Essays on the macroeconomics of financial markets

This dissertation consists of four essays on the macroeconomics of financial markets. Chapter 1 presents a theoretical framework to study the rise of securitization and secondary markets for financial assets. I show that the interplay of banks and the non-bank financial intermediary sector can lead to credit booms that end in financial crises, much like the financial boom and bust observed in the U.S. from 1990 to 2008. In line with empirical evidence, I show that low risk-free interest rates driven by expansionary monetary policy or a large inflow of savings can trigger such booms. I end by proposing regulatory tools to manage the credit cycle. Chapter 2, co-authored with Harold L. Cole and Guillermo Ordonez, is a theoretical study of international sovereign default crises. We propose a framework in which risk-averse investors can spend resources to learn about the default probabilities of sovereign countries. Sovereign bond price volatility increases when some investors acquire information because prices now more closely reflect default probabilities. This force induces other investors to learn, further increasing volatility and raising the specter of a crisis. When investors are exposed to the default risk of multiple countries, these crises events spill over across borders. Chapters 3 and 4, co-authored with Farzad Saidi, analyze the impact of universal banking on the performance of bank-dependent firms. Our basic argument, laid out in Chapter 3, is that universal banks, who are able to concurrently offer both loans and underwriting products, are better informed about their borrower firms, and thus can more efficiently provide external funds to these borrowers. We show empirically that the advent of universal banking after the repeal of the Glass-Steagall Act led to an increase in both the volatility and productivity of borrower firms, suggesting that more informed lenders allow firms to invest in productive ventures further along the risk-return frontier than was previously possible. In light of recent proposals to limit the scope of banking and re-establish the Glass-Steagall Act, our evidence suggests that there may be firm-level efficiency gains from concurrent lending and underwriting of corporate securities that should be balanced against the risks associated with banks becoming too big to fail and other concerns of macroeconomic fragility. In Chapter 4, we trace out the importance of universal banking for the structure of loan syndicates, one of the dominant sources of corporate borrowing. Loan syndicates typically assign one member to be the prime monitor of the borrower firm, with the other members taking a passive role. We show that universal banks are more likely to be chosen as lead arrangers, but take smaller lead arranger shares conditional on doing so. This result is driven only by the superior monitoring ability of universal banks and does not lead to worse firm-level outcomes. Our findings contrast with the previous literature that argued that falling lead arranger shares prior to 2008 were indicative of weak bank monitoring, and provides a deeper view of intermediary-firm interactions in the modern financial system. Degree Type Dissertation Degree Name Doctor of Philosophy (PhD) This dissertation is available at ScholarlyCommons: http://repository.upenn. edu/edissertations/1913 Graduate Group Economics First Advisor Harold L. Cole