Macroeconomic effects of secondary market trading

This paper develops a theory of the credit cycle to account for recent evidence that capital is increasingly allocated to inefficiently risky projects over the course of the boom. The model features lenders who sell risk exposure to non-lender investors in order to relax borrowing constraints, but are tempted to produce and sell off bad assets when asset prices are sufficiently high. Asset prices gradually increase during the boom because non-lender wealth grows as their risk-taking pays off, triggering a fall in asset quality and precipitating an eventual crisis. I study the initial conditions that give rise to the credit cycle and consider policy implications

Comparison of variables measured with a Scheimpflug device for evaluation of progression and detection of keratoconus

Keratoconus is a progressive ectatic corneal disorder, which can result in severe visual impairment. The new ABCD keratoconus classification system allows differentiated description of the disease. Aim of the study was to evaluate the components of this novel staging system (ARC, PRC, thinnest pachymetry) as well as topometric indices, deviation of normality indices, and other parameters in terms of repeatability and reliability. 317 eyes with keratoconus were examined twice with a Scheimpflug device (Pentacam, Oculus). Bland Altman analysis and intraclass correlations were carried out to evaluate the parameters repeatability and reliability. Apart from IHA (ICC=0.730), all parameters showed excellent reliability (ICC>0.900). ARC, PRC, thinnest pachymetry, Kmax, CKI, KI, Rmin, and Progression Avg were the best repeatable parameters with relative repeatability values<2.5%. Other parameters performing well in terms of repeatability were IHD, ISV, IVA, and final D (RR<13%). Regression analysis revealed consistently high repeatability along all stages of keratoconus for PRC, thinnest pachymetry, and CKI. All parameters of the ABCD staging system showed excellent reliability and repeatability, PRC and thinnest pachymetry even at all stages of keratoconus and can consequently be reliably used in the determination of keratoconus progression

Mutations in MAP3K7 that Alter the Activity of the TAK1 Signaling Complex Cause Frontometaphyseal Dysplasia.

Frontometaphyseal dysplasia (FMD) is a progressive sclerosing skeletal dysplasia affecting the long bones and skull. The cause of FMD in some individuals is gain-of-function mutations in FLNA, although how these mutations result in a hyperostotic phenotype remains unknown. Approximately one half of individuals with FMD have no identified mutation in FLNA and are phenotypically very similar to individuals with FLNA mutations, except for an increased tendency to form keloid scars. Using whole-exome sequencing and targeted Sanger sequencing in 19 FMD-affected individuals with no identifiable FLNA mutation, we identified mutations in two genes-MAP3K7, encoding transforming growth factor β (TGF-β)-activated kinase (TAK1), and TAB2, encoding TAK1-associated binding protein 2 (TAB2). Four mutations were found in MAP3K7, including one highly recurrent (n = 15) de novo mutation (c.1454C&gt;T [ p.Pro485Leu]) proximal to the coiled-coil domain of TAK1 and three missense mutations affecting the kinase domain (c.208G&gt;C [p.Glu70Gln], c.299T&gt;A [p.Val100Glu], and c.502G&gt;C [p.Gly168Arg]). Notably, the subjects with the latter three mutations had a milder FMD phenotype. An additional de novo mutation was found in TAB2 (c.1705G&gt;A, p.Glu569Lys). The recurrent mutation does not destabilize TAK1, or impair its ability to homodimerize or bind TAB2, but it does increase TAK1 autophosphorylation and alter the activity of more than one signaling pathway regulated by the TAK1 kinase complex. These findings show that dysregulation of the TAK1 complex produces a close phenocopy of FMD caused by FLNA mutations. Furthermore, they suggest that the pathogenesis of some of the filaminopathies caused by FLNA mutations might be mediated by misregulation of signaling coordinated through the TAK1 signaling complex

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

Macroeconomic effects of secondary market trading

This paper develops a theory of the secondary market trading of financial securitities in which endogenous asset market dynamics generate periods of growing aggregate credit volumes and falling credit standards even in the absence of "financial shocks." Falling credit standards in turn lead to excess risk exposure in the aggregate, precipitating future crises. The credit cycle is triggered by low interest rates, and longer booms lead to sharper crises. Saving gluts and expansionary monetary policy thus lead to financial fragility over time. Pro-cyclical regulation of secondary market traders, such as asset managers or hedge funds, can improve welfare even when such traders are not levered

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

A dynamic theory of collateral quality and long-term interventions

We study a dynamic model of collateralized lending under adverse selection in which the quality of collateral assets is endogenously determined by hidden effort. Complementarities in incentives lead to non-ergodic dynamics: Asset quality and output grow when asset quality is high, but stagnate or deteriorate otherwise. Inefficiencies remain, even in the most efficient competitive equilibrium-investment and output are vulnerable to spells of lending market illiquidity, and these spells may persist because of suboptimal effort. Nevertheless, benevolent regulators without commitment can destroy welfare by prioritizing liquidity over incentives. Optimal interventions with commitment call for large, long-term subsidies in excess of what is required to restore liquidity

Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis

&lt;p&gt;Replication package for Review of Economic Studies Manuscript 29315&lt;/p&gt; &lt;p&gt;&quot;Information Spillovers and Sovereign Debt:&nbsp;Theory Meets the Eurozone Crisis&quot;&lt;/p&gt; &lt;p&gt;by&lt;/p&gt; &lt;p&gt;Harold Cole, Daniel Neuhann and Guillermo Ordonez.&lt;/p&gt; &lt;p&gt;This package contains raw data, code for data analysis, and matlab code for simulations reported in the paper.&lt;/p&gt

Less bank regulation, more non-bank lending

Bank deregulation in the form of the repeal of the Glass-Steagall Act facilitated the entry of non-bank lenders into the market for syndicated loans during the pre-2008 credit boom. Institutional investors disproportionately purchase tranches of loans originated by universal banks able to cross-sell loans and underwriting services to firms (as permitted by the repeal). A shock to cross-selling intensity increases loan liquidity at origination and over time. The mechanism is that non-loan exposures ensure monitoring even when banks retain small loan shares. Our findings complement the conventional view that regulatory arbitrage caused the rise of non-bank lenders