Download or read book Essays on Financial Intermediation in a Dynamic Setting written by Ronaldo Carpio and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The financial crisis of 2007-2009 demonstrated that financial intermediaries play a critical, if not yet well-understood, role in the economy. However, our theoretical understanding of what intermediaries do is currently incomplete. The papers in this dissertation seek to improve our theoretical knowledge by introducing models that explicitly capture the activities of a financial intermediary in a dynamic setting. The first paper tackles two fundamental theoretical questions about banks. The first question seems simple but is still unresolved: how should we model a banking firm? We develop a dynamic model of a banking firm based on the notion of banking as the inventory management of cash. A bank that makes loans and takes deposits is a dynamic, stochastic inventory management problem. The second question is an old issue that has again become relevant in the wake of the financial crisis: why do banks engage in maturity mismatch, the process of "borrowing short and lending long". We show how profit-maximizing behavior in an inventory management model can result in maturity mismatch. We present the dynamic model, solve it numerically, and use simulation to predict the bank's behavior in different environments. A limitation of this model is that interest rates and the supply of deposits are taken as exogenous. The second paper endogenizes these quantities for a simple model of an inventory-theoretic financial firm, a Ponzi scheme. As with an ordinary monopolistic firm, the "bank" faces a demand schedule and chooses the price it offers; here, the price is the interest rate, and demand is generated by an OLG population that chooses to borrow or lend using standard models of savings and portfolio choice. In this way we seek to endogenize interest rates, quantities of credit, and financial risk. An issue that arises in dynamic optimization models such as the ones above is that analytic solutions are rare and we must resort to numerical computation, Standard methods of solving dynamic programming problems are computationally expensive; the third paper presents two promising approaches that can potentially provide dramatic speedups in speed. The first method is based on pre-computing the inverse gradient and Lagrange multipliers of a known utility function; subsequent calls can simply look up the pre-computed maximizers, instead of having to call a numeric root-finding routine each time. The second method exploits the duality between concave functions and their Legendre-Fenchel transforms. The Bellman operator in primal space is isomorphic to a tractable scaling and addition operation in dual space. In special cases, we can obtain the value function of the solution in closed form; even when we cannot obtain a closed form solution, we can gain theoretical insight into the properties of the solution.

Download or read book Essays on Financial Intermediation written by Igor Salitskiy and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three studies. In the first study I This paper extends the costly state verification model from Townsend (1979) to a dynamic and hierarchical setting with an investor, a financial intermediary, and an entrepreneur. Such a hierarchy is natural in a setting where the intermediary has special monitoring skills. This setting yields a theory of seniority and dynamic control: it explains why investors are usually given the highest priority on projects' assets, financial intermediaries have middle priority and entrepreneurs have the lowest priority; it also explains why more cash flow and control rights are allocated to financial intermediaries if a project's performance is bad and to entrepreneurs if it is good. I show that the optimal contracts can be replicated with debt and equity. If the project requires a series of investments until it can be sold to outsiders, the entrepreneur sells preferred stock (a combination of debt and equity) each time additional financing is needed. If the project generates a series of positive payoffs, the entrepreneur sells a combination of short-term and long-term debt. In the second study I I study optimal government interventions during asset fire sales by banks. Fire sales happen when a large portion of banks receive liquidity shocks. This depletes bank balance sheets directly and indirectly because these assets are used as collateral. The government can respond by buying distressed assets or buying stock from banks. Stock purchases do not deprive banks of collateral, but may have a lower effect on asset prices. The optimal policy depends on the elasticity of asset prices to asset supply and the amount of assets held by banks. Calibration to the recent financial crisis is provided. In the third study conducted with Attila Ambrus and Eric Chaney we use ransom prices and time to ransom for over 10,000 captives rescued from two Barbary strongholds to investigate the empirical relevance of dynamic bargaining models with one-sided asymmetric information in ransoming settings. We observe both multiple negotiations that were ex ante similar from the uninformed party's (seller's) point of view, and information that only the buyer knew. Through reduced-form analysis, we test some common qualitative predictions of dynamic bargaining models. We also structurally estimate the model in Cramton (1991) to compare negotiations in different Barbary strongholds. Our estimates suggest that the historical bargaining institutions were remarkably efficient, despite the presence of substantial asymmetric information.

Download or read book Essays on Financial Dynamic Optimization Under Uncertainty written by Gerhard Hambusch and published by ProQuest. This book was released on 2008 with total page 306 pages. Available in PDF, EPUB and Kindle. Book excerpt: The field of financial optimization combines financial valuation approaches and economic optimization models. Most applications are characterized by dynamic settings where decisions over time are subject to many facets of uncertainty. Characterizing optimal decision making in these settings is of upmost importance in many areas of economic policy. The purpose of this research is to investigate economic policy issues in natural resource management and banking regulation through the application of methods of financial dynamic optimization under uncertainty in three essays: The first essay develops a general optimal stopping real option model for the management of mean reverting losses subject to stochastic jumps as an American call option. The model is numerically solved using the explicit finite difference method and provides comparative static results that reveal an important relationship between the two process parameters long run mean level of losses and speed of mean reversion which influence the termination value and therefore, the optimal stopping results. The second essay applies the optimal stopping real option model developed in the first essay as an environmental control investment analysis tool to manage uncertain future invasive species damages. Based on application size, control strategy, and level of control effectiveness, separate policy menus are developed that provide optimal investment rules by reporting critical invader damage, real option, and time values for five selected scenarios. The analysis demonstrates the effects of different control strategy levers and reveals that negative skewness of the jump distribution has an effect on the policy results. The third essay analyzes the impact of capital requirement regulation on the risk taking behavior of value maximizing banks using a financial intermediation model. The paper investigates four cases of intertemporal effects of capital regulation on risk choices when banks face different regulatory conditions. The results reveal differences in a bank's risk taking behavior based on profit, multiplier, and leverage effects. The interrelationship of retention rate, discount factor, and risky asset return has important implications for first and/or second best regulation. An optimal regulation rule is derived and three alternative regulation tools are characterized.

Download or read book Essays on Financial Intermediation and Development written by Gabriel De Abreu Madeira and published by . This book was released on 2007 with total page 270 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis applies contract theory to topics of financial intermediation. Chapter 1 studies the effects of imperfect legal enforcement on optimal project financing contracts. It departs from an environment that combines asymmetric information about cash flows and limited commitment by borrowers. Incentive for repayment comes from the possibility of liquidation of projects by a court, but courts are costly and may fail to liquidate. These ingredients make it possible to evaluate how interest rates and amounts of credit respond jointly to variations in the reliability of courts. Examples reveal that costly use of courts may be optimal, but both asymmetric information and uncertainty about courts are necessary conditions for legal punishments ever to be applied. Numerical solutions for several parameterizations show wealthier individuals borrowing with lower interest rates and running higher scale enterprises, which is consistent with stylized facts. High reliability of courts has a consistently positive effect on investment. However its effect on interest rates is subtler and depends essentially on the degree of curvature of the production function.

Download or read book The Theory of Financial Intermediation written by Bert Scholtens and published by . This book was released on 2003 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Network Games with Incomplete Information with Applications in Finance written by Christian Matthew Leister and published by . This book was released on 2015 with total page 200 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertations includes three (3) chapters, each adding to the growing network games literature that incorporates incomplete information. Financial over-the-counter markets give motivating applications. (1) "Trading Networks and Equilibrium Intermediation" studies the efficiency of trade in networks. A network of intermediaries facilitates exchange between buyers and a seller. Intermediary traders face a private trading cost, a network characterizes the set of feasible transactions, and an auction mechanism sets prices. Stable networks, which are robust to agents' collusive actions, exist when cost uncertainty is acute and multiple, independent trading relationships are valuable. A free-entry process governs the formation of equilibrium networks. Such networks feature too few intermediaries relative to the optimal market organization and they exhibit an asymmetric structure amplifying the shocks experienced by key intermediaries. (2) "Interdealer Trade: Risk, Liquidity, and the role of Market Inventory" further studies traders facing private shocks, placed in a dynamic setting. Trades between ex ante symmetric, inventory carrying intermediaries ("dealers") are motivated by divergent liquidity needs of the counter parties. Market prices and asset flows are pinned by dealers' indifference between providing intermediation services and retaining liquidity to be utilized in subsequent interdealer markets. More active interdealer markets simultaneously increase the value to intermediation and the option-value to providing these services. Under infrequent shocks, interdealer trade boosts the availability of liquidity in the broader market. This boost decays with market inventory, which serves as a constraint on interdealer activity. Through this market mechanism, prices vary inversely with both search frictions between dealers and on their total current holdings. (3) "Information Acquisition and Response in Peer-effects Networks" endogenizes the quality of information that market participants carry in a general peer effects model. When pairwise peer effects are symmetric, asymmetries in acquired information are inefficiently low relative to the utilitarian benchmark. And with information privately acquired, all players face strictly positive gains to overstating their informativeness as to strategically influence the beliefs and behaviors of neighbors. If strategic substitutes in actions are present and significant, low centrality players move against their signals in anticipation of their neighbors' actions. A blueprint for optimal policy design is developed. Applications to market efficiency in financial crises and two-sided markets are discussed.

Download or read book Essays in Financial Intermediation written by Steven Drucker and published by . This book was released on 2005 with total page 304 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Financial Intermediation and Macroeconomic Policy written by Arsenii Olegovich Mishin and published by . This book was released on 2020 with total page 366 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies the role of capital requirements in combating excessive risk-taking incentives of banks in two settings.

Download or read book Essays on Financial Intermediation and Monetary Policy written by Abolfazl Setayesh Valipour and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: My research revolves around financial institutions. In this essay, I aim to further our understandings of the internal workings of financial intermediaries, how they interact in financial networks, and how they affect monetary policy and the macroeconomy. In the first chapter, James Peck and I study a bank run model where the depositors can choose how much to deposit. In the many years and many published articles following the bank runs paper of Diamond and Dybvig (1983), only a few papers have modeled the decision of whether to deposit, much less the decision of how much to deposit. The questions we address here are, how does the opportunity for consumers to invest outside the banking system- in investments that do not provide liquidity insurance- (1) affect the nature of the final allocation, (2) affect the nature of the optimal deposit contract, and (3) affect the fragility of the banking system? We extend the Diamond and Dybvig (1983) model so to incorporate sequential service constraint and the opportunity of outside investments and show that under certain conditions the equilibrium entails partial deposits, thus arguing for the optimality of limited banking. One might think that when depositors are allowed to invest a fraction of their endowments outside the banking system, they would be hedging against the risk of a run occurring, but losing out on some of the services provided by banks. Thus, one might think that this would improve the stability of the financial system at the expense of lost efficiency. However, we show that the opposite could be true, with reduced stability (runs more likely) but higher efficiency! In the second chapter, I study the strategic behavior of heterogeneous banks in a network and its implications on the stability of the financial system. I construct a model alas Allen and Gale (2000) wherein banks differ in whether they are hit by an uninsurable excess liquidity demand. I show that in such a framework banks that are already facing a high liquidity demand are more likely to incur the burden of excess liquidity shocks even when that shock has not directly hit them, i.e. relatively healthier banks strategically pass liquidation costs to relatively less healthy banks. I also show that private bailouts arise endogenously in this framework. If the strategic behavior of a bank results in the other bank's failure, the first bank may choose to incur the burden of the liquidity shock by itself to let the other bank survive and, thus, to control the indirect costs of failure feeding back to its portfolio. I also show that for some economies the financial network becomes more stable as the level of cross-deposits is increased from the minimum level that fully insures banks against liquidity demand uncertainty up to a threshold level. In the third chapter, I study the role of financial intermediaries in the transmission of monetary policy in low interest rate environments. The global financial crisis not only proved our understanding of intermediaries were inaccurate and in many ways misleading but also provided an unprecedented opportunity to investigate the questions in ways that were not possible before. Among those, was the behavior of economic players in ultra-low and even negative market rates. I study the internal workings of intermediaries by exploiting geographical variation in market concentration and provide the first explanation for the gradual deterioration of monetary policy power in low market rates that does not rely on bank-specific characteristics and similarly applies to non-bank intermediaries. I show that- in stark contrast to the textbook view but consistent with my mechanism- in low market rates more concentrated banks respond to market rate falls by reducing their deposit supply as well as their loan supply by more than those of less concentrated banks. I argue this behavior is the response of banks to loan and deposit demand becoming less elastic to market rate changes in low market rates which itself is due to the shift of household assets from the ones that are fully responsive to market rate changes (e.g. money market funds) to those less responsive (e.g. deposits) or irresponsive (e.g. cash) in low market rates. As the market rate falls, The downward pressure of the increased market power and the upward pressure of the traditional channels, cause the non-monotonic response of banks to market rate changes. The results help explain the puzzling slow recovery of the economy as well as stable inflation after the global financial crisis. I also show that local house prices become less responsive to market rate changes in low market rates in the counties that are exposed to high-market-power banks.

Download or read book Essays on the Theory of Financial Intermediation written by Michel de Lange and published by . This book was released on 1992 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Intermediation in Financial Markets written by Hugues Dastarac and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study broker-dealers' trading activity in the US corporate bond market. I find evidence of market making and of proprietary trading exploiting possible mispricings. Market making occurs when customers both buy and sell a bond in a day, which happens half of the time: as predicted by market making theories with adverse selection or inventory costs, prices go down (up) as customers sell (buy). Otherwise, evidence is in favor of broker-dealer initiated trades, i.e. proprietary trading: prices go up (down) when customers sell (buy). I test one aspect of proprietary trading predicted by theories of limits of arbitrage: dealers buy (sell) bonds that are relatively cheap (expensive) with respect to bonds of similar maturity, or with respect to Treasury bonds. These proprietary trading strategies are reduced after the crisis. Relatedly I show that before the 2007-2009 crisis, large broker-dealers borrowed and sold Treasury bonds in amounts similar to their corporate bond holding, but not after. I study why financial institutions trade forward and future contracts on assets they could buy or sell directly. I provide a dynamic trading model in which this occurs because of 1) imperfect competition and 2) uncertainty about future customer trades. Under imperfect competition, risk averse traders realize gains from trading inventory imbalances slowly, leaving them differentially exposed to a supply shock: sellers fear customers sells that depress prices, buyers fear customer buys that increase prices. Opposite exposure to the supply shock implies gains from trading the risk through forward contracts: in equilibrium sellers of the asset sell forwards to buyers, and risk sharing in the asset is slowed down. The cost of slower risk sharing is compensated by the benefit of more certain future trading surplus. Traders are more willing to create inventory imbalance with forward contracts, leading to tighter spreads and/or higher trading volume in fragmented markets. I study the opportunity for dealers, i.e. intermediaries in financial markets to open restricted markets parallel to a centralized, all-to-all market. In a dynamic trading model with imperfect competition, dealers have the opportunity to open a parallel market so that a restricted subset of them trades with customers. Dealers in the parallel market choose to have all customer trades in the parallel market, which makes both customers and dealers not trading in the parallel market worse off. Before dealers learn whether they will have an opportunity to trade with customers in the parallel market, they choose to open the parallel market, as long as the surplus from future transactions are sufficiently high compared with the cost of holding the asset until future transaction, highlighting the role of dynamic trading rent.

Download or read book Essays in Financial Intermediation written by Ping He and published by . This book was released on 2004 with total page 148 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Financial Intermediation and Growth written by Ross Levine and published by . This book was released on 1999 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Financial Intermediation and Growth written by Ranajoy Ray Chaudhuri and published by . This book was released on 2012 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: My dissertation explores the impact of financial development, as well as regulatory changes in the financial sector, on economic growth. Recent literature on growth has often focused on the importance of financial intermediation and institutional quality. Advocates of financial development say that the development of the banking sector and stock markets increase the financing available to firms, raising productivity. The "institutions hypothesis" proponents suggest that institutions jointly determine the growth rate and the policy choice, while policies themselves bear no causal connection to growth. Such hypothesis is difficult to test empirically because the change in institutional quality is, with a few historic exceptions, very slow. For the most part, therefore, a country's economic performance can end up being attributed to a random cause. Using a cross-country data set and numerous financial indicators, institutional quality variables and growth measures, I find that this is not true of financial development. Financial variables have a significant effect on growth that is distinct from that of institutions like private property and rule of law. I also consider this issue in the context of the fifty U.S. states. States differ with respect to financial indicators like the number of banks, assets, equity, loans and deposits. They also vary in terms of their regulatory environments. States like Delaware, Texas and Nevada have very high scores for economic freedom; Mississippi, New Mexico and West Virginia have very low ones. The results again underscore the importance of financial deepening in order to achieve economic growth. Taking up from this point, the final essay studies the impact of U.S. banking deregulation on growth. Many states relaxed restrictions on intra-state bank branching beginning in the early 1960s, both by allowing bank holding companies to convert subsidiaries into branches and by permitting statewide de novo branching. This increased competition in the banking sector forced banks to become more efficient. The existing literature suggests that one of the channels through which this worked was bank lending. Different industries have varying degrees of dependence on external financing, and industries that have greater dependence should grow faster in the post-deregulation period. Using a panel data set, I find this not to be the case for the U.S.; industries that borrow less from banks actually grew at a faster rate after deregulation. This could reflect commercial banks losing market share to other sources of external financing, the general decline in the U.S. manufacturing sector and the terms of trade moving in favor of agriculture. I also consider the effect of deregulation on various banking indicators and find the strongest impact to be on the number of commercial banks operating in the state. Contrary to existing research, these regulatory changes slowed down growth in the number of bank branches and offices, as well as other measures of bank performance like assets, equity, loans and deposits. This suggests that the gains from deregulation are short-lived, and also indicate unprofitable smaller banks shuttering their operations and the emergence of credit unions and other alternatives to commercial banks.

Download or read book Essays on Financial Intermediation written by Gabriel Asaftei and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Financial Intermediation in the Open Economy written by Johanna Krenz and published by . This book was released on 2018 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Financial Intermediation written by Paul Schure and published by . This book was released on 2000 with total page 134 pages. Available in PDF, EPUB and Kindle. Book excerpt: