242 research outputs found
Replication Data for "A Model of Endogenous Risk Intolerance and LSAPs: Asset Prices and Aggregate Demand in a "Covid-19" Shock?"
No full textThis repository contains the code to replicate the figures in "A Model of Endogenous Risk Intolerance and LSAPs: Asset Prices and Aggregate Demand in a "Covid-19" Shock?" by Ricardo Caballero and Alp Simsek (2021). Please start by reading ReadMe.pdf
Speculation and Risk Sharing with New Financial Assets
No full textI investigate the effect of financial innovation on portfolio risks when traders have belief disagreements. I decompose traders’ average portfolio risks into two components: the uninsurable variance, defined as portfolio risks that would obtain without belief disagreements, and the speculative variance, defined as portfolio risks that result from speculation. My main result shows that financial innovation always increases the speculative variance through two distinct channels: by generating new bets and by amplifying traders’ existing bets. When disagreements are large, these effects are sufficiently strong that financial innovation increases average portfolio risks, decreases average portfolio comovements, and generates greater speculative trading volume relative to risk-sharing volume. Moreover, a profit-seeking market maker endogenously introduces speculative assets that increase average portfolio risks
Financial Innovation and Portfolio Risks
No full textI illustrate the effect of financial innovation on portfolio risks by using an example with risk-sharing needs and belief disagreements. I consider two types of innovation: product innovation, formalized as an expansion of new financial assets; and process innovation, formalized as a reduction in transaction costs. When belief disagreements are large, both types of innovation increase portfolio risks. Moreover, endogenous financial innovation is directed towards speculative assets that increase portfolio risks
Liquidity Trap and Excessive Leverage
No full textWe investigate the role of macroprudential policies in mitigating liquidity traps. When constrained households engage in deleveraging, the interest rate needs to fall to induce unconstrained households to pick up the decline in aggregate demand. If the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In this environment, households' ex ante leverage and insurance decisions are associated with aggregate demand externalities. Welfare can be improved with macroprudential policies targeted toward reducing leverage. Interest rate policy is inferior to macroprudential policies in dealing with excessive leverage.International Monetary FundCentre for International Governance Innovation (CIGI)Institute for New Economic Thinking (INET
A Welfare Criterion For Models With Distorted Beliefs
No full textThis article proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on whose belief is correct, our criterion asserts that an allocation is belief-neutral efficient (inefficient) if it is efficient (inefficient) under any convex combination of agents’ beliefs. Although this criterion gives an incomplete ranking of social allocations, it can identify positive- and negative-sum speculation driven by conflicting beliefs in a broad range of economic environments
Replication Data for: 'A Risk-Centric Model of Demand Recessions and Speculation'
No full textThe data and programs replicate tables and figures from "A Risk-Centric Model of Demand Recessions and Speculation", by Caballero and Simsek. Please see the Readme file for additional details
Reach for Yield and Fickle Capital Flows
No full textIn Caballero and Simsek (2017), we develop a model of fickle capital flows and show that, when countries are similar, international flows create global liquidity and mitigate crises despite their fickleness. In this paper, we focus on the asymmetric situation of Emerging Markets (EM) exchanging flows with Developed Markets (DM) that feature lower returns but less frequent crises. Relatively high DM returns help to mitigate EM crises by reducing fickle inflows and by providing greater liquidity. The situation dramatically changes as the DM returns fall, as this increases the fickle inflows driven by reach for yield and exacerbates EM crises
Topology of soft cone metric spaces
No full textInternational Conference on Functional Analysis in Interdisciplinary Applications (FAIA) -- OCT 02-05, 2017 -- Astana, KAZAKHSTANIn Simsek's paper it was introduced a concept of soft cone metric space via soft elements and some fixed point theorems in soft cone metric space were provided. In this work, we examine topological structures such as open ball, soft neighbourhood and soft open set in soft metric spaces and their some properties, and prove that every soft cone metric space under some condition is a soft topological space according to elementary operations on soft sets.Kyrgyz Turkish Manas University [KTMUBAP-2016.FBE.12]This work is supported by Kyrgyz Turkish Manas University in the framework of Scientific Research Projects (KTMUBAP-2016.FBE.12)
Essays on uncertainty in macroeconomics and finance
No full textThesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2010."June 2010." Cataloged from PDF version of thesis.Includes bibliographical references (p. 235-244).This thesis consists of four essays about "uncertainty" and how markets deal with it. Uncertainty is about subjective beliefs, and thus it often comes with heterogeneous beliefs that may be present temporarily or even forever. The first essay analyzes the effect of uncertainty, and the associated belief heterogeneity, on financial contracts and asset prices. I assume that optimists have limited wealth and take on leverage in order to take positions in line with their beliefs. To have a significant effect on asset prices, they need to borrow from traders with moderate beliefs using loans collateralized by the asset itself. Since moderate lenders do not value the collateral as much as optimists do, they are reluctant to lend, which provides an endogenous constraint on optimists' ability to leverage and to influence asset prices. I demonstrate that optimism is asymmetrically disciplined by this constraint, in the sense that optimism concerning the likelihood of bad events has no or little effect on asset prices, while optimism concerning the relative likelihood of good events could have significant effects. This result emphasizes that what investors disagree about matters for asset prices, to a greater extent than the level of disagreement. New financial assets are often associated with much uncertainty and belief heterogeneity, especially because they do not have a long track record. While the traditional view of financial innovation emphasizes the risk sharing role of new assets, belief heterogeneity about these assets naturally leads to speculation, which represents a powerful economic force in the opposite direction. The second essay analyzes the effect of financial innovation on the allocation of risks when both the risk sharing and the speculation forces are present. I demonstrate that speculation on new assets is amplified by the hedge-more/bet-more effect: Traders make bets on new assets which they then hedge by taking complementary positions on existing assets, which in turn enables them to place larger bets and take on greater risks. This effect suggests that, as asset markets get more complete, they become more susceptible to speculation and further financial innovation is more likely to be destabilizing. The third essay, joint with Ricardo Caballero, concerns the sources of uncertainty. We present a model in which uncertainty suddenly and endogenously rises in response to an increase in the complexity of the economic environment. In our model, banks normally collect information about their trading partners which assures them of the soundness of these relationships. However, when acute financial distress emerges in parts of the financial network, it is not enough to be informed about these partners, as it also becomes important to learn about the health of their trading partners. As conditions continue to deteriorate, banks must(cont.) learn about the health of the trading partners of the trading partners of the trading partners, and so on. At some point, the cost of information gathering becomes too unmanageable for banks, uncertainty spikes, and they have no option but to withdraw from loan commitments and illiquid positions. A flight-to-quality ensues, and the financial crisis spreads. The fourth essay, joint with Daron Acemoglu, analyzes the effect of uncertainty of a special kind, that involves economic agents' private actions and anonymous market transactions, on the functioning and efficiency of competitive markets. Despite a sizeable literature, how competitive markets deal with this type of uncertainty remains unclear. A "folk theorem" originating, among others, in the work of Stiglitz maintains that competitive equilibria are always or "generically" inefficient (unless contracts directly specify consumption levels as in Prescott and Townsend, thus bypassing trading in anonymous markets). This essay critically reevaluates these claims in the context of a general equilibrium economy with moral hazard. Our results delineate a range of benchmark situations in which equilibria have very strong optimality properties. They also suggest that considerable care is necessary in invoking the folk theorem about the inefficiency of competitive equilibria with private information.by Alp Simsek.Ph.D
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