credit supply and the housing boom an increase in credit supply driven by looser lending constraints in the mortgage market is the key force behind four empirical features of the housing boom before the great recession the unpreced

securitized markets international capital flows and global welfare we study the effect of collateralized lending and securitization on the global supply of securitized assets welfare and international net and gross capital flows in a two country general equilibrium model with idiosyncratic investment risk the financial sectors in the two countries home and foreign differ by the collateral requirement for investment loans with home requiring lower margins in autarky home endogenously supplies more assets and enables more risk sharing upon financial integration capital flows from foreign to home leading to lower interest rates and an increase in the global supply of assets foreign enjoys substantial welfare gains through better risk sharing and portfolio reallocation while the welfare experience for home is ambiguous gross capital flows arise when agents face aggregate shocks to the expected payoff to investment projects but can collapse when shocks concern the variance of returns

belief disagreements and collateral constraints belief disagreements have been suggested as a major contributing factor to the recent subprime mortgage crisis this paper theoretically evaluates this hypothesis i assume that optimists have limited wealth and take on leverage so as to take positions in line with their beliefs to have a significant effect on asset prices they need to borrow from traders with pessimistic beliefs using loans collateralized by the asset itself since pessimists do not value the collateral as much as optimists do they are reluctant to lend which provides an endogenous constraint on optimists ability to borrow and to influence asset prices i demonstrate that the tightness of this constraint depends on the nature of belief disagreements optimism concerning the probability of downside states has no or little effect on asset prices because these types of optimism are disciplined by this constraint instead optimism concerning the relative probability of upside states could have significant effects on asset prices this asymmetric disciplining effect is robust to allowing for short selling because pessimists that borrow the asset face a similar endogenous constraint these results emphasize that what investors disagree about matters for asset prices to a greater extent than the level of disagreements when richer contracts are available relatively complex contracts that resemble some of the recent financial innovations in the mortgage market endogenously emerge to facilitate betting

extrapolation and bubbles abstract we present an extrapolative model of bubbles in the model many investors form their demand for a risky asset by weighing two signals an average of the asset s past price changes and the asset s degree of overvaluation and waver over time in the relative weight they put on them the model predicts that good news about fundamentals can trigger large price bubbles that bubbles will be accompanied by high trading volume and that volume increases with past asset returns we present empirical evidence that bears on some of the model s distinctive predictions

price and delay competition between two service providers abstract in this paper we study situations in which two firms offer identical service for possibly different prices and response times customers choice between firms is based on their full price which includes the service fee plus expected waiting costs we consider a two level game the first game is a non cooperative game among customers who observe the prices but not the queue sizes and then decide if to give up the service balk or to join a queue in the latter case they need to decide which service provider to seek service from the second game is played between the firms who choose what prices to charge in making their price selections firms take into consideration the game played among customers the new assumption here in contrast with existing literature is that customers belong to one of two classes each of which is characterized by a waiting cost parameter for this model we propose a procedure for solving the former game analytically and the latter numerically various special cases are encountered such as asymmetric price equilibria continuum price equilibria and cases in which demand for service increases with the service fee

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

a welfare criterion for models with distorted beliefs this paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs instead of taking a stand on whose belief is correct our criterion asserts an allocation to be belief neutral ine cient if it is ine cient under any convex combination of agents beliefs while this criterion gives an incomplete ranking of social allocations it can identify negative sum speculation in a broad range of prominent models with distorted beliefs

a risk centric model of demand recessions and speculation we provide a continuous time risk centric representation of the new keynesian model which we use to analyze the interactions between asset prices financial speculation and macro economic outcomes when output is determined by aggregate demand in principle interest rate policy is highly effective in dealing with shocks to asset valuations however in practice monetary policy faces a wide range of constraints if these constraints are severe a decline in risky asset valuations generates a demand recession this reduces earnings and generates a negative feedback loop between asset prices and aggregate demand in the recession phase average beliefs matter not only because they affect asset valuations but also because they determine the strength of the amplification mechanism in the ex ante boom phase belief disagreements or heterogeneous asset valuations matter because they induce investors to speculate this speculation exacerbates the crash by reducing high valuation investors wealth when the economy transitions to recession which depresses wealth weighted average beliefs macroprudential policy that restricts speculation in the boom can pareto improve welfare by increasing asset prices and aggregate demand in the recession

animal spirits heterogeneous expectations and the amplification and duration of crises we introduce a simple equilibrium model of a market for loans households lend to firms and form expectations about their loan default probability under heterogeneous expectations with switching between forecasting strategies driven by reinforcement learning even a small fraction of pessimistic traders has a large aggregate effect causing a heterogeneous expectations risk premium i e significantly higher contract rates for loans and significantly lower output our stylized model illustrates how animal spirits and heterogeneous expectations may lead to aconfidence loss and to financial instability amplifying the magnitude of economic crises and slowing down recovery

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

adverse effects of leverage and short selling constraints in a financial market model with heterogeneous agents this paper investigates the impact of leverage and short selling constraints on financial market stability investors demand is modelled in a well known asset pricing model with heterogeneous beliefs in particular i generalise the heterogeneous agents model of brock and hommes 1998 and anufriev and tuinstra 2013 to allow for leverage constraints as well as a short selling tax i consider two examples of adaptive belief systems describing the coevolution of prices and investors beliefs first if the market is inhabited by fundamentalist and chartist traders demand constraints have potential adverse effects and may restrict the stabilising fundamentalist strategy such that mispricing and price volatility increase second if the market is inhabited by fundamentalists optimists and pessimists with fixed beliefs demand constraints drive down price volatility but mispricing remains the results suggest the stabilising effects of demand constraints in financial markets are limited only if asset prices are too high compared to fundamentals policy makers should consider constraining leverage ratios in order to deflate financial bubbles

securitization bubbles structured finance with disagreement about default risk abstract an additional reason for the structured finance boom of the 2000s may have been disagreement about default risk of collateral assets when risk neutral investors disagree about average default probabilities structuring collateral cash flow raises prices by concentrating optimists demand on risky tranches with disagreement about default correlation low correlation investors believe in diversification and pay high prices for senior tranches they deem riskless high correlation investors value junior tranches they expect to pay whenever aggregate conditions are good risk aversion and short selling through credit default swaps reduce the prices of both pass through and structured securitizations but may increase the return to tranching

trading in derivatives when the underlying is scarce abstract regulatory restrictions and market frictions can constrain the aggregate quantity of long and short positions in a security when these constraints bind we refer to the security as scarce and its price becomes distorted relative to its value in a frictionless market we show that an otherwise redundant derivative can reduce the price distortion of the underlying security by relaxing its scarcity we also show that it is especially important to analyze the underlying and derivative markets jointly when evaluating the impact of regulation such as short sales bans and position limits in derivatives that restricts trade

the dynamics of financially constrained arbitrage we develop a model of financially constrained arbitrage and use it to study the dynamics of arbitrage capital liquidity and asset prices arbitrageurs exploit price discrepancies between assets traded in segmented markets and in doing so provide liquidity to investors a collateral constraint limits their positions as a function of capital we show that the dynamics of arbitrage activity are self correcting following a shock that depletes arbitrage capital profitability increases and this allows capital to be gradually replenished spreads increase more and recover faster for more volatile trades although arbitrageurs cut their positions in these trades the least when arbitrage capital is more mobile across markets liquidity in each market generally becomes less volatile but the reverse may hold for aggregate liquidity because of mobility induced contagion

the real effects of sustainable responsible investing abstract sustainable and responsible investing sri may have a mixed effect on firms incentives to remove negative externalities whereas sri screening incentivizes the removal of externalities sri trading can disincentivize it when traders disagree on the externality removal s cash flow effects

collateral constraints and the law of one price an experiment we test the asset pricing implications of collateralized borrowing that is of using assets as collateral to borrow money in the laboratory to this purpose we develop a general equilibrium model with collateral constraints amenable to laboratory implementation and gather experimental data in the laboratory assets that can be leveraged fetch higher prices than assets that cannot even though assets payoffs are identical in all states of the world collateral value therefore creates deviations from the law of one price the spread between collateralizeable and noncollateralizeable assets is significant and quantitatively close to theoretical predictions

collateral constraints and asset prices abstract we study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes and heterogeneous preferences and beliefs we show that these constraints inflate stock prices and generate spikes and crashes in price dividend ratios and volatilities clustering of volatilities and leverage cycles they also lead to substantial decreases in interest rates and increases in sharpe ratios when investors are anxious about hitting constraints due to production crises in the economy furthermore stock prices have large collateral premiums over nonpledgeable incomes we derive asset prices and stationary distributions of the investors consumption shares in closed form

debt financing in asset markets short term debt such as overnight repurchase agreements and commercial paper was heavily used by financial institutions to fund their investment positions during the asset market boom preceding the financial crisis of 2007 2008 and later played a major role in leading to the distress of these institutions during the crisis what explains the popularity of short term debt in financing asset market investments geanakoplos 2010 presents a dynamic model of the joint equilibrium of asset markets and credit markets in which optimistic buyers of a risky asset use the asset as collateral to raise debt financing from less optimistic creditors the asset s collateral value depends on the marginal creditor s asset valuation and determines the buyers purchasing capacity to bid up the asset price geanakoplos posits that short term debt allows the asset buyers to maximize riskless leverage 1 short term debt however exposes the asset buyers to rollover risk e g acharya gale and yorulmaker 2011 and he and xiong 2012 forthcoming which is reflected in the fact that the asset buyers in geanakoplos model may not be able to obtain refinancing after a negative fundamental shock as a result they are forced to transfer their asset holdings to the

finite bubbles with short sale constraints and asymmetric information abstract we present a finite period general equilibrium model of an exchange economy with asymmetric information we say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one we show that necessary conditions for a strong bubble to occur are that 1 each agent must have private information in the period and state in which the bubble occurs 2 each agent must be short sale constrained at some period in the future with positive probability and 3 agents trades are not common knowledge we present examples of bubbles when the necessary conditions are satisfied journal of economic literature classification numbers c72 d52 d82 d84 g12 g14

the macroeconomics of shadow banking we propose a dynamic macroeconomic model of nancial intermediation in an environment where households demand liquid assets in contrast to the literature intermediaries can issue equity without any friction in normal times intermediaries maximize liquidity creation by levering up the collateral value of their assets a process we call shadow banking a rise in uncertainty causes investors to demand liquidity in bad states intermediaries respond by simultaneously deleveraging and substituting toward safe liabilities shadow banking eectively shuts down prices fall and investment plummets the model generates amplication via endogenous collateral runs as well as ight to quality eects the model s macroeconomic eects are consistent with a slow economic recovery even when and especially when intermediary capital is high we analyze the impact of several policy interventions in the areas of unconventional monetary policy and regulatory reform

house price beliefs and mortgage leverage choice we study the relationship between homebuyers beliefs about future house price changes and their mortgage leverage choices whether more pessimistic homebuyers choose higher or lower leverage depends on their willingness and ability to reduce the size of their housing market investments when households primarily maximize the levered return of their property investments more pessimistic homebuyers reduce their leverage to purchase smaller houses on the other hand when considerations such as family size pin down the desired property size pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly sized homes to determine which scenario better describes the data we investigate the cross sectional relationship between house price beliefs and mortgage leverage choices in the u s housing market we use plausibly exogenous variation in house price beliefs to show that more pessimistic homebuyers make smaller downpayments and choose higher leverage in particular in states where default costs are relatively low as well as during periods when house prices are expected to fall on average our results highlight the important role of heterogeneous beliefs in explaining households financial decisions

collateral motivated financial innovation collateral frictions have a profound effect on our economic landscape ranging from the design of financial securities laws and institutions to various rules and regulations we analyze a model with disagreement where securities and collateral requirements are endogenous it shows that the security that isolates the variable with disagreement is optimal in the sense that alternative securities cannot generate any trading in an economy with n states investors may introduce more than n securities and markets are still incomplete the model has several novel predictions on the behavior of basis the spread between the prices of an asset and its replicating portfolio

new perspectives on farm size and productivity abstract the farm size and productivity debate has been limited by the focus on land or labor productivity generally showing respective productivity advantages to smaller or larger sized farms our purpose is to provide new perspectives on the debate by bringing together evidence from a set of novel case studies in both rich and poor countries common to them are the adoption of total factor productivity tfp as the comparative performance measure and the reliance on panels of farm micro data the present article presents a synthesis of findings from five case studies in i malawi tanzania and uganda ii bangladesh iii brazil iv australia and v the united states the preponderance of evidence from these studies suggests that there is no single economically optimal agrarian structure rather it appears to evolve with the stage of economic development certain farm sizes face relative productivity advantages such as small farms in africa but with economic and market growth that smallholder advantage will likely attenuate moving toward constant and eventually increasing returns to size yet importantly small farms may be quite dynamic and need not be a drag on agricultural growth until perhaps well into the development process