The Swiss Finance Institute (SFI) is a national center for research, doctoral training, knowledge exchange, and continuing education in the fields of banking and finance. Created in 2006 as a public–private partnership, SFI is a common initiative of the Swiss finance industry, six leading Swiss universities, and the Swiss Confederation.
We show that demand pressure from retail investors makes options on low-price stocks relatively expensive-delta-hedged options on low-price stocks underperform those on high-price stocks by 0.63% per week for calls and 0.36% for puts. Natural experiments corroborate this finding: options become more expensive following stock splits, options on mini indices are more expensive than those on main indices, and mini contract options are more expensive than standard options. We attribute our findings to retail investors' preference for skewness and divergence of opinion. Limits to arbitrage and strategic quote setting by market makers contribute to, but do not fully explain, this effect. (JEL G13, G14)
We study the selection of private market managers (GPs) for over 61,000 capital commitments by institutional investors (LPs) from a feasible opportunity set. LPs chase past performance but also seem surprisingly willing to invest in GPs without a track record: the probability that LPs select first-time or young GPs is quantitatively similar to GPs in the highest quartile of past performance. The most plausible explanation is that there is demand for exposure to private markets that is not fulfilled by incumbent GPs. The proclivity to invest in first-time or young GPs is not associated with higher future performance.
Comparing mortgage rates that borrowers obtain to rates that lenders could offer for the same loan, we find that many homeowners significantly overpay for their mortgage, with overpayment varying across borrower types and with market interest rates. Survey data reveal that borrowers' mortgage knowledge and shopping behavior strongly correlate with the rates they secure. We also document substantial variation in how expensive and profitable lenders are, without any evidence that expensive loans are associated with a better borrower experience. Despite many lenders operating in the U.S. mortgage market, limited borrower sophistication may provide lenders with market power.
Agent-based models (ABMs) are increasingly used to study complex economic phenomena such as endogenous growth, but their analysis typically relies on ad-hoc Monte Carlo exercises without formal statistical guarantees. We show how statistical model checking (SMC), and in particular Multi-VeStA, can automate and enrich the analysis of a seminal ABM: the Island Model of Fagiolo and Dosi, which captures the exploration-exploitation trade-off in technological search. We reproduce key stylized facts from the original model with formal confidence intervals, confirm the optimality of moderate exploration rates, and perform a counterfactual sensitivity analysis across returns to scale, skill transfer, and knowledge locality. Using MultiVeStA's built-in Welch's t-test, 6 out of 7 pairwise parameter comparisons yield statistically different growth trajectories, while the exception reveals a saturation effect in knowledge locality. Our results demonstrate that SMC offers a principled, reproducible methodology for the quantitative analysis of agent-based economic models.
Whether proprietary traders provide or take liquidity, and how their behavior evolves over the business cycle and across stocks, remains at the center of an ongoing debate. Using a unique dataset from the NYSE, we document that proprietary traders act as net liquidity providers, buying after price declines in a contrarian pattern. Proprietary trader liquidity provision is concentrated in large, liquid, low-volatility stocks and diminishes significantly when intermediary balance sheets are weak. Liquidity provision is stronger when price movements are plausibly not driven by information. Our findings highlight both the role and the limits of proprietary traders in supporting market liquidity across time and market segments.
