Digital Veblen Goods (with S. Oh and A.L. Zhang)
R&R, Journal of Finance
Summarized in the Chicago Booth Review Here and Here
Previously circulated under the title "Investor Experience Matters: Evidence from Generative Art Collections on the Blockchain"
We propose a new framework for understanding non-fungible tokens (NFTs), crypto-assets that typically represent digital artwork. We posit that NFTs are digital Veblen goods: consumers demand them partly because other consumers do. Demand for NFT collections is thus fragile; issuers respond by underpricing their NFTs in primary markets, creating profit opportunities for "scalpers." We construct a simple model of NFT markets emphasizing social forces on demand and verify its predictions empirically. Our results have implications for redesigning NFT primary markets and for interpreting NFT returns.
Uncertainty-Induced Reallocations, Innovation, and Growth (with R. Bansal, M.M. Croce, and W. Liao)
R&R, Review of Economic Studies
This paper highlights the effect of volatility on sectoral reallocation and its endogenous impact on total factor productivity (TFP). We provide empirical evidence that volatility shocks reduce TFP, private R&D investments, and innovation (patents) in the economy. Using micro data, we document that increased volatility leads to capital reallocation away from riskier high-R&D-intensive firms and toward safer, low-R&D-intensive firms. In our multisector DSGE model with recursive preferences and endogenous growth, when volatility increases, a volatility-averse investor demands higher risk premia and reallocates resources toward safer but less innovation-intensive sectors. This reallocation endogenously leads to lower TFP and growth.
SONOMA: a Small Open ecoNOmy for MAcrofinance (with M.M. Croce and M. Jahan-Parvar)
R&R, Journal of Finance
Data Visualization Website
We develop a new small open economy model (SONOMA) in which domestic corporate debt and equities coexist (Jermann and Quadrini, 2012) and are affected by shocks to both external credit and equity markets. In a novel empirical analysis of several small-but-developed economies, we show that both external debt and equity shocks are important determinants of domestic economic fluctuations, corporate leverage, and net foreign asset positions. SONOMA replicates our empirical facts about asset prices, financial flows, and economic activity.
Adding Fuel to the Fire Sales: Banks, Capital Regulation, and Systemic Risk
Winner: Best Paper Award Junior Researcher Category at 2018 PANORisk Conference
In a model with heterogeneous banks and endogenous fire sales, the tightening of bank capital regulation can aggravate fire sales, leading to larger bank losses and higher systemic risk. When calibrated to the data, the least costly policies to mitigate systemic risk raise both ex ante capital requirements and ex post shortfall penalties. These policies also assign relatively higher capital requirements to banks that can better offset price declines during a fire sale, consistent with the recently implemented capital surcharge for global systemically important banks (G-SIBs). My findings provide further support for leading-edge macroprudential tools, including stress tests and countercyclical capital buffers.
Securities Portfolio Management in the Banking Sector (with X. Zhong)
We develop a method to measure the securities purchasing and selling activity of banks using publicly available data from regulatory filings. Using this data, we document stylized empirical facts and explain securities portfolio management through the lens of contemporaneous balance sheet movements. When focusing on balance sheet changes that are exogenous from the bank's perspective, we find that deposit shocks have the greatest explanatory power. We also find that banks only sell securities to meet deposit withdrawals when cash holdings are low and that, contrary to expectation, only well-capitalized banks sell their risky securities in these cases. Overall, our findings demonstrate unintended consequences on bank securities management from the post-GFC changes in bank regulation and provide guidance for modeling the risk of financial fire sales in regulatory stress testing exercises.
The Impact of Lender Competition on Small Business Loan Pricing: Evidence from the SBA 7(a) Program (with Y. Gong)
We study the impact of lender competition on loan pricing using comprehensive loan-level data from the U.S. Small Business Administration (SBA) 7(a) program. Intended only for the most credit-constrained small businesses, SBA loans are originated in the banking sector and subsidized by the government through partial guarantees. In contrast to previous studies of small business lending markets, we find that greater competition is associated with lower SBA loan spreads. Further, we provide causal evidence for this relationship in a difference-in-differences analysis using bank mergers. Our results suggest that lending relationships are less important in the government-monitored-and-subsidized SBA loan market. As a result, hypothetical policies to encourage competition in the SBA loan market would benefit borrowers. Additionally, our findings support the use of product-market-specific concentration measures by regulators when evaluating bank mergers.
Mission-driven Lenders (with Y. Gong and T. Tang)
The U.S. government created the Community Development Financial Institution (CDFI) certification to promote greater credit access in distressed communities. In this paper, we provide a systematic analysis of CDFIs and provide insights into why CDFIs are growing and how they are different from other lenders. Consistent with their mission-driven requirement, we document that CDFIs have expanded in counties with a greater reliance on government-subsidized business lending, higher unemployment rates, and a larger minority population. Within the universe of depository institutions, credit unions and minority depository institutions (MDIs) are more likely to become certified CDFIs as well as institutions with relatively low levels of cash and high leverage. After becoming certified, CDFIs tend to grow faster and lend more, which suggests that the resources available to CDFIs alleviate institution-level financial constraints. In our final analysis, we analyze the cost of CDFI lending using a novel loan-level dataset.
Trading at Round Numbers (with C. Spaenjers)
Prices of real and private-value assets such as artworks and houses have a strong tendency to cluster at round values. Why? We argue that, first, some investors in these markets operate on coarse valuation grids leading them to use round offers and list prices, and, second, any investor's tendency to round is a function of both their level of informedness and whether they are buying for financial or non-financial reasons. We develop a simple conceptual framework formalizing these hypotheses and find empirical support for the resulting predictions in data from two distinct NFT marketplaces.
Direct Lenders and Financial Stability (with Y.S. Jang)
Direct lenders have substantially increased their market share in providing credit to middle-market firms over the past two decades. In this article, we examine the potential implications of this trend for financial stability. We evaluate three channels through which direct lenders may contribute to systemic risk: (1) contagion via funding chains and fire sales, (2) looser monitoring from close ties with private equity sponsors, and (3) reduced lending following distress. The first risk is largely mitigated by their closed-end fund structures, contained credit line losses to banks, limited secondary market activity, and flexible accounting. The second risk is similarly contained by their repeated interactions with private equity sponsors. However, the significance of the third risk -- curtailed lending in times of distress -- is unclear given the lack of empirical evidence. In summary, we believe that concerns about the growth of direct lenders are unwarranted, as their potential to create financial instability is comparable to or even lower than that of banks. However, this assessment could change as the sector continues to evolve, and we discuss potential future concerns at the conclusion of our article.
