2015 Theses Doctoral

Essays on Macroeconomics and Finance

Baek, Seungjun

This dissertation contains three essays examining the role of informational frictions in financial markets and its aggregate implications. In the first chapter, I study whether securitization can spur financial fragility. I build a model of banking with securitization, where financial intermediaries hold a well-diversified portfolio of asset-backed securities on their balance sheets. On the one hand, securitization diversifies idiosyncratic risk so as to increase the pledgeability of assets in the economy, allowing more profitable investment projects to be financed. On the other hand, individual financial intermediaries do not internalize the benefit of the transparency of the securities they produce, because that benefit is also diversified. Moreover, when financial intermediaries perceive their environment to be safe, they have little incentive to produce more information about the quality of their assets. This leads to an increase in the opaqueness of securitized assets in the economy, causing greater exposure of financial intermediaries to funding and solvency risk. Policy can have a role because of a market failure that induces the securitized-banking system to produce securities that are too opaque making the economy more prone to crises. An efficient macroprudential policy is to impose a flexible capital surcharge on opaque securities.
The second chapter characterizes the optimal interventions to stabilize financial markets in which there is a lemons problem due to asymmetric information. Potential buyers can obtain information about the quality of assets traded in the market to decide whether to buy the assets. A market equilibrium is not necessarily driven by fundamentals, but it can also be driven by agents' beliefs about fundamentals and the corresponding information choices. Multiple self-fulfilling equilibria may arise if the asset price has a large impact on the quality of assets, because a higher asset price increases the likelihood that nonlemons are traded. Large-scale asset purchases are inefficient to correct a market failure, because such purchases crowd out efficient liquidity reallocation in the private sector. In contrast, partial loss insurance, when combined with the credible announcement of an asset price target, implements the efficient allocation as a unique equilibrium. Moreover, the model predicts that direct asset purchases can cause large welfare losses, especially in the mortgage-backed securities markets, and therefore, the partial loss insurance with the credible announcement is the optimal way to correct the market failure in such securities markets.
The final chapter examines a new propagation mechanism by which the effects of uncertainty shocks amplify in the context of the dynamic stochastic general equilibrium framework. An increase in the cross-sectional dispersion of idiosyncratic returns induces entrepreneurs, who have risk-shifting incentive, to distort the quality of an investment project. This leads lenders to reallocate credit from the high productivity sector, in which the risk-shifting problem is more prevalent, to the low productivity sector, which in turn depresses aggregate economic activities further. Empirical evidence from NBER-CES Manufacturing Industry Database provides support for the model's predictions.