Browsing by Subject "Financial crisis"
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Item Essays on achieving investment targets and financial stability(2013-05) Monin, Phillip James; Zariphopoulou, Thaleia, 1962-This dissertation explores the application of the techniques of mathematical finance to the achievement of investment targets and financial stability. It contains three self-contained but broadly related essays. Sharpe et al. proposed the idea of having an expected utility maximizer choose a probability distribution for future wealth as an input to her investment problem rather than a utility function. They developed the Distribution Builder as one way to elicit such a distribution. In a single-period model, they then showed how this desired distribution for terminal wealth can be used to infer the investor's risk preferences. In the first essay, we adapt their idea, namely that a desired distribution for future wealth is an alternative input attribute for investment decisions, to continuous time. In a variety of scenarios, we show how the investor's desired distribution, combined with her initial wealth and market-related input, can be used to determine the feasibility of her distribution, her implied risk preferences, and her optimal policies throughout her investment horizon. We then provide several examples. In the second essay, we consider an investor who must a priori liquidate a large position in a primary risky asset whose price is influenced by the investor's liquidation strategy. Liquidation must be complete by a terminal time T, and the investor can hedge the market risk involved with liquidation over time by investing in a liquid proxy asset that is correlated with the primary asset. We show that the optimal strategies for an investor with constant absolute risk aversion are deterministic and we find them explicitly using calculus of variations. We then analyze the strategies and determine the investor's indifference price. In the third essay, we use contingent claims analysis to study several aggregate distance-to-default measures of the S&P Financial Select Sector Index during the years leading up to and including the recent financial crisis of 2007-2009. We uncover mathematical errors in the literature concerning one of these measures, portfolio distance-to-default, and propose an alternative measure that we show has similar conceptual and in-sample econometric properties. We then compare the performance of the aggregate distance-to-default measures to other common risk indicators.Item Essays on commercial mortgage-backed security(2015-08) Shao, Ruoyu; Griffin, John M. (John Meredith), 1970-; Xu, Haiqing, 1970-; Cabral, Marika; Hallman, Greg; Kline, BrendanStructured finance products including Commercial Mortgage-Backed Security (CMBS) suffered tremendous losses during the 2008 financial crisis. My dissertation consists of three chapters that contribute to our understanding of the causes of the crisis. My first chapter is an empirical study on potential misrepresentation of CMBS. Although CMBS suffered large scale losses during the past financial crisis, currently, this segment of the structured finance market has almost recovered to its pre-crisis level. While evidence was found regarding the systematic misrepresentation of loan quality information for residential mortgages, there was no evidence of large scale misreporting for CMBS. This paper examines important financial variables reported in financial documentation of commercial mortgages such as Underwritten Net Operating Income (UW NOI). I find that, prior to the financial crisis, UW NOI was consistently over-estimated by an average of 7.8%. This overstatement lead to Loan-to-Value ratio and Debt-Service Coverage Ratio being misreported as 67.1% from 84.2% and DSCR as 1.72 from 1.59. The levels of aggregate over-estimation substantially differed among originators and the variations explained the performance differences between originators. Each 1% increase in over-estimation resulted in a 20% higher likelihood in delinquency. The ratings issued by rating agencies failed to capture the adverse impact from over-estimation on CMBS performance. The second chapter of my dissertation studies the CMBS credit rating market using a strategic interaction model. The 2008 financial crisis that arose in the mortgage market has brought renewed attention to the failure of the credit rating mechanism. Using Bloomberg data, I conduct a structural analysis of strategic credit rating behaviors in the Commercial Mortgage-Backed Security (CMBS) market. This chapter models the CMBS credit ratings as strategic behaviors that reflect the peer effects from other rating agencies. Peer effects are incorporated through the estimation of market “beliefs” about the ratings. We establish semiparametric identification of the model by exploiting an exogenous equilibrium shift due to the financial crisis. Moreover, the model is estimated using a two-step estimation procedure. The empirical results strongly support the presence of positive peer effects. By including peer effects, the fitness of our model has been significantly improved. The third chapter examines the entrant-related consequences in the CMBS credit rating market after the financial crisis. I find that the entrant has given more lenient ratings than the incumbents. Among securities that obtained ratings from both entrant and incumbent rating agencies, 13.8% are granted a higher rating from the entrant than the incumbents from 2011-2014. In addition, deal level and loan level analyses further provide evidence that the entrant granted CMBS with 2.25% higher AAA-rated portion while the underlying loans in these CMBS are 10% more likely to become delinquent than other rating agencies. The lenient ratings from the entrant coincide with the sharp increase in the entrant's market share.Item Essays on pricing under uncertainty and heterogeneity in the finance-trade-growth nexus(2013-08) Yousefi, Seyed Reza; Whinston, Andrew B.My dissertation consists of empirical and theoretical essays on Microeconomic Theory and International Economics. The first chapter discusses the existence and characterization of a model that determines producer's optimal pricing and allocation rule as a preannounced markdown schedule. The mechanism focuses on pricing and operational implications of allotting scarce resources when customers are heterogeneous in their valuations and sensitivities towards availability of product. The proposed mechanism suggests that a carefully designed multistep markdown pricing could achieve optimal revenue when selling a single unit. However, to sell multiple units, monopolist should modify the implementation of markdown pricing by either hiding the number of available products or selling them via contingent contracts and upfront payments. In the second essay, we study the heterogeneity of finance and growth nexus across countries. Our paper contributes to the literature by investigating whether this impact differs across regions and types of economy. Using a rich dataset, cross-section and dynamic panel estimation results suggest that the beneficial effect of financial deepening on economic growth in fact displays measurable heterogeneity; it is generally smaller in oil exporting countries; in certain regions, such as the Middle East and North Africa (MENA); and in lower-income countries. Further analysis suggests that these differences might be driven by regulatory/supervisory characteristics and related to differing performance on financial access for a given level of depth. The third chapter analyzes contraction of exports in the aftermath of severe financial crises and tests for its heterogeneity across different industries and based on their credit conditions. It provides a theoretical framework to provide insight on why sectors are hit disproportionately during and in the aftermath of severe financial distresses, and confirms most of them with empirical estimations. The findings suggest that industries with greater reliance on outside financing and fewer shares of tangible assets experience greater contractions in export volumes in the years following a severe financial crisis.Item Statistical problem with measuring monetary policy with application to the current crisis(2010-05) Pappoe, Naakorkoi; Auerbach, Robert D.; Stolp, ChandlerThis report reviews the 2007 financial crisis and the actions of the Federal Reserve. The Full Employment Act of 1946 and the "Humphrey-Hawkins" Act guides the Fed's actions. These two laws outline the long-term goals of the monetary policy framework the Fed uses; however, the framework lacks principles for achieving the mandated long term goals such as reliable, complete data. This report looks at the use of model-based forecasting and gives recommendations for principles which will strengthen the preexisting monetary framework.