Our speaker will be Tomy Lee (Central European University).

He will give a talk on "China Walls" (joint with Daniel Nathan and Chaojun Wang).

Abstract: Conflicts of interest within banking conglomerates contributed to the 2008 financial crisis. Policymakers dramatically tightened internal information barriers-China Walls-within the banking conglomerates in response. We measure trade-relevant private information flows within affiliate and non-affiliate firm pairs to determine if today's China Walls are effectively enforced. Our approach compares firm pairs around exceptionally large trades, exploiting the pairs that are neither affiliates nor ever trade to strip away aggregate information shocks. We apply the approach to regulatory data on the foreign exchange market, in which the China Wall rules aim to separate dealers from their affiliate funds. We document islands of informational autarky within affiliate dealer-fund pairs surrounded by a sea of information sharing: (1) Dealers and affiliate funds never trade with each other. (2) The dealers do not leak information to affiliate funds, nor the funds to affiliate dealers. (3) Unaffiliated dealer-fund pairs that frequently trade with each other systemically share information, even around days when the pair does not trade. (4) Affiliate fund-to-fund pairs intensely share information, including the fund pairs whose dealers do not overlap. (5) The private information flows exhibit strong homophily. Firms specialized in a currency pair respond more to each other's information. Hedge funds respond vastly more to information from other hedge funds, and the non-hedge funds somewhat more to the other non-hedge funds. Our results reveal remarkable regulatory capacity to control information flows in democracies.

The talk will take place on October 24, 2024 at 12:00 pm in room EA.5.040.