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The Wharton School opp Curriculum Vitae (.pdf) |
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Research
Interests: Financial
institutions; financial markets; asset pricing
“Rating Agencies in the Face
of Regulation,” with M. Opp and M. Harris, Journal of Financial Economics 108 (2013), pp. 46-61 (link) 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: ”Adverse Selection and Intermediation
Chains," with V. Glode, April 2013 Abstract We propose
a parsimonious model of over-the-counter trading under asymmetric information
to study the presence of intermediation chains that stand between
heterogeneously informed market participants. We show that moderately
informed intermediaries can reduce trading inefficiencies due to asymmetric
information by layering an adverse selection problem over multiple
transactions. Informed market participants may prefer to trade through one or
more of these intermediaries as they improve trade efficiency but also reduce
the surplus accruing to uninformed traders. Our model makes novel predictions
about optimal network formation when adverse selection problems impede the
efficiency of trade. ”Bank Regulation with Private-Party
Risk Assessments," (previously titled “Regulating Banks' Risk Taking
with External Risk Assessments”), with M. Harris and M. Opp, November 2012 Abstract Credit
ratings are an integral part of world-wide regulatory frameworks such as the
recently proposed Basel III. Yet regulators' reliance on credit ratings has
been criticized, not least because of the poor accuracy of ratings of
structured products in the years leading up to the recent financial crises.
Consistent with these criticisms the Dodd-Frank Act abolishes regulatory
reliance on ratings and mandates that regulators find alternative risk
measures to regulate financial institutions. In this paper we propose a model
to analyze the optimal regulatory reliance on credit ratings provided by an
independent, profit-maximizing rating agency, and the potential effectiveness
of using market-based risk measures. We find that reliance on market prices
instead of credit ratings may be generically ineffective, since equilibrium
prices in markets, in which banks are marginal, reflect government bailouts,
and thus tend to reveal little information about actual risk exposures.
Optimal reliance on credit ratings not only depends on banks' leverage, CRAs'
expertise and asset complexity, but also the social value added banks provide
when holding debt securities to maturity rather than selling them to
investors outside the banking system. “Learning, Active Investors, and the
Returns of Financially Distressed Firms," July 2012 Abstract I develop
a dynamic asset pricing model to analyze expected returns of financially
distressed firms in the presence of learning about firm fundamentals and
endogenous information acquisition by active investors that acquire large
stakes in distressed firms via private investments in public equity. The
model reveals that learning and information acquisition critically affect
risk exposures close to default and can rationalize low and even negative
expected equity returns for firms with high default risk. Similar to
Schumpeter's (1934) argument that recessions have a positive, cleansing
effect on the economy, the model reveals that equity holders may benefit from
the increased speed of learning about insolvent firms in downturns, which
increases the value of their abandonment option in these times. Equity
holders' option value is further enhanced by the ability to partially
free-ride on active investors' acquisition of information on firm fundamentals.
Both information channels are shown to affect equity betas, and may account
for striking, momentum-type dynamics in risk premia. “Cycles
of Innovation and Financial Propagation,” January 2010 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. “Intertemporal Information Acquisition and Asset
Market Dynamics” (Technical Appendix), September 2008 Abstract I analyze
the links between intertemporal information acquisition and the dynamics of
asset markets. In my model, investors are Bayesian learners who optimally
choose how much to consume, how much to invest, and how much information to
acquire. The model predicts that investors acquire more information 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.
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