. Introduction Psychologists have extensively documented the prevalence of cognitive biases and deviations from rational choice. Are these results relevant for actual financial markets? Professionals, operating in their natural habitat [...]

We study how early-stage new ideas are turned into successful businesses. Even promising ideas can be unprofitable if they fail on one dimension, such as technical feasibility, correspondence to market [...]

We study how securities and issuance mechanisms can be designed to mitigate the adverse impact of market imperfections on liquidity. In our model, asset owners seek to obtain liquidity by selling claims contingent on privately observed future cash-flows. Liquidity suppliers can be competitive or strategic. In the optimal trading mechanism associated with an arbitrary given security, issuers with low cash-flows sell their entire holdings of the security, while issuers with high cash-flows are typically excluded from trade. By designing the security optimally, issuers can avoid exclusion altogether. We show that the optimal security is debt. Because of its low informational sensitivity, debt mitigates the adverse selection problem. Furthermore, by pooling all issuers with high cash-flows, debt also reduces the ability of a monopolistic liquidity supplier to exclude them from trade in order to better extract rents from issuers with lower cash-flows.

We measure the degree of overconfidence in judgement (in the form of miscalibration, i.e. the tendency to overestimate the precision of one's information) and self-monitoring (a form of attentiveness to social cues) of 245 participants and also observe their behaviour in an experimental financial market under asymmetric information. Miscalibrated traders, underestimating the conditional uncertainty about the asset value, are expected to be especially vulnerable to the winner's curse. High self-monitors are expected to behave strategically and achieve superior results. Our empirical results show that miscalibration reduces and self-monitoring enhances trading performance. The effect of the psychological variables is strong for men but non-existent for women.

We study opening prices set simultaneously for German and French stocks inFrankfurt and Paris. In our model investors and traders based in the samecountry as the firm have better information on its value than foreigntraders. Our theory implies that prices set on the domestic market differfrom (and are more informationally efficient than) prices set on the foreignmarket. Empirically, we find significant price discrepancies between homeand foreign prices, consistent with lack of integration of internationalfinancial markets. For German stocks, home prices are found to beinformationally more efficient than foreign prices. The informationalefficiency of French stock prices is comparable in the two markets whenFrankfurt traders can observe Paris preopening prices before the opening.

We analyze politically motivated privatization in a bipartisan environment. When median-class voters a priori favor redistributive policies, a strategic privatization program allocating them enough shares can induce a voting shift away from left-wing parties whose policy would reduce the value of shareholdings. To induce median-class voters to buy enough shares to shift political preferences, strategic rationing and underpricing is often necessary. In the extreme, this may lead to free share distribution and voucher privatization. Shifting voting preferences becomes impossible when strong ex ante political constraints require large upfront transfers to insiders or when social inequality is extreme. (JEL D72, L33, P16, P35)

We analyse the optimal Initial Public Offering (IPO) mechanism in a multidimensional adverse selection setting where institutional investors have private information about the market valuation of the shares, the intermediary has private information about the demand, and the institutional investors and intermediary collude. Theorem I states that uniform pricing is optimal (all agents pay the same price) and characterizes the IPO price in terms of conditional expectations. Theorem 2 states that the optimal mechanism can be implemented by a non-linear price schedule decreasing in the quantity allocated to retail investors. This is similar to IPO procedures used in the U.K. and France. Relying on French IPO data we perform a GMM structural estimation and test of the model. The price schedule is estimated and the conditions characterizing the optimal mechanism are not rejected.

Consider strategic risk-neutral traders competing in schedules to supply liquidity to a risk-averse agent who is privately informed about the value of the asset and his hedging needs. Imperfect competition in this common value environment is analyzed as a multiprincipal game in which liquidity suppliers offer trading mechanisms in a decentralized way. Each liquidity supplier behaves as a monopolist facing a residual demand curve resulting from the maximizing behavior of the informed agent and the trading mechanisms offered by his competitors. There exists a unique equilibrium in convex schedules. It is symmetric and differentiable and exhibits typical features of market-power: Equilibrium trading volume is lower than ex ante efficiency would require. Liquidity suppliers charge positive mark-ups and make positive expected profits, but these profits decrease with the number of competitors. In the limit, as this number goes to infinity, ask (resp. bid) prices converge towards the upper (resp. lower) tail expectations obtained in Glosten (1994) and expected profits are zero. Keywords: Multi-principals, mechanism design, competing market-makers, financial markets microstructure.

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). (Reprinted by permission of the publisher.)

This paper compares centralized and fragmented markets, such as floor and telephone markets. Risk-averse agents compete for one market order. In centralized markets, these agents are market order or limit order traders. They are assumed to observe the quotes of their competitors. In fragmented markets they are dealers. They can only assess the positions of their competitors. We analyze differences in bidding strategies reflecting differences in market structures. The equilibrium number of dealers is shown to be increasing in the frequency of trades and the volatility of the value of the asset. The expected spread is shown to be equal in both markets, ceteris paribus. But the spread is more volatile in centralized than in fragmented markets. (Reprinted by permission of the publisher.)

We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financing contracts can be implemented by a combination of debt and equity when the risk-shifting problem is the most severe while stock options are also needed when the effort problem is the most severe. Worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level. Moreover, aggregate leverage decreases with the risk-shifting problem and increases with the effort problem. (Reprinted by permission of the publisher.)

Should management worry about employees' biases, i.e., systematic deviations from rational analysis? We focus on the hindsight bias, which is the inability to correctly remember one's prior expectations after observing [...]

Data for manufacturing companies in Cote d'Ivoire is used as the basis of research into the roles of the formal and informal credit markets in developing nations. It is concluded that the natural functioning of the market is unlikely to produce optimal investment, growth and economic development.