Download or read book Essays on Amplification Mechanisms in Financial Markets written by Marco Di Maggio and published by . This book was released on 2013 with total page 195 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Chapter 1, I explore how speculators can destabilize financial markets by amplifying negative shocks in periods of market turmoil, and confirm the main predictions of the theoretical analysis using data on money market funds (MMFs). I propose a dynamic trading model with two types of investors - long-term and speculative - who interact in a market with search frictions. During periods of turmoil created by an uncertainty shock, speculators react to declining asset prices by liquidating their holdings in hopes of buying them back later at a gain, despite the asset's cash flows remaining the same throughout. Interestingly, I show that a reduction in trading frictions leads to more severe fluctuations in asset prices. At the root of this result are the strategic complementarities between speculators expected to follow similar strategies in the future. Using a novel dataset on MMFs' portfolio holdings during the European debt crisis, I gauge the strength of funds' strategic interactions as the number of funding relationships each issuer has with MMFs. I show that funds are more likely to liquidate the securities of issuers that have fewer funding relationships with other funds, obliging them to borrow at shorter maturity and higher interest rates. In Chapter 2, co-authored with Marco Pagano, I study a model where some investors ("hedgers") are bad at information processing, while others ("speculators") have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators' trades more visible to hedgers. As a consequence, asset sellers will oppose both the disclosure of fundamentals and trading transparency. This is socially inefficient if a large fraction of market participants are speculators and hedgers have low processing costs. But in these circumstances, forbidding hedgers' access to the market may dominate mandatory disclosure. In Chapter 3, I show that reputation concerns are important sources of discipline for institutional investors, but their effectiveness varies along the business cycle. I propose a dynamic model of reputation formation in which investors learn about fund managers' skill upon observing past returns. Managers can generate active returns at a disutility and determine the fund's exposure to tail risk. The model delivers rich dynamics for managers' behavior. Good reputation managers exploit their status by extracting higher rents from investors, while intermediate reputation managers tend to improve their returns to attract more funds. Finally, for bad performers there exists a reputation trap: their perceived low quality prevents them from attracting investors' capital and then also from improving their track record. Furthermore, when the economy is subject to aggregate shocks, fund managers tend to exacerbate fluctuations by exposing the fund to tail risk to increase short-term returns. The model provides a framework to analyze the investment strategies adopted by mutual funds and hedge funds during the recent financial crisis.

Download or read book Essays in Financial Economics written by and published by . This book was released on 2014 with total page 96 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation sets theme to point out the importance of disaggregated data in financial economic research. The main chapter of the dissertation uses Thailand as a case study to analyze impacts of a monetary policy shock on rural economies, in which households have limited access to formal financial markets. We find large effects, both real and financial, on the rural households, which imply existence of monetary policy transmitting channels other than the traditional interest-rate and credit channels through a formal financial system. More importantly, our results show that shallow financial markets in the rural economies actually help amplify the real effects of a contractionary monetary policy shock, because households cannot borrow against such shock. In addition, we document heterogeneous effects of a tightening monetary policy shock across provinces and occupational activities. For better insight to monetary policy transmission mechanism, hence, microeconomic data are imperative inputs for investigating effects of monetary policy at disaggregated levels, which can be different from overall macroeconomic impacts. The other part of the dissertation provides a survey of recent literature related to financial flow of funds among sectors within an economy and discusses possible improvement on flow of funds data and research.

Download or read book Essays on Fiscal and Macro prudential Policies with Credit Market Frictions written by Sofia Kalantzi and published by . This book was released on 2016 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation focuses on how fiscal, and macro-prudential policies interact with financial market frictions. In particular, it addresses some of the key facts of the recent global financial crisis and provides an intuition of why different policies were implemented by many countries in order to mitigate the adverse effects of the financial crisis and how those policies are transmitted in the presence of financial market imperfections. This dissertation opens the discussion of the different welfare implications of alternative policies that seek to stabilize the economy as well as their different real effects in the economy. The dissertation consists of three main chapters. In the first chapter I document empirically a negative relationship between shocks to government spending and credit spreads. Using a SVAR methodology on US data, I show that after a positive shock to government spending, credit spreads drop up to 14 basis points. The analysis shows that it is in particular government investment that has a negative effect on the spreads as opposed to government consumption. Given this empirical evidence, in the second chapter, I examine the interaction between productivity-enhancing government spending and credit spreads. In the context of a costly state verification framework, increased borrowing to expand production increases the threshold productivity level below which firms choose to default, and thus, entails higher risk premium. However, when government spending contributes to aggregate production, the threshold level of default and, thus, the probability of default, decrease, leading to a lower risk premium. In the last chapter I address two main questions: how does the economy respond in a crisis experiment when credit frictions originate from both the supply-side and the demand-side of credit markets? How are alternative unconventional credit policies different in their real effects in an environment where both types of credit frictions are present? I show that higher aggregate risk results in increased leverage for both firms and financial intermediaries, leading to an endogenous amplification mechanism which appears much stronger than what predicted by the benchmark financial accelerator framework. Furthermore, I find that, following a severe recession, a credit policy entailing equity injections into the banking system performs better than one involving direct lending to non-financial firms.

Download or read book Essays on Financial Markets with Frictions written by Mark Victor Loewenstein and published by . This book was released on 1996 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Frictions in Financial Markets written by Yifei Wang and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Liquidity in Financial Markets written by Pierre-Olivier Weill and published by . This book was released on 2004 with total page 358 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Two Essays on Signaling in Financial Markets written by Kartik Raman and published by . This book was released on 1998 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Macroeconomics written by Vladimir A. Asriyan and published by . This book was released on 2014 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: The research presented in this dissertation has been motivated by the Great Recession that has shown us once again how the financial system can amplify and propagate relatively mild economic shocks into larger scale recessions. In the past decade, we witnessed what many may call the worst crisis since the Great Depression that appears to have resulted from a perverse interaction between real estate markets and borrowers' balance sheets. The three chapters of this dissertation are an attempt to shed light on the mechanisms that may have allowed for such perverse effects to arise. I believe that to understand crisis episodes such as the recent one, it is imperative to study why some economic agents become overly exposed to risk, why financial markets fail to function at times, and what policy makers can do to ameliorate the incidence and repercussions of such adverse events. In Chapter 1, "A Theory of Balance Sheet Recessions with Informational and Trading Frictions," I propose a novel theory to rationalize the limited risk-sharing that drives balance sheet recessions as a result of informational and trading frictions in financial markets. I show that borrowers and creditors will find it costly to share macroeconomic risk in environments where creditors value the liquidity of financial claims but where information about the future states of the economy is dispersed and the secondary markets for financial claims feature search frictions. As a result, borrowers will optimally choose to retain disproportionate exposures to macroeconomic risk on their balance sheets, and adverse shocks will be amplified through the balance sheet channel. I show that the magnitude of this amplification becomes closely linked to the level of information dispersion and the severity of search frictions in financial markets. In this setting, I study the implications of the theory for macro-prudential regulation and find that subsidizing contingent write-downs of borrowers' liabilities can be welfare improving. In Chapter 2, "Informed Intermediation over the Cycle," a joint work with Victoria Vanasco, we construct a dynamic model of financial intermediation in which changes in the information held by financial intermediaries generate asymmetric credit cycles as the ones documented by Reinhart and Reinhart (2010). We model financial intermediaries as "expert'' agents who have a unique ability to acquire information about firm fundamentals. While the level of "expertise'' in the economy grows in tandem with information that the "experts'' possess, the gains from intermediation are hindered by informational asymmetries. We find the optimal financial contracts and show that the economy inherits not only the dynamic nature of information flow, but also the interaction of information with the contractual setting. We introduce a cyclical component to information by supposing that the fundamentals about which experts acquire information are stochastic. While persistence of fundamentals is essential for information to be valuable, their randomness acts as an opposing force and diminishes the value of expert learning. Our setting then features economic fluctuations due to waves of "confidence'' in the intermediaries' ability to allocate funds profitably. In Chapter 3, "Credit Crises, Liquidity Traps, and Demand Externalities," I extend the work of Eggertsson and Krugman (2012) to study welfare implications of households' consumption-saving decisions in New Keynesian economies with incomplete asset markets. My contribution is to show that due to aggregate demand externalities the amount of debt pre-contracted in such economies is generally excessive, and that the amount of "over-borrowing" is increasing in the Central Banker's inflation-aversion. This externality arises because an individual household does not internalize its contribution to the overall fragility as the latter is only a function of aggregate indebtedness of all borrowers. These findings suggest that macro-prudential policies geared towards limiting household leverage can indeed be welfare improving.

Download or read book The Predictive Power of Financial Markets written by Heli Kortela and published by . This book was released on 2006 with total page 111 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book ESSAYS in Lending Frictions The Labor Market and Monetary Policy written by and published by . This book was released on 2015 with total page 232 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Great Recession of 2008-09 in the U.S. was characterized by high and persistent unemployment and lack of bank lending due to liquidity issues. The recession was preceded by a housing crisis that quickly spread to the banking and broader financial sectors. We attempt to account for the depth and persistence of unemployment by considering the relationship between credit and firm hiring explicitly. To do so, we introduce search and matching frictions to characterize the dynamics of credit markets in a series of macroeconomic models that present different types of distortions in the labor market as well as in the interbank market. We obtain a novel propagation and amplification mechanism of a financial crisis associated to an inefficiency wedge that affects the aggregate production function of the economy and depends directly on credit conditions.

Download or read book Essays on the Law of One Price in Financial Markets and the Recent Financial Crisis written by Igor Sorkin and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on the Linkages Between Financial Markets and Risk Asymmetries written by Jan Antell and published by . This book was released on 2004 with total page 145 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in the Us Dollar Dominated International Financial Market written by Zefeng Chen and published by . This book was released on 2021 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies a special feature about the international financial market. Classical theories often assume that countries are symmetric, but realistically the international financial market is heavily US dollar dominated, which stimulates my interest to study whether this role of the US dollar can resolve numerous puzzles that classical theories are unable to reconcile with empirical facts, as well as to study policy implications. The role of the US in the international market is mainly unique in two aspects. First, the US dollar is the dominant currency used in international trade. Second, the US treasuries are considered as the most widely accepted safe assets. In this dissertation, the first two chapters study the safe asset role, and the third chapter explores the invoicing currency role. The first chapters analyzes the phenomenon called the US 'Exorbitant Privilege', which describes the fact that the US is the only large net borrower country in the world earning a positive net investment income. To rationalize this phenomenon, I propose a different theory about the role of US in the international financial system being a service provider, in contrast to the conventional view of an insurance provider, which predicts the US exorbitant privilege would vanish during the financial crisis, not supported by data. I build a two-country model with financial friction to explain the dynamics of the US external balance sheet and the dollar exchange rate. In the model, world financial intermediaries demand US safe assets for their convenience value, but US intermediaries do not demand foreign safe assets. Under an aggregate symmetric financial shock, the rest of the world buys more safe assets from the US despite a rise in convenience yield, the dollar appreciates, and the US takes advantage by buying more equities from the rest of the world at a low price. I show my mechanism can quantitatively explain the data, while a real shock triggering risk-sharing dynamic cannot. The second chapter is a paper completed with coauthors Shanaka J. Peiris and Sanaa Nadeem from the IMF. We take a perspective from Asian small open economies against external shocks driven by the US dollar. We focus on the banking sectors in those economics because in emerging Asia banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy.

Download or read book Three Essays on Financial Markets and Monetary Policy written by Conglin Xu and published by . This book was released on 2011 with total page 258 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on the Consequences of Financial Market Frictions written by Andrada Bilan and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Financial Econometrics and Empirical Market Microstructure written by Anil K. Bera and published by Springer. This book was released on 2014-11-18 with total page 282 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the era of Big Data our society is given the unique opportunity to understand the inner dynamics and behavior of complex socio-economic systems. Advances in the availability of very large databases, in capabilities for massive data mining, as well as progress in complex systems theory, multi-agent simulation and computational social science open the possibility of modeling phenomena never before successfully achieved. This contributed volume from the Perm Winter School address the problems of the mechanisms and statistics of the socio-economics system evolution with a focus on financial markets powered by the high-frequency data analysis. ​

Download or read book Handbook of the Economics of Finance written by George M. Constantinides and published by Newnes. This book was released on 2013-02-08 with total page 859 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the 11 articles in this first of two parts, top scholars summarize and analyze recent scholarship in corporate finance. Covering subjects from corporate taxes to behavioral corporate finance and econometric issues, their articles reveal how specializations resonate with each other and indicate likely directions for future research. By including both established and emerging topics, Volume 2 will have the same long shelf life and high citations that characterize Volume 1 (2003). Presents coherent summaries of major finance fields, marking important advances and revisions Describes the best corporate finance research created about the 2008 financial crises Exposes readers to a wide range of subjects described and analyzed by the best scholars