Title & Abstract
Title: Diamond-Dybvig and SVB
Abstract: TBA
Title: Can Firm Characteristics Improve the Accuracy of Option Pricing?
Abstract: This paper proposes machine learning-based option pricing models that incorporate firm characteristics. We employ two semi-parametric models, one that uses machine learning to predict the implied volatility and the other to correct the pricing error of the Black-Scholes model and use 114 firm characteristics as well as option-related variables as the input features. Tested on the stock options in the US market, we find that both models outperform a parametric model even without firm characteristics, and firm characteristics significantly enhance the performance of these models. Idiosyncratic volatility, share price, market equity, illiquidity, and firm age are found to be the most important features.
Title: Debt Contract, Credit History, and the Optimal Information Regime
Abstract: We develop a two-period dynamic model of unsecured debt contracts with adverse selection. Entrepreneurs borrow the investment good from lenders to run their businesses, where the returns depend on both entrepreneurial and aggregate productivity. Entrepreneurial productivity is the entrepreneur's private information, and lenders evaluate the entrepreneur's productivity and credit risk based on aggregate productivity in the past and the entrepreneur's credit history, such as the terms of loan contracts that the entrepreneur made in the past and default history. We investigate how the terms of debt contracts and real allocations are affected by the type of information available to lenders regarding the borrower's financial history and explore the optimal information disclosure policy in credit markets.
Title: Consumption Sustenance Preference and Business Cycles
Abstract: We study a pure exchange economy with two groups of agents who exhibit different consumption patterns: one changes consumption immediately in response to shocks, but the other delays the response. We investigate the linkages among the consumption heterogeneity, business cycles, and asset returns by characterizing their equilibrium dynamics. The model generates counter-cyclical and high effective risk aversion of the economy driven by the dynamics of the wealth distribution. The mechanism also can explain the return predictability of the consumption-wealth ratio and the counter-cyclical variations in the Sharpe ratio, the risk premium, and the stock volatility.
Title: Consumption and Labor-Leisure Choices with Recursive Preference: Is YOLO Sustainable?
Abstract: This paper studies what individual preference factors cause YOLO-like behaviors of consumption and labor-leisure choices in a rational economic agent's framework. We examine whether these YOLO life patterns are sustainable in the long run. To do so, we set up a dynamic optimal consumption, labor-leisure choice, and risky investment decision problem of an agent with recursive preference. The flexible labor-leisure choice setup leads to a non-linear free-boundary value problem. We suggest a novel method to derive optimal policies in closed form by which we categorize types of agents and then investigate their long-run sustainability.
Title: Design of Synthetic Financial Products in Decentralized Markets
Abstract: Decentralized trading motivates financial innovation that would be neutral if assets cleared jointly: Derivatives are generally nonredundant. In markets with large traders, derivatives alter price impact for the underlying assets and, when suitably designed, improve risk sharing and diversification. While mutual funds are efficient in competitive markets, imperfect competition qualifies their efficiency with decentralized trading. Instead, a limited number of synthetic products tailored to traders’ desired risk profile strictly increase welfare under general conditions. The efficient set of securities allows trading all fundamental risks but generally forgoes hedging all contingencies in response to price impact.