This thesis explores the roles of two significant financial intermediaries in the financial markets: venture capital firms, which facilitate equity financing, and banks, which provide debt financing. Initially, the thesis concentrates on the entrepreneurial financing market, examining the factors that influence venture capital firms' decision-making processes when selecting investments. Subsequently, as a complement to equity financing for startups, the thesis delves deeper into the role of banks in offering venture debt. Recognizing that deposits serve as the foundational basis for banks to issue debt, the final part of the thesis investigates competition in the deposit market and the methods banks employ to determine deposit rates.

Venture capital plays a critical role in entrepreneurial finance, with networks prominently featuring in venture capital (VC) markets. Chapter 1, \textbf{Networks in Venture Capital Markets}, explores the role and channels of networks in VC investments. The paper examines alumni networks between VCs and startups, using a new partner with new alumni networks joining a venture capital company as a plausibly exogenous shock to the VCs' alumni networks to identify the network effects on VC investments. New alumni ties lead to a significant increase in investments in startups with alumni founders. However, startups with new alumni ties perform worse, with higher failure rates and lower acquisition rates, IPO rates, and portfolio returns. This highlights VCs' overemphasis on alumni networks and potential inefficiencies in their investment strategies. To understand the underlying mechanism, the paper frames network effects through two channels: improving information (information channel) and inducing homophily-based favoritism (preference channel). Supplementary tests suggest that the preference channel outweighs the information channel, leading to VCs' capital misallocation.

As a complementary financing option to equity financing for startups, Chapter 2, \textbf{Signaling in the Venture Debt Financing}, sheds light on the interaction between startup financing and banks. Venture debt financing for startups has experienced steady growth in recent years, prompting this paper to focus on understanding the rise of venture debt through a signaling channel. We model and document the role of venture debt as a positive signal in startup financing under asymmetric information, which increases the probability of a firm receiving future venture capital (VC) funding, thereby reducing the risk of venture debt and encouraging lending to startups. However, VCs' reliance on this signal induces over-investment in lower-quality startups, as they interpret venture debt as a positive signal and conduct less thorough due diligence. Data show that startups invested after obtaining venture debt perform worse than others. This paper offers a unique explanation for the rise of venture debt and highlights the efficiency loss induced by venture debt.

Chapter 3, \textbf{Banks' Rate Setting Behavior and Regional Distribution of Deposit Rates}, turns to the competition in the deposit market, documenting banks' differential deposit rate-setting behavior associated with bank size. Large banks set uniform deposit rates that ignore local market competition, while small banks set higher rates and respond to local market conditions. Despite large banks setting lower deposit rates, they hold the majority of deposits. We find that the differential rate setting behavior is due to customer segmentation between large and small banks. Large banks target more populated areas with higher-income populations who value complex financial services and are less sensitive to low deposit rates. In contrast, small banks serve rural regions where customers prioritize deposits and are more sensitive to deposit rates.

This dissertation consists of three chapters on mortgage funding and risk management.

The U.S mortgage market is very concentrated. In 2006, the top 40 lenders were responsible

for the origination of 96 percent of all mortgages (Stanton et al. (2014)). These large lenders

originated about 60 percent of the mortgages through the wholesale channel, delegating parts

of the origination process to third party agents such as mortgage brokers and correspondent

lenders. I show that the type of agent selected by the wholesale lender could crowd out

local banks, who often act as correspondents and rely on these wholesale lenders for funding.

I also show that this crowding out has spillover eects. As local banks decreased their

presence in the county, they have also reduced other types of lending. As a result, their local

communities showed less growth in small businesses.

The second chapter discusses the perils of warehouse lending. Warehouse lending is an

important part of the U.S. mortgage market because a large fraction of mortgage origination,

both pre-crisis and currently, is carried out by non-depositories who are reliant on warehouse

facilities to fund their mortgage origination activity. After the passage of The Bankruptcy

Abuse Prevention Act (BAPCPA), in April 2005, most warehouse facilities were structured

as Master Repurchase Agreements (MRAs). BAPCPA re-dened the mortgage loans held

as collateral on the warehouse lines (the newly originated mortgages) as repo thus exempting

them from automatic stay upon the bankruptcy of the mortgage originator (the repo

seller). We consider the eect of the growth of MRAs for funding mortgage originations on

the performance of the mortgage originators (repo sellers) and warehouse lenders (repo buyers).

We nd that mortgage originators (repo sellers), that used MRAs to fund their loans,

originated mortgages of lower quality and that these originators were more likely to declare

bankruptcy. Symmetrically, we nd that the warehouse lenders (repo buyers) experienced a

sharper increase in mortgage charge-os and non-performing mortgages than non-warehouse

lenders, even though the quality of the retail and wholesale mortgages that they originated

were comparable to the quality of mortgages originated by non warehouse lenders. This

negative outcome for warehouse lenders arose from the exemption of the mortgage repo

collateral from automatic stay, since under BAPCPA the poor quality assets of bankrupt counter parties, the mortgage originators, became consolidated on the warehouse lender balance

sheets. Thus, the consolidated loans from the bankrupt counter parties generated an

important component of the deterioration in the warehouse lenders' mortgage

In the third chapter, we propose an empirical duration measure for the stock of U.S.

Agency MBS that appears to be less prone to model risk than measures such as the Barclays

Eective Duration measure. We nd that this measure does not appear to have a strong

eect on the 12-month excess returns of ten-year Treasuries as would be expected if shocks

to MBS duration lead to commensurate shocks to the quantity of interest rate risk borne

by professional bond investors (see, Hanson, 2014; Malkhozov et al., 2016). Given this

negative reduced form result, we then explore the mortgage and treasury hedging activities

of the primary MBS investors such as commercial banks, insurance companies, the agencies,

the Federal Reserve Bank, Mutual Funds, and foreign investors. We nd that the only

investors that may follow the models of Hanson (2014) and Malkhozov et al. (2016) are

foreign investors in Switzerland and the United Kingdom and life insurance rms. Life

insurance rm market share has declined over the period, dropping below 10% since 1996

and reaching 4% in 2016. Furthermore, Switzerland and the United Kingdom are not major

participants in the US Treasury market. Of the investors we are not able to study, hedge

funds and pensions/retirement funds are the two investor groups that may trade along the

Hanson (2014) and Malkhozov et al. (2016) models. However, although these two investor

groups held almost 25% of the Agency MBS market (including households and non prot

organizations) in the late 1990s, post crisis their share has fallen below 10%

This dissertation addresses various aspects of asset pricing theory in the following three contexts: the case of insider trading (of stocks) with uninformed biased traders, the case of trading of real options (specifically, of the option to sell a real indivisible asset), and the case of house pricing and construction of better house price indices.

Chapter 1 examines the effects of insider trading on uninformed traders with bounded rationality in the context of a continuous-time Kyle-type model with a single perfectly informed risk-neutral agent (insider), a competitive risk-neutral market maker and a set of biased uninformed traders.

Two cases of behavioral biases or bounded rationality on the part of the uninformed traders are considered. In the first case the uninformed traders' order flow has a non-zero covariation with a set of public signals (where positive covariation describes aggregate momentum strategies among the uninformed investors in reaction to news, while negative covariation indicates that the uninformed traders are predominantly contrarians). In the second case, the order flow from the uninformed traders has a strictly positive or a strictly negative covariance between its increments and is no longer Markov.

The equilibrium strategy of the insider, taking into account such biases, is derived in both cases and the

effects of the biases on the equilibrium price of the underlying asset are considered. The question of whether such biases benefit or harm the uninformed traders is answered.

In Chapter 2 a class of mixed stochastic control/optimal stopping problems arising in the problem of finding the best time to sell an indivisible real asset, owned by a risk averse utility maximizing

agent, is considered. The agent has power type utility based on the $\ell_{\alpha}$-type aggregator and has access to a frictionless financial market which can be used to partially hedge the risk associated with the real asset if correlations between the financial assets and the real asset value are nonzero. The solution to the problem of finding the optimal time to sell the real asset is characterized in terms of solution to a certain free boundary problem. The latter involves a nonlinear partial differential

equation and includes, as special case with $\alpha=1$, the Hamilton-Jacobi-Bellman equation found in {Evans, Henderson, Hobson, 2008}. Comparisons with the case of exponential utility are also given.

Due to lack of data, the U.S. primarily uses repeat-sales indices to measure real-estate returns, despite the serious shortcomings of these indices. Making use of a newly available data set that contains both time-varying characteristics for all properties in the U.S. and transaction details for those properties that traded, in Chapter 3 a new hedonic house-price index is developed that overcomes these shortcomings by allowing house prices and returns to depend on house characteristics and on local and national macroeconomic factors. The index is estimated using Markov Chain Monte Carlo (MCMC) linear filtering techniques and results in significant differences, in both the level and volatility of prices, between the new estimates and those from the Federal Housing Finance Board's weighted-repeat-sales (WRS) price index. This suggests that the new index is significantly superior to repeat-sales indices as a measure of U.S. real-estate returns for economic forecasting, mortgage valuation, and bank stress tests.

This dissertation consists of three chapters that concern the housing market and home prices. The first chapter analyzes why foreclosures were more prevalent than short sales despite the advantages that short sales offered. The Great Recession led to widespread mortgage defaults, with borrowers resorting to both foreclosures and short sales to resolve their defaults. I first quantify the economic impact of foreclosures relative to short sales by comparing the home price implications of both. After accounting for omitted variable bias, I find that homes selling as a short sale transact at 8.5% higher prices on average than those that sell after foreclosure. Short sales also exert smaller negative externalities than foreclosures, with one short sale decreasing nearby property values by one percentage point less than a foreclosure. So why weren't short sales more prevalent? These home-price benefits did not increase the prevalence of short sales because free rents during foreclosures caused more borrowers to select foreclosures, even though higher advances led servicers to prefer more short sales. In states with longer foreclosure timelines, the benefits from foreclosures increased for borrowers, so short sales were less utilized. I find that one standard deviation increase in the average length of the foreclosure process decreased the short sale share by 0.35-0.45 standard deviation. My results suggest that policies that increase the relative attractiveness of short sales could help stabilize distressed housing markets.

The second chapter analyzes how the housing market captures the efficiency of public goods. This chapter is co-authored with David Schönholzer. In the U.S., 36 million people live in unincorporated communities without separate municipal government, instead receiving limited local public goods by counties and special districts. This paper formalizes and empirically quantifies the extent of sorting induced by this arrangement of local governance. Based on predictions of a Tiebout model with heterogeneous income and preferences, we document the effect of municipal governance on housing supply, house prices, land prices, and public goods. We use a boundary discontinuity design and an event study design with administrative data from all boundary changes of 189 Californian cities, combined with the universe of individual property sales over the years 1988-2013. We find considerable sorting induced by municipal boundaries and their changes: sales prices are around $6,000 higher in municipalities and land values are 20% higher. Both housing supply and land values increase substantially after annexation. Changes in per capita expenditures and increases in the quality of police services provide suggestive evidence for public goods as the key mechanism for sorting.

The third chapter analyzes the effects of real estate investments by foreign Chinese on local economies in the United States. This chapter is co-authored with Zhimin Li and Leslie Sheng Shen. Starting in 2007, the U.S. witnessed an unprecedented surge in housing purchases by foreign Chinese. We exploit cross-local-area variation in the concentration of Chinese population stemming from pre-sample period differences in Chinese population settlement to identify the economic effects of these investments. Using detailed transaction-level housing purchase data, we find housing investment by foreigners induces higher local area housing net wealth, leading to higher local employment in the non-tradable sectors. Our results suggest the improvement in household balance sheet resulting from capital inflow for housing investment in the U.S. played a mitigating role for the domestic economy during the Great Recession. Based on our empirical findings, we develop a framework that incorporates the housing net worth channel for interpreting the empirical estimates. Our evidence highlight the role of capital inflow and foreign investments on the domestic output and employment, especially in times of economic downturns.