Working Papers
Revise and resubmit, Review of Financial Studies 

Abstract: This paper shows that collateralised short-term debt, although privately optimal for reducing borrowers' moral hazard, can cause fragility (multiple equilibria) when the collateral market is illiquid. A new form of coordination failure between borrowers' ex ante margin and risk-taking decisions engenders a systemic run in the collateralised debt market: large changes in credit rationing, margins, repo spreads, etc. The model also captures the large (small) cross-sectional differences between safe and risky collateral in bad (good) times. Finally, I show that asset price guarantees could improve welfare and promote stability but repealing repo contracts' ``automatic stay'' exemption might do the opposite.

Abstract:  

Does securitisation distort the foreclosure decision of non-performing mortgages? In a model in which an informed securitiser jointly designs the mortgage-backed security and the foreclosure policy, we find that the securitiser with high-quality pool optimally adopts an excessive foreclosure policy and sells a risky debt (the senior tranche) to uninformed investors. Foreclosure effectively mitigates the adverse selection friction in securitisation by making the risky debt less information sensitive. Our model predicts that foreclosure likelihood, loan loss, mortgage servicers' capacity and incentive to modify delinquent loans endogenously vary with the quality of the underlying mortgage pool. Policies that aim to restore ex post efficient foreclosures may inadvertently reduce mortgage originators' screening effort..



(New, draft coming soon!) Funding constraints and Informational Efficiency (with Sergei Glebkin and Naveen Gondhi)
Abstract:  

We develop a tractable REE model in which investors acquire information and are subject to general portfolio constraints. In application, we study the effect of Value-at-Risk based margin constraints and find a novel amplification mechanism featuring an information spiral. When investors suffer a negative shock on initial wealth, due to margin constraints, their maximum (absolute) trading positions thus profit from informed trading become smaller. In response, investors acquire less information, causing price to become less informationally efficient and more volatile in equilibrium. Finally, higher (expected) price volatility tightens the margin constraints, further lowering information acquisition and price efficiency. Our model suggests a new, information-based rationale why the wealth (equity capital) of informed investors are important and can derive some testable empirical implications.


Work in Progress
Maturity collapse and asset market runs