Asset Pricing with Dynamic Margin Constraints

This paper provides a novel theoretical analysis of how endogenous time‐varying margin requirements affect capital market equilibrium. I find that margin requirements, when there are no other market frictions, reduce the volatility and correlation of returns as well as the risk‐free rate, but increase the market price of risk, the risk premium, and the price of risky assets. Furthermore, margin requirements generate a strong cross‐sectional dispersion of stock return volatilities. The results emphasize that a general equilibrium analysis may reverse the conclusions of a partial equilibrium analysis often employed in the literature.     

How Sticky Is Sticky Enough? A Distributional and Impulse Response Analysis of New Keynesian DSGE Models

In this paper, we add to the literature on the assessment of how well data simulated from new-Keynesian dynamic stochastic general equilibrium (DSGE) models reproduce the dynamic features of historical data. In particular, we evaluate sticky price, sticky price with dynamic indexation, and sticky information models using impulse response and correlation measures and via implementation of a distribution based approach for comparing (possibly) misspecified DSGE models using simulated and historical inflation and output gap data. One of our main findings is that for a standard level of stickiness (i.e., annual price or information adjustment), the sticky price model with indexation dominates other models. We also find that when a lower level of information and price stickiness is used (i.e., bi-annual adjustment), there is much less to choose between the models (see Bils and Klenow 2004 , for evidence in favor of lower levels of stickiness). This finding is due to the fact that simulated and historical densities are "much" closer under bi-annual adjustment.     

Outsourcing in the International Mutual Fund Industry: An Equilibrium View

We study outsourcing relationships among international asset management firms. We find that, in companies that manage both outsourced and in‐house funds, in‐house funds outperform outsourced funds by 0.85% annually (57% of the expense ratio). We attribute this result to preferential treatment of in‐house funds via the preferential allocation of IPOs, trading opportunities, and cross‐trades, especially at times when in‐house funds face steep outflows and require liquidity. We explain preferential treatment with agency problems: it increases with the subcontractor's market power and the difficulty of monitoring the subcontractor, and decreases with the subcontractor's amount of parallel in‐house activity.     

An Experimental Analysis of Contingent Capital with Market‐Price Triggers

We report an experiment that evaluates three market‐based regimes for triggering the conversion of contingent capital bonds into equity: a “fixed‐trigger” regime, where a price threshold triggers mandatory conversion; a “regulator” regime, where regulators make conversion decisions based on prices; and a “prediction market” regime, where regulators also observe a market that predicts conversion. Consistent with theory, we observe inefficiencies and conversion errors in the fixed‐trigger and regulator regimes. The prediction market somewhat improves the regulator's performance, but inefficiencies and conversion errors persist. The regulator regime has conversion errors over the widest range of shocks.