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Author : Shengxing Zhang
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (14 download)
Download or read book Essays on frictions in financial over-the-counter markets written by Shengxing Zhang and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Yu An
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (11 download)
Download or read book Essays in Over-the-counter Markets written by Yu An and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three essays, which examine several issues in over-the-counter financial markets. The first essay shows that dealers build socially excessive inventories in order to compete for market share. The distortion in pricing is empirically identified using transaction level data in the U.S. corporate bond market. The second essay shows that the two roles of a dealer, immediacy provision and matchmaking, create a conflict of interest. A direct implication is that bid-ask spread is a misleading measure of immediacy provision. The third essay introduces reducible intermediation chains in order to quantitatively measure search frictions in over-the-counter markets. This allows us to categorize intermediation chains by their primary intermediation incentives. Specifically, the first essay shows that dealers in over-the-counter markets build socially excessive inventories in order to compete for market share and get the associated intermediation rents. Using the TRACE dataset for the U.S. corporate bond market, I find that, excluding the crisis, the incentive to build inventory raises dealers' bid prices for corporate bonds by an average of 5 basis points. During the crisis, this effect was reversed by 23 basis points of implied additional dealer balance-sheet costs. The second essay, co-authored with Zeyu Zheng, shows that the two roles of a dealer, immediacy provision and matchmaking, create a conflict of interest that leads dealers to hold inefficiently high levels of inventory in order to extract additional rents from customers. Because of this, bid-ask spread is a misleading measure of immediacy provision. Our model suggests the use of execution delays as an additional measure of immediacy provision. The third essay, co-authored with Yang Song and Xingtan Zhang, introduces reducible intermediation chains in order to quantitatively measure search frictions in over-the-counter markets. This allows us to categorize intermediation chains by their primary intermediation incentives. Using interdealer trades in the U.S. corporate bond market, we discover new types of intermediation chains that are not formed to mitigate search frictions or to facilitate liquidity provision. Instead, these chains arise when dealers intermediate trades for other dealers in order to unwind positions at a profit.
Author : Yifei Wang
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (14 download)
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:
Author : Andrada Bilan
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (127 download)
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:
Author : Semih Uslu
Publisher :
ISBN 13 :
Total Pages : 186 pages
Book Rating : 4.:/5 (14 download)
Download or read book Essays on Search Frictions in Financial Markets written by Semih Uslu and published by . This book was released on 2016 with total page 186 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters about search frictions in financial markets. Chapter 1: "Pricing and Liquidity in Decentralized Asset Markets" I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. I also calibrate the model, demonstrate that it produces realistic quantitative outcomes, and use it to study the effect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule. Chapter 2: "Price Dispersion and Trading Activity during Turbulent Times" I construct a dynamic model of crises in a decentralized asset market that operates via search and bargaining. The crisis is modeled as a one-time aggregate shock to uncertainty with a random recovery. The arrival of the crisis shock leads to an increase in both the volatility of asset payoff and the volatility of investors' background risk. The equilibrium path for investors' valuations, terms of trade, and the distribution of investors' positions is characterized in closed form both during the crisis and during the recovery. Tractability of the model allows me to derive natural proxies for price dispersion and trading activity. I show that both volatility of asset payoff and volatility of background risk contribute to higher level of price dispersion during the crisis. Trading activity might be higher or lower depending on the increase in the volatility of background risk relative to the increase in the volatility of asset payoff, consistent with the "flight-to-quality" observations during extreme episodes. A flight to the asset market always starts with a "heating-up" in trading activity but a flight from the market might start with a dry-up or heating-up during the onset of the crisis. If the relative increase in the volatility of asset payoff is too high, a period of fire sales is triggered leading to a short heating-up before the complete dry-up of the trading activity. I calibrate the model according to the U.S. corporate bond market data and show that it captures the observations during the subprime crisis. Chapter 3: "Endogenous Liquidity and Cross-section of Returns in Dynamic Bargaining Markets" The empirical analysis of liquid/illiquid asset pairs reveals the existence of a return differential (liquidity premium) between those types of assets. The time variation in liquidity premia is delineated by the term "flight-to-liquidity," meaning that liquidity premia are higher during extreme market episodes. In this paper, I extend the search-and-bargaining model of Weill (2008) by allowing for risk aversion, to explain this observation. Risk-averse investors optimally allocate their limited budgets of search efforts to various assets. This extension allows me to examine the relationship between risk and liquidity of assets in the cross-section and over time. My model generates endogenous cross-sectional liquidity differentials corroborating much of the empirical evidence. Furthermore, I show that when asset payoffs are more volatile, trade surpluses are higher because idiosyncratic hedging quality differentials are wider. Higher trade surpluses lead to higher value of search, and in turn, higher opportunity cost of committing to a particular asset, especially to an illiquid one. Therefore, periods of high volatility are associated with a flight-to-liquidity.
Author : Mark Victor Loewenstein
Publisher :
ISBN 13 :
Total Pages : 152 pages
Book Rating : 4.:/5 (364 download)
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:
Author : Fabricius Somogyi
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (135 download)
Download or read book Essays on Frictional Financial Markets written by Fabricius Somogyi and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays that uncover the origins of market frictions and their implications for the functioning of the global foreign exchange (FX) market. The first research paper speaks to the hegemony of the US dollar in FX trading. Over 85% of all FX transactions involve the US dollar, despite the United States accounting for less than one quarter of global economic activity. I show both theoretically and empirically that the US dollar dominates FX volumes because FX market participants are strategic about their trading costs. Hence, they avoid directly transacting in non-dollar currency pairs if the expected trading cost is too large. Instead, market participants exchange non-dollar pairs indirectly by using the US dollar as a vehicle currency. That is, market participants first exchange a non-dollar currency into US dollars, and then trade those US dollars for their target currency. I derive a set of theoretical conditions for currency dominance in FX trading volume. To validate these conditions empirically, I use a granular and globally representative FX trade data set. My empirical findings are consistent with the predictions of my theoretical framework and corroborate the importance of strategic behaviour as a novel determinant of currency dominance. Using a novel identification strategy, I show that up to 36-40% of the daily volume in the most liquid dollar currency pairs are due to vehicle currency trading. The second paper studies the information content of trades in the FX market. Specifically, we analyse a novel, comprehensive order flow data set, distinguishing among different groups of market participants and covering a large cross-section of currency pairs. We find compelling evidence that global FX order flows convey superior information heterogeneously across agents, time, and currency pairs. These findings are consistent with theories of asymmetric information and over-the-counter market fragmentation. A trading strategy based on exposure to asymmetric information risk generates high returns even after accounting for risk, transaction cost, and other common risk factors shown in the FX literature. Finally, the third paper analyses the cross-sectional asset pricing implications of liquidity risk in the FX market. Precisely because of its sheer size and despite its decentralised nature, the FX market is commonly known as one of the most liquid and resilient trading venues. However, a clear understanding of whether FX liquidity matters for asset prices is still missing. This paper aims to fill this gap by providing the first systematic study of the pricing implications of FX liquidity risk. We show that, even in this market, exposure to liquidity risk commands a non-trivial risk premium of up to 4% percent per annum. In particular, systematic (marketwide) and idiosyncratic liquidity risk are not subsumed by existing FX risk factors and successfully price the cross-section of currency returns. However, we also find that liquidity and carry trade premia are significantly correlated. The carry trade is a simple trading strategy that aims to profit from the interest rate differential between high- and low-yielding currencies. The correlation between liquidity and carry trade premia lends support to a liquidity-based explanation of the infamous carry trade risk premium. To illustrate this point, we decompose carry trade returns and show that the commonality with liquidity risk stems from periods of high market stress and is confined to the static but not the dynamic carry trade.
Author : Martin Oehmke
Publisher :
ISBN 13 : 9780549968290
Total Pages : 268 pages
Book Rating : 4.9/5 (682 download)
Download or read book Essays on Financial Markets with Liquidity Frictions written by Martin Oehmke and published by . This book was released on 2009 with total page 268 pages. Available in PDF, EPUB and Kindle. Book excerpt: The third chapter, joint work with Markus Brunnermeier, examines predatory short selling of equity in financial institutions. We show that when the stock of a leverage-constrained financial institution is shorted aggressively, this can trigger liquidations of long-term investments at fire-sale prices. Predatory short selling can emerge in equilibrium when a financial institution is (i) close to its leverage constraint (the vulnerability region) or (ii) violates its leverage constraint even in the absence of short selling (the constrained region). The model provides a potential justification for temporary restrictions on short selling for vulnerable institutions.
Author : Yueyang Han
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (111 download)
Download or read book Essays on Information and Frictions in Financial Markets written by Yueyang Han and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Mario Rafael Silva
Publisher :
ISBN 13 : 9780355307344
Total Pages : 200 pages
Book Rating : 4.3/5 (73 download)
Download or read book Essays on Liquidity, Monopolistic Competition, and Search Frictions written by Mario Rafael Silva and published by . This book was released on 2017 with total page 200 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study the interactions between liquidity constraints, monopolistic competition, and search frictions for product markets, labor markets, and credit markets. Monopolistic competition is especially important for three different reasons. First, there is an externality that links the demand of firms to the state of the economy. Second, under free entry, the product space is influenced by policy and interacts with liquidity constraints. Third, monopolistic competition generates markups, which can augment other wedges and thereby interact with liquidity constraints.The first chapter considers the role played by endogenous variety and monopolistic competition in the long-run transmission of monetary policy. The combination of free entry and product variety gives rise to both an intensive margin (quantity of particular good) and extensive margin (extent of variety), and search frictions imply that firm entry involves a congestion externality. Inflation generally reduces variety. Under constant-elasticity-of-substitution (CES) preferences, firms are inefficiently small, with the inefficiency increasing in product differentiation and the extent of search frictions. The Friedman rule, which involves contracting the money supply at the rate of time preference, is the best policy under CES preferences. In contrast, with variable elasticity of demand, inflation can increase firm size, reduce markups, and raise welfare, even though output is lower. Under CES preferences, the welfare cost of inflation is high; moreover, it increases monotonically with the markup and is higher with endogenous variety than with a fixed variety alternative.The second chapter departs from the dramatic growth of revolving credit since 1970 relative to both consumption and consumer credit. Importantly, revolving credit primarily determines short-run household liquidity and comoves positively with product variety. I augment the Mortensen-Pissarides model with an endogenous borrowing constraints and free entry of monopolistically competitive firms. Unemployment is amplified from a two-way feedback: higher debt limits encourage firm entry and raise product variety (the entry channel), and greater variety makes default more costly and thereby raises the equilibrium debt level (the consumption value channel). I compare the model to a counterfactual economy in which either channel is shut down and find that mean amplification exceeds 50%. Furthermore, only the model economy generates a procyclical response of the credit-to-consumption ratio, as observed in the data.The third chapter examines the role of corporate finance and imperfect competition in the pass through of monetary policy to the real lending rate and its transmission into investment. Monopolistically competitive entrepreneurs can finance investment opportunities using bank-issued credit or money. They seek loans in an over-the-counter market where the terms of the contract (loan size, interest rate, and down payment) are negotiated subject to pledgeability constraints. I investigate pass through of the policy rate to the real lending rate and its transmission to output and investment, taking into account the interplay of (1) heterogeneous financial frictions from limited enforcement and (2) aggregate demand externalities from monopolistic competition. Whereas returns to scale or product diversity are not important for the pass through, the former substantially affect the transmission of policy to investment and output. Furthermore, financial frictions interact positively with demand complementarities from monopolistic competition. Greater dispersion of financial frictions reduces investment and output and also increases transmission unevenly across the range of nominal policy rates, having a maximal effect at about a policy rate of 9%.
Author : Adem Dugalic
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)
Download or read book Essays in Financial Economics written by Adem Dugalic and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation explores effects of trading frictions due to the over-the-counter nature of some financial markets on asset prices, trading activity, market structure and efficiency. The first chapter analyses how the introduction of post-trade transparency affected dealers' trading and market liquidity in the secondary U.S. corporate bond market. Using the TRACE dataset with a novel variable identifying different dealers in the market, I quantify dealers' centrality in the context of the trading network and estimate a differential response to the reform across dealers of different centrality. I show that the introduction of transparency reduced the estimated bid-ask spreads of peripheral dealers by about 24 basis points, while spreads of core dealers remained unaffected. The trading volume of high-yield bonds fell by 6.7% for core dealers and by an insignificant amount for peripheral dealers. There was no effect on dealers' capital commitment and inventory behavior. To rationalize these findings, I propose a dynamic model of trade with asymmetric information and search frictions that gives rise to endogenous heterogeneity in dealers' trading activity and explains the empirical evidence. Three mechanisms through which transparency may affect the market are outlined: marketwise reduction in adverse selection, higher demand for immediacy by informed traders, and interaction between liquidity and informed traders. Further effects of transparency and welfare implications in the context of the model are discussed. The second chapter is co-authored with Diego Torres Patino. We study how short sale constraints on the lending side of the market affect asset prices in an equilibrium model with multiple assets. We endow investors with heterogeneous beliefs in order to generate short selling demand. We obtain a CAPM-like equation that links asset-specific excess returns with the market equity premium. In the presence of short sale constraints in the market, the model gives rise to asset-specific alphas that are explained by both asset-specific and market-wide short sale constraints; unconstrained stocks have higher risk-adjusted expected returns relative to the market portfolio, whereas the opposite holds for constrained stocks. In the absence of short sale constraints, the model reduces to the standard CAPM. We test the model using extensive data on short interest and borrow fees. The model is able to empirically explain asset prices for 10 portfolios sorted by the degree to which they are short sale constrained, as opposed to the CAPM and factor models which produce unexplained alphas that are significantly different from zero for the portfolios consisting of highly constrained stocks. In the final chapter, I study financial intermediation in a model of entry and competition between an over-the-counter market and exchange. The over-the-counter market is characterized by search, bargaining and capacity to intermediate trade of securities customized to individual investors. The exchange can support trading of a subset of standardized securities at prices quoted to all investors. I compute explicitly asset prices and volume at each trading venue and analyze efficiency of the resulting market structure. Bargaining power of investors in the OTC market and cost associated with trading non-customized securities at the exchange have ambiguous effects on the relative volume across the trading venues. The market outcome is inefficient due to bargaining in the OTC market and imperfect competition of specialist at the exchange. The model is well suited for quantitative analysis provided sufficiently detailed trading data from both types of trading venues.
Author : Mohammadreza Bolandnazar
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (126 download)
Download or read book Essays on the Effects of Frictions on Financial Intermediation written by Mohammadreza Bolandnazar and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The insider does not perfectly observe the true value of the security, but he continues to hone his knowledge by using private information sources over time. Two classes of equilibria emerge from this model. In one class, the insider trades excessively patiently, and the market efficiency is reached only asymptotically. In the second type, the insider optimally chooses a deterministic time T, before which he trades patiently as in Kyle (1985) until the price reaches its full efficiency. After T, the insider keeps revealing every piece of new information immediately, and the market price stays efficient while the insider keeps making profits. Which equilibrium emerges depends on the insider's learning capacity, initial informational advantage, and the private source's informational content.
Author : Sougata Das
Publisher :
ISBN 13 : 9781339034133
Total Pages : 120 pages
Book Rating : 4.0/5 (341 download)
Download or read book Three Essays on Market Frictions and Prices written by Sougata Das and published by . This book was released on 2015 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt: During the last decade there have been significant changes in market structure as well as in the regulatory framework. New regulations require firms to disclose more information in a timely manner. Simultaneously, quantum improvements in computer networks have increased the speed of information flows and facilitated explosive growth in trading volume. In light of such changes, I examine three important questions regarding how security pricing has responded to recent changes in market frictions. Given the rise of automated trading in the post-decimalization era, we examine time trends in price clustering for exchange traded funds (ETFs) and individual stocks during 2001 - 2010. There is limited prior evidence on price clustering for portfolio securities such as ETFs. A striking feature of the evidence is the substantial reduction in clustering over the sample period for ETFs as well as for individual stocks. This decline occurs for trades of all sizes. We attribute the decline in clustering to the increasing prominence of algorithmic trading, which is immune to psychological biases. The second chapter examines the impact of a firm's disclosure patterns on its cost of debt. Using data on current report (Form 8-K) filings, we examine firms' information disclosure behavior prior to debt issuances and the resultant impact on the cost of debt capital. We find that firms increase their current report filing frequency as the debt issuance approaches; this tendency is more pronounced for public debt issues compared to private debt issues. Among public debt issuers, the increase in disclosure is greater for high-yield debt versus investment-grade debt. Analysis of yield spreads of high-yield debt reveals that more disclosure reduces the cost of debt. These results further suggest that debt issuing firms find current report filing as an economic and useful way to improve the information environment. Finally, chapter three investigates stock market reactions to 8-K reports filed under the new regime in the specific context of acquisitions of privately held target firms by public acquirers. This paper finds that 8-K disclosures filed by public acquirers have a material impact on the pricing and the trading of the acquirers' shares around the event date and the SEC filing dates. Further, we find that this impact is economically significant even for targets classified as "insignificant" by the SEC. We find no significant effects related to the pre-event information transparency of the acquirer.
Author : Shuo Liu
Publisher :
ISBN 13 :
Total Pages : 215 pages
Book Rating : 4.:/5 (116 download)
Download or read book Essays on Over-the-Counter Financial Markets written by Shuo Liu and published by . This book was released on 2020 with total page 215 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters that study dealer's endogenous search effort in over-the-counter (OTC) financial markets and its effect on asset's liquidity risk in U.S. corporate bond markets. In Chapter 1, I study dealer's search intensity using a transaction-level data set on U.S. corporate bonds. The main target of this chapter is to test whether dealer's search intensity is endogenously determined by their idiosyncratic states and how search intensity affects market efficiency. Existing literatures commonly do not consider dealer's continuous adjustment of search intensity in search-and-match models and there is no paper using transaction-level data to estimate the dealer-level state-dependent search intensity. In this paper, I propose a search-and-match model with dealers' endogeneous and state-dependent search intensity and estimate it using the TRACE data for the U.S. corporate bond market. I find that: [1] if we rank all dealers by their private valuations for holding the bond, the dealer of the middle-level private valuation will choose the highest level of search intensity, and she works as the "dealer of dealers" to reallocate bond positions from the low-type dealers to the high-type dealers; [2] the estimated model gives us a quantitative evaluation of the inefficiency due to the decentralized market structure. At the average level across all sub-markets in our sample, the model estimates that dealers' search cost is 0.75% of bond's face value, and there is on average 8.64% of bond positions being misallocated, comparing with a counterfactual frictionless market. In conclusion, the decentralized market structure generates 8.96% welfare loss relative to the frictionless one. In Chapter 2, I study the correlation between corporate bond's misallocation among dealers and liquidity risk. This chapter bridges the literature on search-and-match models and the literature on explaining the non-default component of corporate bond's credit spread variations. In this paper, I propose a measure of bond's misallocation among dealers. This measure is based on a structural search-and-match model, and is defined as the cross-sectional covariance of dealers' idiosyncratic private valuations for holding the bond and their actual inventory positions in the bond. Using the TRACE data for the U.S. corporate bond market, I construct a panel data which contains yearly series of empirical estimates of bond's misallocation and liquidity risk, and verify that: at the bond level, a higher magnitude of misallocation among the dealers is associated with a higher magnitude of liquidity risk. This finding gives a preliminary market microstructural evidence supporting that: the distribution of market maker's states correlates with the magnitude of asset's liquidity risk. In Chapter 3, I theoretically study the social optimal policy function of dealer's meeting technology in over-the-counter markets. This chapter contributes to the existing literature by considering the dealer-level state-dependent meeting technology in a random search model and obtaining explicit-form solutions of the social optimal policy functions. In the model, I allow the agents (dealers) to freely adjust their meeting technologies based on two types of idiosyncratic states: asset position and liquidity need. I find that in the social optimal policy functions, there is no intermediation in the sense that no dealer will choose to search simultaneously on both the buy side and sell side of the market. This result applies for a general form of search-cost function.
Author : Jae Eun Song
Publisher :
ISBN 13 : 9781109848281
Total Pages : 60 pages
Book Rating : 4.8/5 (482 download)
Download or read book Essays on Market Frictions and Money written by Jae Eun Song and published by . This book was released on 2006 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on market frictions and money. In Chapter 1, we analyze the effect of money growth on long-run capital accumulation and production in case that there exist trading frictions in the capital market. We model liquidity demand for money that includes both speculative and precautionary purposes. The main result is that the relationship between money growth and capital accumulation can be either positive or negative depending on the degree of the frictions. If no friction exists in the capital market, inflation raised by an increase in money growth always has a negative real balance effect on capital accumulation. However, together with the capital market frictions, inflation may induce portfolio substitution out of money into capital, and this effect can be greater than the negative one. In Chapter 2, we present a price-posting monetary search model for studying endogenous trading frequency as well as prices. Here we show sellers' price setting results in higher prices but more trades compared with the benchmark case in which buyers set prices and extract all trading surplus. This is because sellers under the price-posting mechanism internalizes a part of trading frequency of the economy while buyers in the benchmark case do not. It is also shown that technology progress under this pricing mechanism can lower down prices and facilitate trading at the same time while the trading frequency remains unchanged in the benchmark case. In the matter of the effects of monetary policy on this economy, we find an increase in money supply raise prices, but it also facilitates trading unless there are too many buyers. In Chapter 3, we present a fixed price search-theoretic model of monetary exchange to study endogenous specialization. Here we show under what conditions technology progress can explain historical deepening of specialization to some extent. In comparison between barter and monetary equilibrium, we find agents become more specialized by the use of money as in existing studies. We also find individual specialization decision does not depend on others' level of specialization in the former while it does in the latter.
Author : Christine N. Tewfik
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (133 download)
Download or read book Essays in Macroeconomics and Financial Frictions written by Christine N. Tewfik and published by . This book was released on 2017 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation is comprised of three papers on the causes and consequences of the U.S. Great Recession. The emphasis is on the role that financial frictions play in magnifying financial shocks, as well as in informing the effectiveness of potential policies. Chapter 1, "Financial Frictions, Investment Delay and Asset Market Interventions," co-authored with Shouyong Shi, studies the role of investment delay in propagating different types of financial shocks, and how this role impacts the effectiveness of asset market interventions. The topic is motivated by the observation that, during the Great Recession, governments conducted large-scale asset market interventions. The aim was to increase the level of liquidity in the asset market and make it easier for firms to obtain financing. However, firms were observed to have delayed investment by hoarding liquid funds, part of which were obtained through the interventions. We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the U.S. data, we quantitatively examine how aggregate activity is affected by two types of financial shocks: (i) a shock to equity liquidity, and (ii) a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment. In Chapter 2, "Housing Liquidity and Unemployment: The Role of Firm Financial Frictions," I build upon the role that firms' ability to obtain funding plays in the severity of the Great Recession. I focus specifically on how the housing crisis reduced the ability of firms to obtain funding, and the consequences for unemployment. An important feature I focus on is the role of housing liquidity, or how easy it is to sell or buy a house. I analyze how an initial fall in housing market liquidity, linked to rising foreclosure costs for banks, affects labor market outcomes, which can have further feedback effects. I focus on the role that firm financial frictions play in these feedback effects. To this end, I construct a dynamic macro model that incorporates frictional housing and labor markets, as well as firm financial frictions. Mortgages are obtained from banks that incur foreclosure costs in the event of default. Foreclosure costs also affect the ease with which firms can borrow, and this influences their hiring decisions. I calibrate the model to U.S. data, and find that a rise in foreclosure costs that generates a 10% fall in the firm loan-to-output ratio results in a 3 percentage point rise in the unemployment rate. The rise in unemployment makes it more difficult for indebted owners to avoid defaulting on their mortgage. This rise in default, on the order of 20 percent, creates further slack in the housing market by both increasing the number of houses on the market and reducing the amount of buyers. Consequently, there are large drops in housing prices and in the size of mortgage loans. Notably, when firm financial frictions are absent, I observe a counter-factual fall in the unemployment rate, which mitigates the effects on the housing market, and even results in a fall in the mortgage default rate. The results highlight the importance of the impact of the housing market crisis on a firm's willingness to hire, and how firms' limited access to credit magnifies the initial housing shock. In Chapter 3, "Housing Market Distress and Unemployment: A Dynamic Analysis," I add to the contributions of my second paper, and extend the analysis to determine the dynamic effects of the housing crisis on unemployment. In Chapter 2, I focused on comparing stationary equilibria when there is a rise in the foreclosure costs associated with mortgage default. However, a full analysis must also take into account the dynamic effects of the shock. In order to do the dynamic analysis, I modify the model in my job market paper to satisfy the conditions of block recursivity. I do this by incorporating Hedlund's (2016) technique of introducing real estate agents in the housing market that match separately with buyers and sellers. Doing this makes the model's endogenous variables independent of the distribution of households and firms. Rather, the impact of the distribution is summarized by the shadow value of housing. This greatly improves the tractability of the model, and allows me to compute the dynamic response to a fall in a bank's ability to sell a foreclosed house, thus raising the costs of mortgage default. I find that the results are largely dependent on the size and persistence of the shock, as well as the level of firm financial frictions that are present. When firm financial frictions are high, as represented by the presence of an interest rate premium charged to firms, and the initial shock is large, the shock is transferred to firms via an endogenous rise in the cost of renting capital. Firms scale back on production and reduce employment. The rise in unemployment increases the debt burden for households with large mortgages. They can try and sell, but find it difficult to do so because they must sell at a high price to be able to pay off their debt. If they fail, they are forced to default, thus further raising the mortgage costs of banks, further reducing resources to firms, and propagating the initial shock. However, the extent of the propagation is limited; once the shock wears off, the economy recovers to its pre-crisis levels within two quarters. I discuss the reasons why, and what elements would be needed for greater persistence.
Author :
Publisher :
ISBN 13 :
Total Pages : 136 pages
Book Rating : 4.:/5 (927 download)
Download or read book Three Essays on Market Frictions written by and published by . This book was released on 2015 with total page 136 pages. Available in PDF, EPUB and Kindle. Book excerpt:
