Finance Theory

We study the pricing and liquidity implications of sentiment and disagreement as origins of radical uncertainty in financial markets. We address this question in two ways. First, we propose a unified theoretical framework to explore how sentiment and disagreement affect the trading behaviors of market participants and hence asset prices and liquidity. Second, we use various data sources to investigate the model-generated empirical predictions on how disagreement-sentiment dynamics can explain certain patterns in stock return predictability and liquidity in the cross section and in the time series.  

The financial crisis that began in summer 2007 has turned into the worst economic crisis since the Great Depression. Its causes are usually sought in the malfunctioning of the financial sector. Non-financial factors often receive less attention. One of the major socio-economic changes of recent decades has been a dramatic shift in income distribution. The project investigates whether rising inequality has contributed to the macroeconomic imbalances that erupted in the present crisis. This is done based on a Kaleckian macroeconomic model. This project suggests that the present crisis should be understood as an outcome of the interaction of the process of financial deregulation with the effects of the polarization of income distribution. Read more

This project will construct a broad set of software tools designed to better facilitate the understanding and comparative features of various types of agent-based finical markets.  These tools should form a computational foundation for researchers interested in getting started in the field and for those interested in teaching courses based on agent-based principles.  They should also form a comparative theoretical test bed to better understand what the critical theoretical features are and how they impact our broader understanding of actual market dynamics.