Alessandro Romano

Insider Trading and Macroeconomic Risk

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In a new article, I use network theory to show that there is a hidden link between insider trading and macroeconomic risk.  I suggest that current laws on insider trading increase the level of macroeconomic risk for the economy, and I show that this problem can be addressed by banning what I call network trades: trades based on private material information in firms that are connected to the firm of the insider (e.g. suppliers and competitors).

We live in an interconnected economy where private material information about one firm is also a relevant predictor of the performance of connected firms … Read more

Network-Sensitive Financial Regulation

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Shocks to only part of the financial system, such as the collapse of the subprime mortgage market in 2007, can spread and intensify through the complex interconnections among financial and non-financial institutions to become systemic threats. The consequences can be catastrophic, prompting economists and regulators to study and find ways to curtail such threats by using network theory. Legal scholars, however, have so far largely overlooked that approach, as have policymakers. Most financial regulation remains atomistic, in that it fails to account for the fact that each individual is part of, and plays a role in, a wider network.

In … Read more

Institutional Investor Voting Behavior: A Network Theory Perspective

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It is received wisdom that institutional investors have insufficient incentives to cast informed votes because they compete on relative performance. If BlackRock invests in the monitoring of one of its portfolio companies, it will become relatively less competitive vis-à-vis the other institutional investors that hold shares in that company. In fact, other institutions would reap roughly the same benefits as BlackRock from its monitoring effort, without incurring any cost. Yet, there is evidence that institutional investors, whether actively or passively managed, no longer rubberstamp any proposal managers put to a vote. While that is not, in itself, evidence that institutional … Read more