Nicolae Bogdan Gârleanu

Assistant Professor of Finance, Wharton School, University of Pennsylvania
Faculty Research Fellow, National Bureau of Economic Research (NBER)
Research Affiliate, Centre for Economic Policy Research (CEPR)

Contact Information
2425 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia
PA 19104-6137
E-mail: garleanu@wharton.upenn.edu
Office phone: (1) 215 746 0005
Fax : (1) 215 898 6200

Curriculum Vitae

Publications

"Liquidity and Risk Management" (with Lasse Heje Pedersen).
American Economic Review Papers and Proceedings, forthcoming.
Stricter risk-management requirements can reduce liquidity (and prices), especially if they are tied to the liquidity level. Abstract.

"Valuation in Over-the-Counter Markets" (with Darrell Duffie and Lasse Heje Pedersen).
Review of Financial Studies, forthcoming.
The effect of search and bargaining on asset prices. Abstract.

"Design and Renegotiation of Debt Covenants" (with Jeffrey Zwiebel)
Review of Financial Studies, forthcoming.
The creditor, having inferior information, receives stronger control rights -- i.e., covenants are stricter -- than optimal. Abstract.

"Over-the-Counter Markets" (with Darrell Duffie and Lasse Heje Pedersen).
Econometrica, vol 73 (2005), pp. 1815-1847.
Marketmakers' spread is narrower for sophisticated investors with better search options (NB: reverse of information-based models). Abstract.

"Adverse Selection and the Required Return" (with Lasse Heje Pedersen).
Review of Financial Studies, vol 17 (2004), pp. 643-665.
Future adverse-selection based bid-ask spreads need not constitute a trading cost. Abstract.

"Securities Lending, Shorting, and Pricing" (with Darrell Duffie and Lasse Heje Pedersen).
NYSE Award for best paper on equity trading, Western Finance Association, 2002.
Journal of Financial Economics vol. 66 (2002), pp. 307-339.
Short sellers search for stock owners and pay a lending fee. The lending fee, acting as a dividend, increases the stock's price. Abstract.

"Risk and Valuation of Collateral Debt Obligations" (with Darrell Duffie).
Graham and Dodd Award of Excellence, Association for Investment Management and Research, 2001.
Financial Analysts Journal vol.57 (2001), number 1 (January-February), pp. 41-59.
Model CDOs and compare risk estimates with those of rating agencies. Abstract.

Working Papers

"Auctions with Endogenous Selling" (with Lasse Heje Pedersen).
The effect of market structure on volume, prices, and welfare, when owners and potential buyers have information. Abstract.

"Demand-Based Option Pricing" (with Lasse Heje Pedersen and Allen Poteshman).
The effect of end-user demand on option prices when dealers cannot perfectly hedge. Theory and supportive empirics. Abstract.
The Geewax, Terker, \& Company First Prize in Investment Research, Rodney White Center, 2006.

"Pricing and Portfolio Choice in Illiquid Markets"
The effect of the inability to trade immediately on optimal portfolio choice and price. Abstract.

Work in Progress

"Margin Constraints" (with Lasse Heje Pedersen).
The general-equilibrium impact of margin constraints on asset price levels and volatilities.

"Heterogeneous Agents and Asset Prices" (with Stavros Panageas).
Agent heterogeneity can simultaneously generate low and smooth interest rates, counter-cyclical excess returns, and counter-cyclical labor income.

Paper Abstracts

"Design and Renegotiation of Debt Covenants"
We analyze the design and renegotiation of covenants in debt contracts as a particular example of the contractual assignment of property rights under asymmetric information. In particular, we consider a setting where future firm investments are efficient in some states, but also involve a transfer from the lender(s) to shareholders. While there is symmetric information regarding investment efficiency, managers are better informed about any potential transfer than the lender. The lender can learn this information, but at a cost. In this setting, we show that the simple adverse selection problem leads to the allocation of greater ex-ante decision rights to the uninformed party than would follow under symmetric information. Consequently, ex-post renegotiation is in turn biased towards the uninformed party giving up these excessive rights. In many settings, this result yields the opposite implication from standard Property Rights results regarding contracting under incomplete contracts and ex-ante investments, whereby rights should be allocated to minimize inefficiencies due to distortions in ex-ante investments. Indeed, for debt contracts as well as other settings, the uninformed party, who receives strong decision rights in our setting, is likely to have few significant ex-ante investments to undertake relative to the informed party.

"Over-the-Counter Markets"
We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other, as well as marketmakers' bid and ask prices in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors, or have easier access to multiple marketmakers. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications.

"Adverse Selection and the Required Return"
An important feature of financial markets is that securities are traded repeatedly by asymmetrically informed investors. We study how current and future adverse selection affect the required return. We find that the bid-ask spread generated by adverse selection is not a cost, on average, for agents who trade, and hence the bid-ask spread does not directly influence the required return. Adverse selection contributes to trading-decision distortions, however, implying allocation costs, which affect the required return. We explicitly derive the effect of adverse selection on required returns, and show how our result differs from models that consider the bid-ask spread to be an exogenous cost.

"Securities Lending, Shorting, and Pricing"
We present a model of asset valuation in which short-selling is achieved by searching for security lenders and by bargaining over the terms of the lending fee. If lendable securities are difficult to locate, then the price of the security is initially elevated, and expected to decline over time. This price decline is to be anticipated, for example, after an initial public offering (IPO), among other cases, and is increasing in the degree of heterogeneity of beliefs of investors about the likely future value of the security. The prospect of lending fees may push the initial price of a security above even the most optimistic buyer's valuation of the security's future dividends. A higher price can thus be obtained with some shorting than if shorting is disallowed.

"Risk and Valuation of Collateral Debt Obligations"
This paper addresses the risk analysis and market valuation of collateralized debt obligations (CDOs). We illustrate the effects of correlation and prioritization for the market valuation, diversity score, and risk of CDOs, in a simple jump-diffusion setting for correlated default intensities.

"Valuation in Over-the-Counter Markets"
We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, prices are lower and illiquidity discounts higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. If agents face risk limits, then higher volatility leads to greater difficulty locating unconstrained buyers, resulting in lower prices. We discuss a variety of financial applications and testable implications.

"Auctions with Endogenous Selling"
The seminal paper by Milgrom and Weber (1982) ranks the expected revenues of several auction mechanisms, taking the decision to sell as exogenous. We endogenize the sale decision. The owner decides whether or not to sell, trading off the conditional expected revenue against his own use value, and buyers take into account the information contained in the owner's sale decision. We show that revenue ranking implies volume and welfare ranking under certain general conditions. We use this to show that, with affiliated signals, English auctions have larger expected price, volume, and welfare than second-price auctions, which in turn have larger expected price, volume, and welfare than first-price auctions.

"Demand-Based Option Pricing"
We model the demand-pressure effect on prices when options cannot be perfectly hedged. The model shows that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option. Similarly, the demand pressure increases the price of any other option by an amount proportional to the covariance of their unhedgeable parts. Empirically, we identify aggregate positions of dealers and end users using a unique dataset, and show that demand-pressure effects help explain well-known option-pricing puzzles. First, end users are net long index options, especially out-of-money puts, which helps explain their apparent expensiveness and the smirk. Second, demand patterns help explain the prices of single-stock options.

"Pricing and Portfolio Choice in Illiquid Markets"
This paper studies portfolio choice and pricing in markets in which immediate trading may be impossible, such as the market for private equity and certain over-the-counter markets. Optimal positions are found to depend significantly and naturally on liquidity: when future liquidity is expected to be higher, agents take more extreme positions, given that they do not have to hold them for long when no longer desirable. Consequently, in markets with more frequent trading larger trades should be observed. The price, on the other hand, is not affected significantly by liquidity, due to the mitigating effect of endogenous position choice.