Matthew D. Baron

Ph.D. Candidate in Economics

Princeton University and
Bendheim Center for Finance
26 Prospect Ave
Princeton, NJ 08540


Google Scholar

 Research interests: financial economics (banking, asset pricing)

Job Market Paper

Countercyclical Bank Equity Issuance

Abstract: It is well established that equity issuance for non-financial firms is procyclical. This paper shows that, in contrast, equity issuance for banks is countercyclical across credit cycles after 1980, as is retained income. Thus, during credit booms, banks raise less equity, even though more equity might help banks better absorb shocks. This paper shows that government guarantees play a crucial role in driving banks' countercyclical equity issuance. Countercyclical equity issuance arises in the U.S. during the bailouts of the 1980s, mostly in banks that equity markets perceive as “too-big-to-fail” (TBTF). Across types of firms, historical time periods, and countries, equity issuance is countercyclical when government guarantees are strong and procyclical when government guarantees are weak. Furthermore, bank equity issuance becomes more countercyclical in Eurozone countries that gain increased implicit guarantees upon adopting the Euro. These findings help explain why banks may resist raising equity during credit expansions, making financial distress more likely.

Working Papers

Credit Expansion and Neglected Crash Risk (with Wei Xiong) [Online Appendix]

Selected presentationsNBER Asset Pricing (2014), NBER Summer Institute (2014)

Abstract: In a set of 20 developed countries over the years 1920-2012, bank credit expansion predicts increased crash risk in the bank equity index and equity market index. However, despite the elevated crash risk, bank credit expansion predicts lower rather than higher mean returns of these indices in the subsequent one to eight quarters. Conditional on bank credit expansion of a country exceeding a 95th percentile threshold, the predicted excess return for the bank equity index in the subsequent eight quarters is -25.8%. This joint presence of increased crash risk and negative mean returns presents a challenge to the views that financial instability associated with credit expansions are simply caused by either banks acting against the will of shareholders or by elevated risk appetite of shareholders, and instead suggests a need to account for the role of over-optimism and neglect of crash risk by shareholders.

Risk and Return in High Frequency Trading (with Jonathan Brogaard and Andrei Kirilenko) [SSRN]

Selected presentationsNBER Market Microstructure (2012), Western Finance Association (2013)
Press Coverage: New York Times, Wall Street Journal, Bloomberg, US News & World Report
R&R in the Journal of Financial Economics

Abstract: This paper studies high frequency trading (HFT) in the E-mini S&P 500 futures contract over a two-year period and finds that revenue is concentrated among a small number of HFT firms who achieve greater investment performance through liquidity-taking activity and higher speed. While the median HFT firm realizes an annualized Sharpe ratio of 4.3 and a four-factor annualized alpha of 22.02%, revenues persistently and disproportionally accumulate to top performing HFTs, consistent with winner-takes-all industry structure. New entrants are less profitable and more likely to exit. Our results imply that HFT firms have strong incentives to take liquidity and compete over small increases in speed.

Teaching experience

Teaching assistant for:
- Financial Investments, Prof. Harrison Hong, Fall 2012 & Fall 2014
- Financial Investments, Prof. Yacine Ait-Sahalia, Fall 2013 & Fall 2014
- Statistics for Public Policy, Prof. Marc Ratkovic, Spring 2013
- The Great Recession, Prof. Paul Krugman, Spring 2014

Link to Teaching Evaluations