"Risk Reallocation in OTC Derivatives Networks" (paper available upon request) with Bernard Herskovic and Emil Siriwardane
Over-the-counter (OTC) derivatives markets are the key venue for quickly reallocating exposures to key risk factors such as interest rates, exchange rates, and credit amongst market participants. These markets are very large, and are characterized by a complex trading network with disperse prices. In this paper, we ask how the structure of the OTC derivatives trading network, the preferences and technologies of the participants, and the distribution of endowed exposures to the underlying risk factor, jointly determine the observed patterns of trade, post-trade exposures, and prices. We use detailed data from the DTCC to estimate the key parameters of our model. Finally, we use the model at estimated parameters to study comparative statics related to risk management and regulation.
"Risk and Return in Segmented Markets with Expertise" (with Hanno Lustig and Lei Zhang)
We define expertise as the ability to reduce effective risk in complex asset markets. We explore how the joint distribution of wealth and expertise is determined in the market for a complex risky asset. We then study the role of the joint distribution of wealth and expertise in determining equilibrium excess returns to and Sharpe Ratios.
"Rental Yields and HPA: The Returns to Single Family Rentals" (with Andrew Demers)
We develop the stylized facts describing the returns to SFR, explore portfolio formation, and examine existing SFR backed bond collateral.
We use a structural model, along with information in the cross-section regarding firms' uses of the funds they raise, in order to construct a time series measure of the aggregate cost of external finance for US firms.
Estimated Average Cost of External Finance: US Firms 1980-2010
"The Financial Soundness of US Firms 1926-2012" (with Andrew Atkeson and Pierre-Olivier Weill)
Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility.
Insolvency Crises 1929-2012: Median Distance below 1.
"The Market for OTC Derivatives" (with Andrew Atkeson and Pierre-Olivier Weill)
Develops the stylized facts characterizing CDS markets, along with the positive implications of a model of OTC derivatives markets. See also our policy commentary on Voxeu.org.
This paper studies the level and dynamics of the value of aggregate liquidity induced by firms’ financing shortfalls.
We examine the endogenous dynamics of the distribution property rights in a framework in which people with property-rights protection trade off efficiency and exploitation in their decisions to award or limit the property rights of others.
Work in Progress:
"Slow Moving Capital in Segmented Markets with Expertise" (with Hanno Lustig and Lei Zhang. Slides available upon request. Presented at SED 2013, Wharton, UNC).
Publications:We develop a new framework to address the positive and normative issues surrounding OTC derivatives markets, focusing on entry and exit incentives. We address market resiliency following shocks. See also our policy commentary on Voxeu.org.
American Economic Review, Papers and Proceedings, May 2014, 189-194.
We use a simple model of the sharing rule between key labor inputs and capital owners, along with accounting data, to measure the fraction of the US capital stock which is owned by key labor and thus missing from book and market values.
Amundi Smith Breeden First Place Paper Award 2013.
Journal of Finance, August 2013, 1365-1406.
The supplementary appendix contains further details.
The UCLA Anderson Blog provides a general audience summary.
We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from the shareholders' perspective. We find that firms with more organization capital have risk adjusted returns that are 4.7% higher than firms with less organization capital.
Journal of Financial Economics, August 2013, 351-372.
We show that both absolute and relative performance driven turnover can be natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics which are either general or firm-specific, and provide unique empirical support for our model.
We show theoretically why financially constrained firms lease vs. buy, and provide supporting empirical evidence for the key predictions of our model using census data.
“Managerial Incentives, Capital Reallocation, and the Business Cycle.” (with Adriano Rampini.)
We develop an analytical characterization of the effect of agency costs on capital reallocation and aggregate productivity to show that the agency problem between owners and managers makes bad times worse because capital is less productively deployed. We quantitatively measure the impact of misallocation in the cross section on aggregate productivity.
“New or Used? Investment with Credit Constraints.” (with Adriano Rampini.)
Explains that the low demand for liquid assets by consumer-savers is due to that fact that, with standard preferences, the auto-correlation of savings is an order of magnitude larger than that of income. Thus, under any reasonable calibration of standard consumption-savings models, consumers' savings are much to smooth to induce substantial liquidity demand.
See updated time series, and a link to Eisfeldt Rampini Capital Reallocation Data, below.
Documents the fact that the amount of capital reallocation between firms is procyclical, whereas measures of productivity dispersion are countercyclical. Uses a quantitative dynamic model to infer the aggregate dynamics for capital liquidity that reconciles these facts, and argue that capital is less liquid in recessions.
“Endogenous Liquidity in Asset Markets.”
Explores the link between macroeconomic fundamentals and asset market liquidity driven by adverse selection, and demonstrates the magnifying effects of liquidity on investment and volume. Emphasizes the link between risk taking and market liquidity. Explains why exogenous negative shocks alleviate adverse selection, but endogenous shocks from investor risk taking leads to procyclical asset market liquidity.
Capital Reallocation and the Business Cycle: Data Update to EOY 2013
The correlation of the cyclical component of GDP with the cyclical component of sales of PP&E plus acquisitions over total book assets is 0.68 with a standard error of 0.10.