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Date of Award
Doctor of Philosophy (PhD)
In the first chapter of my dissertation, I provide a novel framework – the cumulant generating function (cgf) of the market risk on the positive half real line – for studying the market risk which can be replicated by cross sections of index option prices in a model-free manner. Within this unifying framework, independent of the underlying price process, the VIX index measures the height of the cgf at one while the SVIX index proposed by Martin (2016) measures the convexity of the cgf over the interval [0, 2]. A tail index of the market risk, TIX, is proposed based on this framework which measures the tail decay rate of the distribution of market risk revealing the market perceptions of extreme risk. The change in TIX strongly predicts market returns both in and out of sample, with monthly R2 statistics of 3.33% and 6.15%, respectively, outperforming the popular return predictors in the literature. In the second chapter of my dissertation, I study a shadow banking system featuring collateral constraints to investigate the joint determination of haircut and interest rate, as well as its interaction with collateral asset pricing. The banks with limited commitment serve the households’ need for consumption smoothing by taking deposits with a risky asset used as collateral and pursue the maximal leverage returns. In a collateral equilibrium as in Geanakoplos (1997, 2003), agents’ marginal rates of substitution are equalized only in non-default states, only the deposit contract with the highest liquidity value per unit of collateral is traded, and the risky asset price is boosted such that banks earn zero profit. Relative to the traditional banking with full commitment, banks are better off if they are endowed with the collateral asset while households are strictly worse off. I also find (i) higher households’ risky asset endowment leads to a higher asset price because a stronger saving motive creates a scarcity of collateral, while higher banks’ collateral endowment has the opposite effects; (ii) for the quality of collateral, the higher asset price resulting from an upside improvement simply leads to a higher haircut with the interest rate unchanged since lenders do not care about upside risk; on the contrary, for lenders with a high risk aversion, a downside improvement of quality decreases the asset price because it alleviates the tension of imperfect risk sharing and, therefore, reduces the collateral value, but everything goes in opposite directions for a low risk aversion; (iii) collateral use exhibits a diminishing return to scale in the amount of borrowing supported. In the third chapter of my dissertation, I study specifically the implications of disaster concerns about financial intermediaries for stock market returns. Manela and Moreira (2017) develop a text-base measure of disaster concerns using phrase counts of front-page articles of the Wall Street Journal. While they do not find evidence for return predictability at the monthly horizon and, in particular, at any horizon for the financial intermediation category of this measure, I document that an increase in the news coverage of intermediation is followed by lower stock market returns next month in the sample since the World War II. The effect is economically large with a one-standard-deviation increase in the coverage associated with an 44 basis point decrease in next month’s stock market excess return.
Chair and Committee
Siddhartha Chib, Philip H. Dybvig, Asaf Manela, Paulo Natenzon,
Hao, Jinji, "Essays in Financial Economics" (2017). Arts & Sciences Electronic Theses and Dissertations. 1106.
Available for download on Thursday, May 19, 2022