Market Efficiency after the Financial Crisis: It's Still a Matter of Information Costs

Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007-2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis (“ECMH”). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It was subject to its own bubble – as a result of politics, it expanded from a narrow but important academic theory about the informational underpinnings of market prices to a broad ideological preference for market outcomes over even measured regulation. In this Article we examine the Subprime Crisis as a vehicle to return the ECMH to its information cost roots that support a more modest but sensible regulatory policy. In particular, we argue that the ECMH addresses informational efficiency, which is a relative, not an absolute measure. This focus on informational efficiency leads to a more focused understanding of what went wrong in 2007-2008. Yet informational efficiency is related to fundamental efficiency – if all information relevant to determining a security’s fundamental value is publicly available and the mechanisms by which that information comes to be reflected in the securities market price operate without friction, fundamental and informational efficiency coincide. But where all value relevant information is not publicly available and/or the mechanisms of market efficiency operate with frictions, the coincidence is an empirical question both as to the information efficiency of prices and their relation to fundamental value. Properly framing market efficiency focuses our attention on the frictions that drive a wedge between relative efficiency and efficiency under perfect market conditions. So framed, relative efficiency is a diagnostic tool that identifies the information costs and structural barriers that reduce price efficiency which, in turn, provides part of a realistic regulatory strategy. While it will not prevent future crises, improving the mechanisms of market efficiency will make prices more efficient, frictions more transparent, and the influence of politics on public agencies more observable, which may allow us to catch the next problem earlier. Recall that on September 8, 2008, the Congressional Budget Office publicly stated its uncertainty about whether there would be a recession and predicted 1.5 percent growth in 2009. Eight days later, Lehman Brothers had failed, and AIG was being nationalized

Tkachenko modes and quantum melting of Josephson junction type of vortex array in rotating Bose-Einstein condensate

Using path integral formalism, we show that the Abrikosov-Tkachenko vortex lattice may equivalently be understood as an array of Josephson junctions. The Tkachenko modes are found to be basically equivalent to the low energy excitations (Goldstone modes) of an ordered state. The calculated frequencies are in very good agreement with recent experimental data. Calculations of the fluctuations of the relative displacements of the vortices show that vortex melting is a result of quantum fluctuations around the ordered state due to the low energy excitations (Tkachenko modes)and occurs when the ratio of the kinectic energy to the potential energy of the vortex lattice is 0.001.Comment: revised paper 11 pages with 2 figures, all in Pdf forma

Enhanced electrical resistivity before N\'eel order in the metals, RCuAs2_2 (R= Sm, Gd, Tb and Dy

We report an unusual temperature (T) dependent electrical resistivity($\rho$) behavior in a class of ternary intermetallic compounds of the type RCuAs$_2$ (R= Rare-earths). For some rare-earths (Sm, Gd, Tb and Dy) with negligible 4f-hybridization, there is a pronounced minimum in $\rho$(T) far above respective N\'eel temperatures (T$_N$). However, for the rare-earths which are more prone to exhibit such a $\rho$(T) minimum due to 4f-covalent mixing and the Kondo effect, this minimum is depressed. These findings, difficult to explain within the hither-to-known concepts, present an interesting scenario in magnetism.Comment: Physical Review Letters (accepted for publication

Ultra-High Energy Neutrino Fluxes: New Constraints and Implications

We apply new upper limits on neutrino fluxes and the diffuse extragalactic component of the GeV gamma-ray flux to various scenarios for ultra high energy cosmic rays and neutrinos. As a result we find that extra-galactic top-down sources can not contribute significantly to the observed flux of highest energy cosmic rays. The Z-burst mechanism where ultra-high energy neutrinos produce cosmic rays via interactions with relic neutrinos is practically ruled out if cosmological limits on neutrino mass and clustering apply.Comment: 10 revtex pages, 9 postscript figure

Landau-Ginzburg Description of Boundary Critical Phenomena in Two Dimensions

The Virasoro minimal models with boundary are described in the Landau-Ginzburg theory by introducing a boundary potential, function of the boundary field value. The ground state field configurations become non-trivial and are found to obey the soliton equations. The conformal invariant boundary conditions are characterized by the reparametrization-invariant data of the boundary potential, that are the number and degeneracies of the stationary points. The boundary renormalization group flows are obtained by varying the boundary potential while keeping the bulk critical: they satisfy new selection rules and correspond to real deformations of the Arnold simple singularities of A_k type. The description of conformal boundary conditions in terms of boundary potential and associated ground state solitons is extended to the N=2 supersymmetric case, finding agreement with the analysis of A-type boundaries by Hori, Iqbal and Vafa.Comment: 42 pages, 13 figure

Measuring the Higgs Sector

If we find a light Higgs boson at the LHC, there should be many observable channels which we can exploit to measure the relevant parameters in the Higgs sector. We use the SFitter framework to map these measurements on the parameter space of a general weak-scale effective theory with a light Higgs state of mass 120 GeV. Our analysis benefits from the parameter determination tools and the error treatment used in new--physics searches, to study individual parameters and their error bars as well as parameter correlations.Comment: 45 pages, Journal version with comments from refere

Too Big to Fail — U.S. Banks’ Regulatory Alchemy: Converting an Obscure Agency Footnote into an “At Will” Nullification of Dodd-Frank’s Regulation of the Multi-Trillion Dollar Financial Swaps Market

The multi-trillion-dollar market for, what was at that time wholly unregulated, over-the-counter derivatives (“swaps”) is widely viewed as a principal cause of the 2008 worldwide financial meltdown. The Dodd-Frank Act, signed into law on July 21, 2010, was expressly considered by Congress to be a remedy for this troublesome deregulatory problem. The legislation required the swaps market to comply with a host of business conduct and anti-competitive protections, including that the swaps market be fully transparent to U.S. financial regulators, collateralized, and capitalized. The statute also expressly provides that it would cover foreign subsidiaries of big U.S. financial institutions if their swaps trading could adversely impact the U.S. economy or represent the use of extraterritorial trades as an attempt to “evade” Dodd-Frank. In July 2013, the CFTC promulgated an 80-page, triple-columned, and single-spaced “guidance” implementing Dodd-Frank’s extraterritorial reach, i.e., that manner in which Dodd-Frank would apply to swaps transactions executed outside the United States. The key point of that guidance was that swaps trading within the “guaranteed” foreign subsidiaries of U.S. bank holding company swaps dealers were subject to all of Dodd-Frank’s swaps regulations wherever in the world those subsidiaries’ swaps were executed. At that time, the standardized industry swaps agreement contemplated that, inter alia, U.S. bank holding company swaps dealers’ foreign subsidiaries would be “guaranteed” by their corporate parent, as was true since 1992. In August 2013, without notifying the CFTC, the principal U.S. bank holding company swaps dealer trade association privately circulated to its members standard contractual language that would, for the first time, “deguarantee” their foreign subsidiaries. By relying only on the obscure footnote 563 of the CFTC guidance’s 662 footnotes, the trade association assured its swaps dealer members that the newly deguaranteed foreign subsidiaries could (if they so chose) no longer be subject to Dodd-Frank. As a result, it has been reported (and it also has been understood by many experts within the swaps industry) that a substantial portion of the U.S. swaps market has shifted from the large U.S. bank holding companies swaps dealers and their U.S. affiliates to their newly deguaranteed “foreign” subsidiaries, with the attendant claim by these huge big U.S. bank swaps dealers that Dodd-Frank swaps regulation would not apply to these transactions. The CFTC also soon discovered that these huge U.S. bank holding company swaps dealers were “arranging, negotiating, and executing” (“ANE”) these swaps in the United States with U.S. bank personnel and, only after execution in the U.S., were these swaps formally “assigned” to the U.S. banks’ newly “deguaranteed” foreign subsidiaries with the accompanying claim that these swaps, even though executed in the U.S., were not covered by Dodd-Frank. In October 2016, the CFTC proposed a rule that would have closed the “deguarantee” and “ANE” loopholes completely. However, because it usually takes at least a year to finalize a “proposed” rule, this proposed rule closing the loopholes in question was not finalized prior to the inauguration of President Trump. All indications are that it will never be finalized during a Trump Administration. Thus, in the shadow of the recent tenth anniversary of the Lehman failure, there is an understanding among many market regulators and swaps trading experts that large portions of the swaps market have moved from U.S. bank holding company swaps dealers and their U.S. affiliates to their newly deguaranteed foreign affiliates where Dodd- Frank swaps regulation is not being followed. However, what has not moved abroad is the very real obligation of the lender of last resort to rescue these U.S. swaps dealer bank holding companies if they fail because of poorly regulated swaps in their deguaranteed foreign subsidiaries, i.e., the U.S. taxpayer. While relief is unlikely to be forthcoming from the Trump Administration or the Republican-controlled Senate, some other means will have to be found to avert another multi-trillion-dollar bank bailout and/or a financial calamity caused by poorly regulated swaps on the books of big U.S. banks. This paper notes that the relevant statutory framework affords state attorneys general and state financial regulators the right to bring so-called “parens patriae” actions in federal district court to enforce, inter alia, Dodd- Frank on behalf of a state’s citizens. That kind of litigation to enforce the statute’s extraterritorial provisions is now badly needed

Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions?

The President and members of Congress are considering proposals that would give the government broad authority to rescue financial institutions whose failure might threaten market stability. These systemically important institutions include bank and insurance holding companies, investment banks, and other large, highly leveraged, and interconnected entities that are not currently subject to federal resolution authority. Interest in these proposals stems from the credit crisis, particularly the bankruptcy of Lehman Brothers. That bankruptcy, according to some observers, caused massive destabilization in credit markets for two reasons. First, market participants were surprised that the government would permit a massive market player to undergo a costly Chapter 11 proceeding. A very different policy had been applied to other systemically important institutions such as Bear Steams, Fannie Mae, and Freddie Mac. Second, the bankruptcy filing triggered fire sales of Lehman assets. Fire sales were harmful to other non-distressed institutions that held similar assets, which suddenly plummeted in value. They were also harmful to any institution holding Lehman\u27s commercial paper, which functioned as a store of value for entities such as the Primary Reserve Fund. Fire sales destroyed Lehman\u27s ability to honor these claims. Lehman\u27s experience and the various bailouts (of AIG, Bear Steams, and other distressed institutions) have produced two kinds of policy proposals. One calls for wholesale reform, including creation of a systemic risk regulator with authority to seize and stabilize systemically important institutions. Another is more modest and calls for targeted amendments to the Bankruptcy Code and greater government monitoring of market risks. This approach would retain bankruptcy as the principal mechanism for resolving distress at non-bank institutions, systemically important or not. Put differently, current debates hinge on one question: is the Bankruptcy Code an adequate mechanism for resolving the distress of systemically important institutions? One view says no, and advances wholesale reform. Another view says yes, with some adjustments. This Essay evaluates these competing views: Section II discusses the current structure of the Bankruptcy Code and its limited ability to protect markets from failing systemically important institutions. Section III outlines policy responses. In Section IV, I conclude that the Code is indeed inadequate for dealing with failures of systemically important institutions. A systemic risk regulator is needed because a judicially administered process cannot move with sufficient speed and expertise in response to rapidly changing economic conditions