Essays in financial economics.

Summary This thesis is composed of three distinct chapters. In the first chapter, co-authored with Edouard Challe, we analyze the joint determination of the information embedded in prices, and the market composition by order type in an asset market with dispersed information. The market microstructure is such that informed agents can place either simple market orders or a set of limit orders. The market-makers set the price. Agents using simple market orders trade less aggressively on their information and thus reduce the information content of the price. In a market where only this type of order is present, the information embodied in the price is limited, no matter how well informed agents are about the asset's dividend. When agents can choose their type of order and limit orders are more expensive than market orders, then agents will mostly choose market orders when the accuracy of private signals tends to infinity. Limit orders are substitutes: at high levels of precision, a residual fraction of agents placing limit orders is sufficient to align the price with the agents' signals, and thus with the dividend. Thus the gain from conditioning one's orders on the price (via limit orders) in addition to one's own signal (as all agents do) disappears. We then apply this mechanism in the second chapter of this thesis. Speculators contemplating an attack (as in the case of currency crises) must guess the beliefs of other speculators, which they can do by watching the stock market. This chapter examines whether this information-gathering process is stabilizing, by better anchoring expectations, or destabilizing, by generating multiple equilibria. To do so, we study the results of a two-stage global game where an asset price determined in the trading stage of the game provides an endogenous public signal about the fundamental that affects agents' decision to attack in the coordination phase of the game. The microstructure of the asset market replicates that studied in the first chapter. Microstructure frictions that lead to greater individual exposure (to price execution risk) can reduce aggregate uncertainty (by setting a single equilibrium outcome). Finally, in the third chapter, in collaboration with Victor Lyonnet, we present a model of the interactions between traditional banks and shadow banks that speaks to their coexistence. During the 2007 financial crisis, some assets and liabilities of shadow banks were transferred to traditional banks and the assets were sold at fire sale prices. Our model replicates these stylized facts. The difference between traditional banks and shadow banks is twofold. First, traditional banks have access to a guarantee fund that allows them to finance themselves without risk in times of crisis. Second, traditional banks have to comply with costly regulations. We show that in times of crisis, shadow banks liquidate assets to pay off their creditors, while traditional banks buy these assets at fire sale prices. This exchange of assets in times of crisis generates a complementarity between traditional banks and shadow banks, where each type of intermediary benefits from the presence of the other. We find two competing effects of a small decrease in support for traditional banks in times of crisis, which we call the substitution effect and the income effect. The latter effect dominates the former, so that a lower level of expected support for traditional banks in times of crisis induces more bankers to switch to the traditional sector ex ante.