Accepted, Review of Financial Studies
Winner of Deutsche Bank Prize in Financial Risk Management and Regulation 2014
Abstract: This paper shows that collateralized short-term debt, although privately optimal for reducing borrowers' risk-taking incentive, can cause fragility (multiple equilibria). Hence, despite first-come-first-served constraint being absent in collateralized debt such as repurchase agreements (repo), a systemic run can arise, featuring large increases in default risks, fire-sale discounts of collateral, cost of credit, and amount of credit rationing. Policies such as asset-price guarantee, leverage cap, and central clearing can promote stability and welfare. Using global-game techniques, I show that a systemic run is more likely in bad times and a large enough asset-price guarantee reduces run risks.
2. Funding Constraints and Informational Efficiency (with Sergei Glebkin and Naveen Gondhi) (revised draft!)
Accepted , Review of Financial StudiesSelected presentations: FTG summer meeting at Madrid*, FIRS Savannah*, Tel Aviv Finance Conference 2018*, EFA 2018, 2nd European Capital Markets Workshop (Cass), WFA 2018, Frontiers of Finance 2018*, Adam Smith Asset Pricing 2018*, HEC-McGill Winter Finance workshop 2018*
Abstract: We analyze a tractable rational expectations equilibrium model with margin constraints. We argue that constraints affect and are affected by informational efficiency, leading to a novel amplification mechanism. A decline in wealth tightens constraints and reduces investors' incentive to acquire information, lowering price informativeness. Lower informativeness, in turn, increases the risk borne by financiers who fund trades, leading them to further tighten constraints faced by investors. This information spiral leads to (a) significant increases in risk premium and return volatility in crises, when investors’ wealth declines, (b) complementarities in information acquisition in crises, and (c) complementarities in margin requirements.
Accepted, Journal of Financial IntermediationSelected presentations: FIRS 2018*, 1st Bristol Banking Workshop, Financial Stability Conference 2016* (Washington DC), 8th European Banking Center network conference* (Tilburg), Inaugural Young Scholars Finance Consortium* (Texas A&M), Chicago Financial Institutions Conference 2016*, OxFIT 2015*, CICF 2015*
Abstract: Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank's ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.
Abstract: We consider a model in which dealers need to raise external financing to provide immediacy to their clients, and also exert unobservable effort to improve the chance of closing their positions at a profit. This moral hazard problem reduces the amount of external finance dealers can raise, and therefore reduces intermediation volume, softens competition between dealers, and widens bid-ask spreads, and in this sense has a negative effect on the market liquidity of intermediated assets. When dealers suffer losses, the problem becomes worse. Effects are stronger for riskier assets. Endogenous correlations and liquidity spillovers arise between otherwise unrelated assets. As the optimal financing arrangement involves debt, regulations that limits the leverage of bank-affiliated dealers can have adverse effects on market liquidity.
Market power and delegation cost (with Denis Gromb)
The Design of Central Counterpary (with Vincent Maurin)
Monetary policy and corporate bond fund fragility (with Jinyuan Zhang)