The Journal of Finance

Cross‐Asset Speculation in Stock Markets

Published: 09/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01400.x

DAN BERNHARDT, BART TAUB

In practice, heterogeneously informed speculators combine private information about multiple stocks with information in prices, taking into account how their trades influence the inferences of other speculators via prices. We show how this speculation causes prices to be more correlated than asset fundamentals, raising price volatility. The covariance structure of asset fundamentals drives that of prices, while the covariance structure of liquidity trade drives that of order flows. We characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators, and relate the cross‐asset factor structure of order flows to that of returns.

Financial Speculators' Underperformance: Learning, Self‐Selection, and Endogenous Liquidity

Published: 05/08/2007   |   DOI: 10.1111/j.1540-6261.2007.01237.x

REZA MAHANI, DAN BERNHARDT

We develop an equilibrium model of learning by rational traders to reconcile several empirical regularities: Cross sectionally, most individual speculators lose money; large speculators outperform small speculators; past performance positively affects subsequent trade intensity; most new traders lose money and cease speculation; and performance shows persistence. Learning from trading generates substantial endogenous liquidity, reducing bid–ask spreads and the impact of exogenous liquidity shocks on asset prices, but amplifying the effects of real shocks. Introducing slightly overconfident traders increases bid–ask spreads, hurting all traders. Finally, behavioral theories cannot reconcile all of these empirical regularities.

Rent Extraction with Securities Plus Cash

Published: 03/16/2021   |   DOI: 10.1111/jofi.13018

TINGJUN LIU, DAN BERNHARDT

In our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.

Informed Trading When Information Becomes Stale

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00635.x

Dan Bernhardt, Jianjun Miao

This paper characterizes informed trade when speculators can acquire distinct signals of varying quality about an asset's value at different dates. The most reasonable characterization of private information about stocks is that while information is long‐lived, new information will arrive over time, information that may be acquired by others. Hence, while a speculator may know more than others at a moment, in the future, his information will become stale, but not valueless. In an environment that allows for arbitrary correlations among signals, we characterize equilibrium outcomes including trading, prices, and profits. We provide explicit numerical characterizations for different informational environments.

Near‐sighted Justice

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00712.x

DAN BERNHARDT, ED NOSAL

Chapter 11 structures complex negotiations between creditors and debtors that are overseen by a bankruptcy court. We identify conditions where the court should sometimes err in determining which firms should be liquidated. Such errors affect actions by both good and bad entrepreneurs. We first characterize the optimal error rate without renegotiation. When creditors and debtors can renegotiate to circumvent an error‐riven court, for one class of actions a blind court that ignores all information is optimal. For another class, the court should place the burden of proof on the entrepreneur. The robust feature is that the court should sometimes err.