Essays on Financial Markets
This dissertation consists of three chapters that concern financial markets. The first chapter analyzes how financial frictions impact local government infrastructure spending. The US is frequently criticized for its recent poor spending and upkeep in local infrastructure, such as schools, utilities, and roads. I provide evidence that financial frictions in municipal bond markets exacerbate infrastructure underfunding. To demonstrate this, I exploit the differential exposure to government-rescued monoline bond insurers during the financial crisis as a quasi-experiment that affected local government access to municipal bond markets. I show that local governments with more exposure to a government-rescued monoline insurer FSA and its purchaser Assured Guaranty had better borrowing outcomes and spending in capital investments, relative to others that had exposure to non-rescued insurers. Event-study coefficients and difference-in-difference regression estimates show that issuers in the treatment group issue more bonds in the years after 2008, and also spend more on capital investments. The effect is significant for categories of public goods for which federal resources are scarce -- specifically in education, housing development, and some general utilities.
The second chapter analyzes the effect of passive indexing on informed trading. I develop a model of segmented trade that considers the effect of comovement on asset pricing, efficiency, and incentives to acquire information. The main contribution is to show that traders who participate via passive indexes have characteristics of both informed and uninformed traders. They are like uninformed traders as they diversify away all idiosyncratic risk, and so do not seek costly information, but they are alike informed traders as their presence causes any informed trading to be more quickly disseminated into prices. I provide some empirical justification for this model using a regression-discontinuity design around Russell 2000 index inclusions with institutional holding data.
The third chapter explores the asset pricing properties of cryptocurrencies, an emerging type of digital transaction that utilizes decentralized, cryptographic methods to verify ownership. This chapter is co-authored with my dissertation chair Professor Christine Parlour. We provide summary statistics on cryptocurrency return properties and measures of common variation for over 200 digital coins. Secondly, we provide investment characteristics of initial coin offerings (ICOs), a method of crowdfunding that utilizes cryptocurrencies as legal tender. We reconcile these statistics with traditional finance theories and develop a set of empirical facts for this new asset class.