On Thursday, June 23 at 5 pm, room 3211 (Shabolovka str. 26) ICEF and LFE will hold the Research Seminar in Finance.
Speaker: José Scheinkman (Columbia University/Princeton University)
Theme: "Savings Gluts and Financial Fragility" joint with Patrick Bolton and Tano Santos
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On Thursday, June 23 at 5 pm, International College of Economics and Finance and International Laboratory of Financial Economics will hold the Research Seminar in Finance.Speaker: José Scheinkman (Columbia University/Princeton University)Theme: "Savings Gluts and Financial Fragility" joint with Patrick Bolton and Tano SantosVenue: Shabolovka st., 26, room 3211
Abstract: We investigate the effects of an increase in liquidity (a "savings glut") on the incentives to originate high quality assets and on the fragility of the financial sector. Originators incur private costs when originating high quality assets. Assets are subsequently distributed in two markets: A private market where informed intermediaries operate and an exchange where uninformed liquidity trades. Uninformed liquidity pays the same price irrespective of the quality of the assets, which discourages good origination. Informed liquidity instead creams skims the best assets paying a premium over the uninformed price, which encourages originators to supply good assets. We show that the positive origination effects of an increase in liquidity matter when the overall level of liquidity is low whereas the opposite is true when liquidity is abundant - an increase in liquidity has a non-monotone effect on origination incentives. Leverage increases monotonically with liquidity and is highest precisely when incentives for good asset origination are at their lowest. Thus plentiful liquidity leads to fragile balance sheets: On the asset side there are more low quality assets and on the liability side more of those assets are funded with debt. We relate our findings to some of the stylized facts observed in financial markets in the lead up to the Great Recession and draw policy conclusions from the model.
Pass can be ordered by:
Phone: 8 (495) 772-95-90*26090
e-mail: vzheleznov@hse.ru
contact: Zheleznov Slava
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