Christian Opp

Christian C. G. Opp

The Wharton School
University of Pennsylvania

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Curriculum Vitae [link]


Research Interests:

Financial institutions and asset pricing



”Asymmetric Information and Intermediation Chains," with V. Glode.
American Economic Review, 2016, 106(9): 2699-2721 [Paper] [Online Appendix]
Best Paper Award --- 12th Annual Conference in Financial Economics at IDC-Herzliya


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]



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:

“Venture Capital and the Macroeconomy," October 2016.
Revise & Resubmit Journal of Political Economy.


I develop a model of venture capital (VC) intermediation that can explain central empirical facts about the magnitude and cyclicality of VC activity, and allows evaluating its impact on the macroeconomy. The framework reveals how pro-cyclical VC investment dynamics are self-reinforcing through a risk premium channel that rationalizes strongly declining funding standards in booms. VC investments' growth contributions generate significant societal value added, despite their strong cyclicality, even after accounting for large uninsurable idiosyncratic risks associated with VC contracts. The proposed general equilibrium model yields exact solutions despite the presence of informational frictions, imperfect risk sharing, and endogenous growth.


“Can Decentralized Markets Be More Efficient?," with V. Glode, October 2016



Decentralized markets attract large amounts of trade volume, even though they exhibit frictions absent in centralized exchanges. We develop a model with asymmetric information and expertise acquisition where some traders try to exploit any market structure to inefficiently screen their counterparties. In this environment, frictions characteristic of decentralized markets, such as time-consuming search, can promote higher efficiency. First, screening behavior may be less aggressive when traders reach fewer counterparties. Second, for asset classes where information improves allocative efficiency, decentralized markets with predictable trading encounters may dominate by encouraging expertise acquisition. In contrast, when information causes adverse selection, centralized markets dominate.


Real Anomalies,”  with J. van Binsbergen, October 2016



We examine the importance of asset pricing anomalies for the real economy. When firms interpret public information in the way it is reflected in market prices, informational inefficiencies manifesting in financial markets as anomalies can cause material real inefficiencies. We estimate the joint dynamic distribution of firm characteristics that have been linked to anomalies and other firm variables, such as investment, capital, and value added. Based on a model that matches these joint dynamics, we then evaluate the counterfactual dynamic distribution of these quantities in an informationally efficient economy, and find significant deviations. Our results suggest that if financial- and academic institutions helped reduce and/or eliminate such anomalies they could provide large value added to the economy. We show that informational inefficiencies are particularly destructive for high Tobin's q firms, and that the persistence and the amount of mispriced capital are major determinants of the real economic consequences.


On the Efficiency of Long Intermediation Chains,”  with V. Glode and X. Zhang, October 2016



We study a classic problem in economics where an agent uses his market power to inefficiently screen his privately informed counterparty. We show that, generically, if efficient trade is implementable, either by adding competition or more broadly by allowing for incentive-compatible mechanisms that eliminate market power, it is also implementable via a trading network that takes the form of a long intermediation chain in which each trader's information set is similar to those of his direct counterparties.


“Learning about Distress," April 2015.
Winner of the Marshall Blume Prize in Financial Research [First Prize]


I develop an analytically tractable dynamic asset pricing model to study expected returns of financially distressed firms in the presence of learning and investor activism. Learning critically affects distressed stocks' valuations and risk exposures as information about solvency is essential for firm survival in distress. Informational externalities from active investors thus can also have first-order effects on distress risk premia. The presented model can shed light on a variety of empirical regularities related to financial distress, such as distressed firms' apparent stock market underperformance, momentum return dynamics, and negative abnormal returns after private placements of public equity involving active investors.


Macroprudential Bank Capital Regulation in a Competitive Financial System," with M. Harris and M. Opp, October 2014


We propose a tractable general equilibrium framework to analyze the effectiveness of bank capital regulations when banks face competition from public markets. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineffective but also imply that, over some ranges, increases in capital requirements cause more banks to engage in value-destroying risk-shifting. Our model generates a set of novel implications that highlight the dependencies between optimal bank capital regulation and the comparative advantages of various players in the financial system.


Intertemporal Information Acquisition and Investment Dynamics”  , February 2015



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


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.



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