This study uses methods from social network analysis to assess the relative importance of financial centers around the world. The first phase of the analysis evaluates international stock exchanges based on their ability to attract global initial public offerings (IPOs). The second phase compares the capacity of these exchanges to provide an efficient trading platform for cross-listed companies. Cetorelli and Peristiani find that despite a diminished ability to attract cross-border IPOs, U.S. exchanges have maintained an undisputable lead in global equity activity throughout the entire sample period. They do find evidence of the rising importance of competing exchanges—in particular, the London Stock Exchange, the Deutsche Börse, and the Hong Kong Stock Exchange— and of an expanding role for a number of emerging market stock exchanges. However, this rising pattern reflects improved competitive conditions in a growing global market rather than a sudden decline in the activity of U.S. exchanges.

In responding to the severity and broad scope of the financial crisis that began in 2007, the Federal Reserve has made aggressive use of both traditional monetary policy instruments and innovative tools in an effort to provide liquidity. Sarkar examines the Fed’s actions in light of the underlying financial amplification mechanisms propagating the crisis—in particular, balance sheet constraints and counterparty credit risk. The empirical evidence supports the Fed’s views on the primacy of balance sheet constraints in the earlier stages of the crisis and the increased prominence of counterparty credit risk as the crisis evolved in 2008. The author concludes that an understanding of the prevailing risk environment is necessary in order to evaluate when central bank programs are likely to be effective and under what conditions the programs might cease to be necessary.

Mehran and Thakor address two questions: 1) Are bank capital structure and value correlated in the cross section, and if so, how? 2) If bank capital does affect bank value, how are the components of bank value affected by capital? The authors first develop a dynamic model with a dissipative cost of bank capital that is traded off against the benefits of capital: strengthened incentives for the bank to engage in value-enhancing loan monitoring and a higher probability of avoiding regulatory closure due to loan delinquencies. The model predicts that 1) the total value of the bank and its equity capital are positively correlated in the cross section and 2) the various components of bank value are also positively cross-sectionally related to bank capital. When the authors confront the predictions with the data on bank acquisitions, they find strong support. Their results are robust to a variety of alternative explanations.

The authors find that banks charge more for overdraft credit when depositors have access to a potential substitute: deferred deposit (“payday”) credit. They attribute this rise in prices partly to adverse selection created by banks’ practice of charging a flat fee regardless of the overdraft amount—pricing that favors depositors prone to large overdrafts. When deferred deposit credit priced per dollar borrowed is available, depositors prone to small overdrafts switch to that option. That selection works against banks; large overdrafts cost more to supply and, if depositors default, banks lose more, so prices rise. Consistent with this adverse-selection hypothesis, Melzer and Morgan document that the average dollar amount per returned check at banks and other depository institutions increases when depositors have access to deferred deposit credit. Beyond documenting another case of price-increasing competition, their findings bear on theories of adverse selection in credit markets and contribute to the debate over the pros and cons of payday credit.

Coffey, Hrung, and Sarkar provide robust evidence of a deviation in the covered interest rate parity (CIP) relation since the onset of the financial crisis in August 2007. The deviation exists with respect to various dollar-denominated interest rates and exchange rate pairings of the dollar vis-à-vis other currencies. The authors show that their proxies for margin conditions and for the cost of capital are significant determinants of the CIP deviations, especially during the crisis period. The supply of dollars by the Federal Reserve to foreign central banks via reciprocal currency arrangements (swap lines) reduced CIP deviations at this time. Following the bankruptcy of Lehman Brothers, uncertainty about counterparty risk became a significant determinant of CIP deviations, and the swap lines program no longer affected the deviations significantly. These results indicate a breakdown of arbitrage transactions in the international capital markets that owes partly to lack of capital and partly to heightened counterparty credit risk.

This study develops a new likelihood-based approach to signing trades in the absence of quotes. The approach is equally efficient as the existing Markov-chain Monte Carlo methods, but more than ten times faster. It can address the occurrence of multiple trades at the same time and allows for analysis of settings in which trade times are observed with noise. The authors apply this method to a high-frequency data set of thirty-year U.S. Treasury futures to investigate the role of the market maker. Most theory characterizes the market maker as an uninformed, passive supplier of liquidity. Their findings suggest, however, that some market makers actively demand liquidity for a substantial part of the day and that they are informed speculators.