1,721,095 research outputs found
On the Equivalence of Private and Public Money
Full text linkWhen does a swap between private and public money leave the equilibrium allocation and price system unchanged? To answer this question, the paper sets up a generic model of money and liquidity which identifies sources of seignorage rents and liquidity bubbles. We derive sufficient conditions for equivalence and apply them in the context of the “Chicago Plan”, cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). Our results imply that CBDC coupled with central bank pass-through funding need not imply a credit crunch nor undermine financial stability
ESBies: safety in the tranches
Full text linkThe euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies — diversification and seniority — can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities
Three Essays in Financial Economics
No full textThis dissertation is comprised of three chapters that cover topics in corporate finance, behavioral finance, and financial economics. In ``Managing Human Capital Risk,'' I argue that adjustment costs and firm-specific human capital make labor behave like an asset of the firm, rather than like an externally supplied service ``flow,'' as extant work suggests. I provide empirical support by showing that firms manage human capital risk similar to the way they manage risk from physical assets. In response to an exogenous increase of labor adjustment costs, firms reduce leverage and increase the liquidity of their on-balance sheet asset structure.
``Anxiety and Overconfidence in the Face of Risk,'' joint with Thomas Eisenbach, is the first attempt in the literature to study dynamically inconsistent preferences with respect to risk tradeoffs. We show that higher risk-aversion for more imminent risks can explain a set of well-documented asset pricing patterns, such as earnings announcement anomalies, as well as systematic belief distortions, such as the underestimation of risks known as overconfidence.
``Revealing Downturns,'' joint with Sergey Zhuk, presents a model of Bayesian learning about multiple parameters of firms' fundamentals. We show that the market can better tell apart components of operating performance due to idiosyncratic ``goodness'' or skill from correlation with market-wide factors when the macroeconomy declines. Therefore, stock picking earns higher returns and boards tend to fire CEOs more frequently in downturns rather than in upturns
Essays in Financial Economics
No full textThis dissertation studies the interaction between the financial sector and real economy. The first chapter develops a parsimonious continuous time model to study the role of endogenously varying financial competition during periods of crisis. Our analysis provides strong support for ¿bad bank¿ solutions among similarly targeted government interventions. The second chapter characterizes the connection between two strongly related frictions for financial firms: the principal-agent conflict with their collateral managers, and the asymmetric information problem affecting their collateral portfolios. Solving the principal-agent conflict requires banks to pledge away payoffs to prevent shirking¿however, pledging away these payoffs provides a debt-like structure that incentivizes banks to unload high quality assets. These transactions exacerbate the quality of banks¿ collateral portfolios, especially during times of crisis. The third chapter, co-authored with Jeong-Ho Kim, provides an empirical analysis of the unintended consequences of quantitative easing and low interest rate policy. Specifically, we find that conditions in the wealth management industry interacted strongly with low-interest rates to provide incentives for mutual funds to ¿reach for yield¿ by taking on greater risk
Essays in Financial Economics
No full textThis dissertation contains three essays that study liquidity crises and financial system stability.
The first chapter studies a model of systemic panic among heterogeneously leveraged financial institutions. Concerns about potential spillovers from each other generate strategic interactions among institutions and bring self-fulfilling panic. I show that systemic risk critically depends on the financial health of stronger institutions (less leveraged) in the contagion chain, although financial contagion originates in weaker institutions. My analysis highlights the striking contrast between macroprudential and non-systemic regulatory approaches yielding novel policy implications. Systemic stability can be enhanced by making the institutions more heterogeneous, and bolstering the strong institutions in the contagion chain, rather than the weak, more effectively contains systemic panic.
The second chapter studies a model of a credit crunch (an interbank market freeze) in which risk sharing among banks exacerbates financial fragility. Banks that wish to borrow with liquidity shortages may have to pay extra cost of credit if lenders have a better investment opportunity; collecting fire-sale assets at cheap price from the distressed banks. They thus have to compensate the lender for this outside option in order to borrow. With risk sharing among the banks, this option value can become more sensitive to aggregate uncertainty fluctuations since joint distress arises and the lender anticipates large price discounts. Credit costs and aggregate output can become more volatile, and credit rationing more likely with risk sharing.
The third chapter studies feedback between asset market distress and money market distress. The market clearing asset price can act as a public signal from which agents can extract information about the asset fundamental. As the asset price drops, the creditors in the money market become concerned and less willing to lend. This distress in the money market forces financial institutions to liquidate their assets in the asset market, and the asset price becomes even lower, generating vicious cycle between the two markets. I combine noisy rational expectation equilibrium setup and global game setup to characterize this feedback. The asset price volatility becomes larger as the economic fundamental deteriorates, and the asset price distribution becomes negatively skewed
Essays on Liquidity, Information, and Macroeconomics
No full textChapter 1 proposes a theory of credit cycles driven by the private production of opaque, liquid assets (e.g., ABS or CLOs). Opacity enhances assets' liquidity, permitting greater issuance volumes, but prevents investors from determining whether the underlying projects are of low quality. Strong macroeconomic fundamentals give rise to credit booms characterized by opaque asset origination and pervasive credit misallocation. As bad projects build up in the economy, investors begin to question the value of opaque assets and eventually refuse to finance them altogether, precipitating a collapse in investment. The bust has a cleansing effect: opaque origination is abandoned, and investors no longer finance projects whose quality they cannot evaluate. I show that a policymaker would limit opaque intermediation during booms in order to moderate the subsequent bust.
Chapter 2 presents a model in which agents with heterogeneous beliefs borrow by using a physical asset and the liabilities of other agents as collateral. In equilibrium, a chain of lending emerges: each agent lends to the next-most optimistic agent and borrows from the next-most pessimistic agent. Intermediation allows optimists to lever up while pessimists invest in safe assets. In extensions of the benchmark model, I examine the implications of this arrangement for financial stability and relate the model's predictions to stylized facts.
Chapter 3, which was co-authored with Markus Brunnermeier, develops a model of digital record-keeping. Traditional centralized record-keeping systems establish a consensus based on trust in the record-keeper. Trust arises from the ability to incentivize honest reporting. Rents extracted by the record-keeper create an internal source of trust, allowing the system to be self-sufficient. Blockchains decentralize record-keeping, dispensing with the need for trust in a single entity. Some build a consensus based on externally verifiable resource costs (proof-of-work), whereas others do not (proof-of-stake). We prove a Blockchain Trilemma: it is impossible for any digital record-keeping system to simultaneously be (i) self-sufficient, (ii) rent-free, and (iii) resource-efficient. Record-keeping systems without rents or resource costs must ultimately rely on some external source of trust
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