Amil Dasgupta

Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders

Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signaling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investors, small investors attach the currency when fundamentals are stronger. Yet, the difference can be small, or null, depending on the relative precision of private information of the small and large investors. Adding signaling makes the influence of the large trader on small traders behaviour much stronger.

The Price Impact of Institutional Herding

In this paper we develop a simple theoretical model to analyze the impact of institutional herding on asset prices. A growing empirical literature has come to the intriguing conclusion that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We offer a theoretical resolution to this dichotomy. In our model, career-concerned money managers interact with profit-motivated proprietary traders and security dealers endowed with market power. We show that the reputational concerns of fund managers imply an endogenous tendency to imitate past trades, which impacts the prices of the assets they trade. In our main result, we show that institutional herding positively predicts short-term returns but negatively predicts long-term returns. Our theory thus provides a simple and unified framework within which to interpret the empirical literature on the price impact of institutional herding. In addition, our paper generates several new testable predictions linking institutional herding behavior, trading volume, and the time-series properties of stock returns.

Coordination and Delay in Global Games

What is the effect of offering agents an option to delay their choices in a global coordination game? We address this question by considering a canonical binary action global game, and allowing players to delay their irreversible decisions. Those that delay have access to accurate private information at the second stage, but receive lower payoffs. We show that, as noise vanishes, as long as the benefit to taking the risky action early is greater than the benefit of taking the risky action late, the introduction of the option to delay reduces the incidence of coordination failure in equilibrium relative to the standard case where all agents must choose their actions at the same time. We outline the welfare implications of this finding, and probe the robustness of our results from a variety of angles.

Institutional Trade Persistence and Long-term Equity Returns

How does the trading behaviour of institutional money managers affect stock prices? In this paper we document a robust relationship between the net trade patterns of institutional money managers and long term equity returns. Examining quarterly data on US institutional holdings from 1983 to 2004, we find evidence that stocks that have been persistently bought (sold) by institutions in the past 3 to 5 quarters underperform (overperform) the rest of the market in the next 12 to 30 months. Our results are of a similar magnitude to, but distinct from, other known asset pricing anomalies. Furthermore, we find that institutional investors show an aggregate tendency to trade in the direction of past institutional trades, buying stocks that have been persistently bought and selling stocks that have been persistently sold. We present a simple model of career-concerned trading by delegated portfolio managers that generates results consistent with our empirical findings.

Model of a Kuiper Belt Small Grain Population and Resulting Far-Infrared Emission

We have calculated a simple model of the expected Kuiper Belt (KB) small grain population and the thermal emission that would arise from such grains. We have also sought observational evidence for this emission. The model assumed equilibrium between grain creation by collisional fragmentation of comets and removal by Poynting-Robertson radiation drag, radiation pressure-driven ejection, mutual collisions, and sublimation. The model far-IR intensity scales as the square of total KB mass. Comparison of our model with observations of the zodiacal dust rules out emission from trans-Neptunian dust representing more than about 0.3 M of KB comets. This agrees with recent HST reports of a population of comet-sized bodies in the KB which has a minimum mass of about 0.04 M, although that population can be extrapolated to include as much as 1 M in the volume of our model. The model KB dust fractional bolometric luminosity (Ldust/Lstar) would have about 10-2 and 10-4 of the values for the grain disks around Vega and β Pic, respectively. A preliminary search in COBE DIRBE data reveals nonuniform bands near the ecliptic of cold (T = 20-30 K) emission prominent at wavelengths of 140 and 240 μm but not prominent relative to zodiacal emission at shorter (IRAS) wavelengths. Most of this emission is probably not from solar system material.

Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics

Financial contagion is modeled as an equilibrium phenomenon in a dynamic setting with incomplete information and multiple banks. The equilibrium probability of bank failure is uniquely determined. We explore how the cross holding of deposits motivated by imperfectly correlated regional liquidity shocks can lead to contagious effects conditional on the failure of a financial institution. We show that contagion is possible in the unique equilibrium of the economy and characterize exactly when it may exist. At the same time, we identify a direction of flow for contagious effects, which provides a rationale for localized financial panics. Simulations identify the optimal level of interbank deposit holdings in the presence of contagion risk. Our results suggest that when the probability of bank failure is low, maximal levels of interbank holdings are optimal. When cross holding of deposits is complete, we demonstrate that the intensity of contagion is increasing in the size of regionally aggregate liquidity shocks.

New Rotation Periods in the Pleiades: Interpreting Activity Indicators

We present results of photometric monitoring campaigns of G, K, and M dwarfs in the Pleiades carried out in 1994-1996. We have determined rotation periods for 18 stars in this cluster. In this paper we examine the validity of using observables such as X-ray activity and the amplitude of photometric variations as indicators of angular momentum loss. We report the discovery of cool, slow rotators with high amplitudes of variation. This contradicts previous conclusions about the use of amplitudes as an alternate diagnostic of the saturation of angular momentum loss. We show that the X-ray data can be used as observational indicators of mass-dependent saturation in the angular momentum loss proposed on theoretical grounds.

The Wall Street Walk when Blockholders Compete for Flows

Publicly traded corporations are a¤ected by a core agency problem: managers pay the full cost of e¤ort in running the corporations but shareholders enjoy most of the bene?ts. When ownership is dispersed individual shareholders have little incentive to monitor managers and little ability to in?uence them. Holders of equity blocks (?blockholders?) are a natural solu- tion to this problem. Because they own many shares they have both the incentive to monitor and the ability to in?uence management. Several well-known papers (e.g. Grossman and Hart (1980), Shleifer and Vishny (1986), Admati, P?eiderer, and Zechner (1994) and Kahn and Winton (1998)) have shown that blockholders can increase ?rm value through monitoring and activism. Activism can take the form of bringing forth shareholder proposals, proxy voting against management, informal negotiations with management, jawboning etc. These activities are collectively referred to as the use of ?voice?by blockholders.

Dynamic coordination with individual learning

We study coordination in dynamic global games with private learning. Players choose whether and when to invest irreversibly in a project whose success depends on its quality and the timing of investment. Players gradually learn about project quality. We identify conditions on temporal incentives under which, in sufficiently long games, players coordinate on investing whenever doing so is not dominated. Roughly speaking, this outcome occurs whenever playersʼ payoffs are sufficiently tolerant of non-simultaneous coordination. We also identify conditions under which players coordinate on the risk-dominant action. We provide foundations for these results in terms of higher order beliefs.

Ties that Bind: How Business Connections Affect Mutual Fund Activism

We investigate how business ties with portfolio firms influence mutual funds’ proxy voting using a comprehensive dataset spanning 2003 to 2011. In sharp contrast to the prior literature, we show that the proxy voting of mutual funds is significantly influenced by their business ties with portfolio firms. Our result holds at the level of individual proposals after robustly controlling for unobserved heterogeneity across firms and fund families and over time as well as for the e?ects of ISS recommendations and fund family holdings. We also show that the influence of business ties on proxy voting is strongest for highly contested shareholder proposals where proxy votes are most relevant for firm value. Finally, we show that the prominent class action lawsuits of 2006 against 401(K) sponsors and providers had di?erential e?ects on the voting of di?erent fund families depending on whether they were sued, thus unearthing a potential link between investor attention and corporate governance.