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Christian Opp


Christian C. G. Opp

The Wharton School
University of Pennsylvania

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Curriculum Vitae [Link]

 

Research Interests:

My work analyzes financial institutions’ and markets’ impact on allocations, with a particular focus on the role of informational frictions. [Research Statement]

 


Published or forthcoming articles:

“Over-the-Counter vs. Limit-Order Markets: The Role of Traders’ Expertise," with V. Glode
Review of Financial Studies (Forthcoming) [BibTeX]

Abstract

Over-the-counter (OTC) markets attract substantial trading volume despite exhibiting frictions absent in centralized limit-order markets. We compare the efficiency of OTC and limit-order markets when traders' expertise is endogenous. We show that asymmetric access to counterparties in OTC markets yields increased rents to expertise acquisition for a few well-connected core traders. When the existence of gains to trade is uncertain, traders' higher expertise in OTC markets can improve allocative efficiency. In contrast, when expertise primarily causes adverse selection, competitive limit-order markets tend to dominate. Our model provides guidance for policymakers and empiricists evaluating the efficiency of market structures.


“Venture Capital and the Macroeconomy,"
Review of Financial Studies, 2019, doi:10.1093/rfs/hhz031 [Link] [BibTeX]

Abstract

I develop a model of venture capital (VC) intermediation that quantitatively explains central empirical facts about VC activity and can evaluate its macroeconomic relevance. I find that VC-backed innovations' impact is significantly larger than suggested by observed aggregate venture exit valuations, even after accounting for large exposures to systematic and uninsurable idiosyncratic risks. The risk properties of venture capital play a quantitatively important role in both explaining empirical regularities and shaping the value of ventures' contributions to economic growth. The model is analytically tractable and yields exact solutions, despite the presence of matching frictions, imperfect risk sharing, and endogenous growth.


”Real Anomalies,”  with J. van Binsbergen
Journal of Finance, 2019, doi:10.1111/jofi.12771 [Link] [BibTeX]

Jacobs Levy Center Outstanding Research Paper Prize

Abstract

We examine the importance of cross-sectional asset pricing anomalies (alphas) for the real economy. We develop a novel quantitative model of the cross-section of firms that features lumpy investment and informational inefficiencies, while yielding distributions in closed form. Our findings indicate that anomalies can cause material real inefficiencies, raising the possibility that agents that help to eliminate them add significant value to the economy. The framework reveals that the magnitude of alphas alone is a poor indicator of real implications, and highlights the importance of alpha persistence, the amount of mispriced capital, and the Tobin's q of firms affected.


”Voluntary Disclosure in Bilateral Transactions,”  with V. Glode and X. Zhang
Journal of Economic Theory, 2018, 175: 652–688 [Link] [BibTeX]

Abstract

We characterize optimal voluntary disclosures by a privately informed agent facing a counterparty endowed with market power in a bilateral transaction. Although disclosures reveal some of the agent's private information, they may increase his information rents by mitigating the counterparty's incentives to resort to inefficient screening. We show that when disclosures are restricted to be ex post verifiable, the informed agent optimally designs a disclosure plan that is partial and that implements socially efficient trade in equilibrium. Our results shed light on the conditions necessary for asymmetric information to impede trade and the determinants of disclosures' coarseness.


”On the Efficiency of Long Intermediation Chains,”  with V. Glode and X. Zhang
Journal of Financial Intermediation, 2017, doi:10.1016/j.jfi.2017.08.006 [Link] [BibTeX]

Abstract

Intermediation chains represent a common pattern of trade in over-the-counter markets. We study a classic problem impeding trade in these markets: an agent uses his market power to inefficiently screen a privately informed counterparty. We show that, generically, if efficient trade is implementable via any incentive-compatible mechanism, it is also implementable via a trading network that takes the form of a sufficiently long intermediation chain. We characterize information sets of intermediaries that ensure this striking result. Sparse trading networks featuring long intermediation chains might thus constitute an efficient market response to frictions, in which case no regulatory action is warranted.


 

”Asymmetric Information and Intermediation Chains,”  with V. Glode.
American Economic Review, 2016, 106(9): 2699-2721 [Link] [Appendix] [BibTeX]

Best Paper Award --- 12th Annual Conference in Financial Economics at IDC-Herzliya


Abstract

We propose a parsimonious model of bilateral trade under asymmetric information to shed light on the prevalence of intermediation chains that stand between buyers and sellers in many decentralized markets. Our model features a classic problem in economics where an agent uses his market power to inefficiently screen a privately informed counterparty. Paradoxically, involving moderately informed intermediaries also endowed with market power can improve trade efficiency. Long intermediation chains in which each trader's information set is similar to those of his direct counterparties limit traders' incentives to post prices that reduce trade volume and jeopardize gains to trade.

 

”Rating Agencies in the Face of Regulation,”  with M. Opp and M. Harris.
Journal of Financial Economics, 108 (2013), pp. 46-61 [Link] [BibTeX]


Abstract

This paper develops a theoretical framework to shed light on variation in credit rating standards over time and across asset classes. Ratings issued by credit rating agencies serve a dual role: they provide information to investors and are used to regulate institutional investors. We show that introducing rating-contingent regulation that favors highly rated securities may increase or decrease rating informativeness, but unambiguously increases the volume of highly rated securities. If the regulatory advantage of highly rated securities is sufficiently large, delegated information acquisition is unsustainable, since the rating agency prefers to facilitate regulatory arbitrage by inflating ratings. Our model relates rating informativeness to the quality distribution of issuers, the complexity of assets, and issuers' outside options. We reconcile our results with the existing empirical literature and highlight new, testable implications, such as repercussions of the Dodd-Frank Act.

 

Working Papers:

Exactly Solved Economies with Heterogeneity," with J. van Binsbergen, January 2019 [BibTeX]

Abstract

We propose a novel modeling approach for general equilibrium economies with persistent heterogeneity that yields exact solutions. This is an important advancement relative to previous approaches where approximations are necessary, either by summarizing the distributional state space with a fixed number of moments or, alternatively, by perturbing the problem around a given fixed point for which the solution is known. As our approach does not impose any restriction on the shape of the state variable distribution, it can also be used to evaluate the conditions under which previous solution methods are likely to succeed.



The Aggregate Demand for Bank Capital," with M. Harris and M. Opp, March 2019 [BibTeX]

Abstract

We propose a novel conceptual approach to characterizing the credit market equilibrium in economies with multi-dimensional borrower heterogeneity. Our method is centered around a micro-founded representation of borrowers' aggregate demand correspondence for bank capital. The framework yields closed-form expressions for the composition and pricing of credit, including a sufficient statistic for the provision of bank loans. Our analysis sheds light on the roots of compositional shifts in credit toward risky borrowers prior to the most recent crises in the U.S. and Europe, as well as the macroprudential effects of bank regulations, policy interventions, and financial innovations providing alternatives to banks.

 

“Large Shareholders and Financial Distress," March 2019 [BibTeX]

Abstract

I examine large shareholders' externalities on other claimholders when firms are in financial distress. To this end, I develop a tractable dynamic credit risk model featuring the interaction between blockholders and other investors. Blockholders' information acquisition and funding decisions play a pivotal role in distressed firms' access to finance, affecting both total firm value and its distribution across claims. The impact on distress costs is generically non-monotone --- whereas blockholders exacerbate inefficiencies for intermediate levels of distress, they alleviate costs in deep distress. The results reveal that frictions that delay block acquisitions to "last minute" rescue interventions can in fact be efficiency-enhancing.

 

“To Pool or Not to Pool? Security Design in OTC Markets," with V. Glode and R. Sverchkov, November 2018 [BibTeX]

Abstract

This paper studies the optimality of pooling and tranching for a privately informed originator who offers structured securities in an over-the-counter (OTC) market where buyers have market power (e.g., due to liquidity shortages among financial institutions). Contrary to the standard result that pooling and tranching are optimal practices, we find that selling assets separately may be optimal for originators, as doing so weakens buyers' incentives to inefficiently screen them. Our results can shed light on recently observed time-variations in the prevalence of pooling and tranching in financial markets.

 

Intertemporal Information Acquisition and Investment Dynamics”  , February 2015 [BibTeX]

 

Abstract

This paper studies intertemporal information acquisition by agents that are rational Bayesian learners and that dynamically optimize over consumption, investment in capital, and investment in information. The model predicts that investors acquire more information in times when future capital productivity is expected to be high, the cost of capital is low, new technologies are expected to have a persistent impact on productivity, and the scalability of investments is expected to be high. My results shed light on the economic mechanisms behind various dynamic aspects of information production by the financial sector, such as the sources of variation in returns on information acquisition for investment banks or private equity funds.

 

“Cycles of Innovation and Financial Propagation,” January 2010 [BibTeX]

Abstract

Episodes of boom-bust cycles tend to occur in sectors with recent arrivals of new technologies and are often related to excessive funding by the financial sector. In this paper, I develop a dynamic general equilibrium model consistent with a role for the financial sector in propagation during such episodes. I extend a standard Schumpeterian growth model by incorporating (a) a monopolistically competitive financial sector and (b) time-varying technological conditions in real sectors. I identify two propagation channels. The first operates through financial firms' acquisition of sector-specific knowledge (skill channel); financial firms chase "hot sectors" and thereby amplify fluctuations. The second channel originates in an interaction between competition in the financial sector and patent races in product markets (competition channel). Financial firms' temporary competitive advantages in access to new ventures imply market segmentation: financial firms maximize the surplus generated by the client firms they can currently attract, anticipating competing financial firms' future screening and funding decisions. Relative to the Pareto optimum, the competition channel generates overinvestment in sectors with temporarily improved technological conditions; excessively high growth in these sectors comes at the cost of lower growth in the economy as a whole. The model links financial propagation to time variation in the cross section of asset prices. Exposures to aggregate risk dampen amplification effects.