Assistant Professor of Finance
UCLA Anderson School of Management
"Optimal Securitization with Moral Hazard" with Tomasz Piskorski and Alexei Tchistyi, Journal of Financial Economics, 104 (2012) 186-202
Abstract: We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect. Finally, we demonstrate that the optimal contract can be closely approximated by the “first loss piece.”
"Reputation and Signaling in Asset Sales" (Revised November 2013).
Abstract: Static adverse selection models of security issuance show that informed issuers can perfectly reveal their private information by maintaing a costly stake in the securities they issue. This paper shows that allowing an issuer to both signal current security quality via retention and build a reputation for honesty leads that issuer to misreport quality even when owning a positive stake—the equilibrium is neither separating nor pooling. An issuer retains less as reputation improves and prices are more sensitive to retention when the issuer has a worse reputation.
"Dynamic Agency and Real Options" with Sebastian Gryglewicz (Revised 2014).
Abstract: We present a model integrating dynamic moral hazard and real options. A risk-averse manager can exert costly hidden effort to increase productivity growth of a firm. In addition, risk-neutral owners of the firm can irreversibly increase the firms capital stock. In contrast to the literature, moral hazard can accelerate or delay investment relative to the first best. When the agency problem is more severe, the firm will invest earlier than in the first best case because investment acts as substitute for effort. This mechanism provides an explanation for over-investment that does not rely on "empire-building'' preferences. Moreover, when the growth option is large, the firm will invest later than in the first best.
"Mortgage Underwriting Standards in the Wake of Quantitative Easing" with Richard Stanton and Nancy Wallace (2014)
Abstract: While the large-scale asset purchases (LSAPs) have funneled vast amounts of capital into the secondary market for mortgages, the direct effect of these programs on the primary mortgage market is not yet clear. We present evidence that while the LSAPs may have improved conditions for the least risky borrowers, they have not improved conditions for all borrowers. For example, the average FICO score of agency securitized mortgages increased from below 720 (low risk) in 2008 to above 760 (extremely low risk) in 2012. What explains this dramatic shift in the average quality of agency securitized mortgages, and why did it persist even with the flood of capital into the secondary mortgage market from the LSAPs? We argue that the change in the probability of buy back requests on Fannie and Freddie mortgage backed securities can explain the tightening of mortgage credit standards.
Work in Progress:
"Cash and Dynamic Agency" with Konstantin Milbradt (2014)