Financial Markets and Investment Externalities



    1. University of Texas
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    • Presidential Address to the American Finance Association, San Diego, California, January 2013. The discussion of investment externalities draws from my joint work and discussions with Andres Almazan, Zhaohui Chen, Adolfo de Motta, Casey Dougal, and Chris Parsons. The discussion of the interactions between financial market shocks and investment externalities is closely related to my joint work with Avanidhar (Subra) Subrahmanyam. I would also like to thank David Chapman, Kent Daniel, Andrea Eisfeldt, Michael Gallmeyer, and Tyler Muir for help on the macro finance literature. Finally, I would like to thank Aydogan Alti, Jonathan Cohn, David Hirshleifer, the Journal of Finance editors, Bruno Biais, Michael Roberts, and Kenneth Singleton, and my current students, Nicholas Crain, Nathan Swem, and Parth Venkat, for helping me clarify my ideas.


This address explores the link between financial market shocks, investment choices, and various externalities that can arise from these choices. My analysis, which emphasizes differences between shocks to debt and equity markets, provides insights about some stylized facts from the macro finance literature. These insights are illustrated with a discussion of the technology boom and bust in the late 1990s and early 2000s, and the housing boom and bust in the mid-2000s.