Prevailing theories of financial intermediation assume an integrated financial sector with frictionless risk-sharing. However, we identify substantial risk-sharing frictions linked to intermediary specialization using currency derivatives markets as a laboratory. Using confidential supervisory data covering $25 trillion in daily bank exposures, we document imperfect hedging in banks' FX-swap intermediation: banks rarely hedge their synthetic dollar lending with maturity-matched foreign safe assets. Intermediaries specialize in markets in which they have expertise in managing the associated exposures, giving rise to cross-market variation in deviations from covered-interest parity. Our results highlight the importance of intermediary specialization and its impact on risk premia.
How do recent advances in Generative Artificial Intelligence (AI) affect firm value? We construct the first measure of firms' workforce exposures to Generative AI and show that an "Artificial-Minus-Human" portfolio earned 5% in the two weeks following the release of ChatGPT. The labor-exposure effect is more pronounced for firms with greater data assets and is distinct from the effect of firms' product exposures to AI. We assess whether exposed workforces are substituted or complemented by Generative AI based on whether their exposed tasks are core or supplemental. Examining firms' labor demand and profitability following the release of ChatGPT supports a labor-technology substitution channel.
ABSTRACT Many of the key determinants of human behavior identified in the life sciences, such as stress response, impulse control, and mood regulation, remain absent from standard economic and finance models. This paper illustrates how such insights can enhance economic models in the context of inflation expectations. Combining a retrospective survey that elicits personal inflation histories with an experimental intervention that induces the reexperiencing of historic inflation, I show that physiological, emotional, and cognitive stress markers predict heightened inflation expectations and sharper memory recall, while also shaping personal economic narratives. These findings suggest novel policy tools to counter the persistent scars of economic distress and crisis experiences, for example, by designing experiences to provide predictability and control.
ABSTRACT We propose and examine a novel mechanism whereby holdings of dollar assets by foreign institutions can have a large, unexpected impact on foreign Treasury yields in crisis periods. Non‐U.S. institutions hold substantial dollar assets and hedge dollar exposures by selling dollars forward. In crisis periods, the dollar appreciates against other currencies. To meet margin calls on foreign exchange (FX) hedging positions, traditionally passive institutions liquidate domestic safe assets to raise cash. We show that during the recent COVID crisis, U.K. institutions with substantial dollar holdings and FX hedging positions sold large amounts of gilts, contributing significantly to the observed gilt yield spike.
ABSTRACT Experimental asset markets provide a controlled approach to studying financial markets. We attempt to replicate 17 key results from four prominent studies, collecting new data from 166 markets with 1,544 participants. Only three of the 14 original results reported as statistically significant were successfully replicated. We fail to replicate findings on emotions, self‐control, and gender differences in bubble formation but confirm that experience reduces bubbles and cognitive skills explain trading success. Our study demonstrates the importance of replications in enhancing the credibility of scientific results in this field.
