Abstract: Is investment in public sector capital inadequate in the U.S.? The answer is yes from investors’ perspective. This paper takes an asset pricing approach to evaluating the overall (in)adequacy of public sector investment. I propose a two-sector general equilibrium model that demonstrates how the share of public sector capital may enter the pricing kernel. From this theory I derive a factor pricing model with shocks to the public sector investment share (“PUB shocks”) as a risk factor. I confront the factor model with a variety of test assets and find that PUB shocks are priced and carry a consistently positive price of risk. I find further support from the analysis of a sample of U.S. government contractors: I postulate that the extent to which a firm depends on government customers for revenue is a relevant proxy for its exposure to public sector investment. I find that high-dependency firms (that is, firms with greater sales to government relative to their total sales) provide a 7.4\% higher average return annually compared to low-dependency firms. A subsample analysis reveals that this return spread is widening as the public sector investment share declines; it implies a growing shortfall in public sector investment in recent years.
Abstract: Independent technological glitches forced two separate trading halts on different U.S. exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit exogenous variation provided by this unprecedented coincidence, in conjunction with a proprietary data set, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. When the voluntary liquidity providers on one exchange were removed, liquidity remained unchanged; when DMMs were removed, liquidity decreased market-wide. We find evidence consistent with the idea that these DMMs, despite facing only mild formal obligations, significantly improve liquidity in the modern electronic marketplace.