Networks, Asset Pricing, and Financial Intermediation.
Firm Networks and Asset Returns [PDF, Feb 1 2018] [Revise and Resubmit, The Review of Financial Studies]
This paper argues that changes in the propagation of idiosyncratic shocks along firm networks are important to understanding variations in asset returns. When calibrated to match key features of supplier-customer networks in the United States, an equilibrium model in which investors have recursive preferences and firms are interlinked via enduring relationships generates long-run consumption risks. Additionally, the model matches cross-sectional patterns of portfolio returns sorted by network centrality, a feature unaccounted for by standard asset pricing models.
WORK IN PROGRESS
Regulating Financial Networks
I study the problem of regulating a network of interdependent financial institutions that is susceptible to contagion when there is uncertainty regarding its precise structure. I show that such uncertainty reduces the scope for welfare improving regulations. Although acquiring institution-level information potentially reduces this uncertainty, it does not always lead to welfare improving interventions. Under certain conditions, welfare can be improved by regulation that targets a small set of institutions to reduce their risk-taking incentives. The size and composition of such a set crucially depends on the symmetry of the network, the cost of acquiring institution-level information, the cost of regulating institutions, and investors' attitudes toward ambiguity.
Basket Securities in Segmented Markets [PDF, Dec 22 2017]
Basket securities are securities that bundle different assets and whose payoffs depend on those of the underlying pool of assets, such as index funds and exchange-traded funds (ETFs). I study the design and welfare implications of basket securities issued in markets with limited investor participation in which profit-maximizing intermediaries are involved in financial innovation. I show that when only one intermediary exists, the equilibrium is not constrained efficient. Increasing competition among intermediaries increases the variety of baskets issued but does not necessarily improve investors’ welfare.