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ST. LOUIS, Miss 63130
Institutional Affiliation: Washington University in St. Louis
Information about this author at RePEc
NBER Working Papers and Publications
|January 2019||Markets for Financial Innovation|
with Kinda Cheryl Hachem: w25477
Financial securities trade in a wide variety of market structures. This paper develops a theory in which both the market structure of trade and the payoffs of the claims being traded form endogenously. Financial intermediaries use the cash flows of an underlying asset to design securities for investors. The demand for securities arises as investors choose markets then trade using strategies represented by quantity-price schedules. We find that intermediaries create increasingly riskier securities when facing deeper markets in which investors trade more competitively. In turn, investors elicit safer securities when they choose to trade in thinner, more fragmented markets. These findings reveal a novel role for market fragmentation in the creation of safer securities. The model is also infor...
|July 2010||Financial Connections and Systemic Risk|
with Franklin Allen, Elena Carletti: w16177
We develop a model where institutions form connections through swaps of projects in order to diversify their individual risk. These connections lead to two different network structures. In a clustered network groups of financial institutions hold identical portfolios and default together. In an unclustered network defaults are more dispersed. With long term finance welfare is the same in both networks. In contrast, when short term finance is used, the network structure matters. Upon the arrival of a signal about banks' future defaults, investors update their expectations of bank solvency. If their expectations are low, they do not roll over the debt and there is systemic risk in that all institutions are early liquidated. We compare investors' rollover decisions and welfare in the two net...
|June 2010||Financial Connections and Systemic Risk|
with Franklin Allen, Elena Carletti
in Market Institutions and Financial Market Risk, Mark Carey, Anil Kashyap, Raghuram Rajan, and René Stulz, organizers