Essays in Financial Economics

Abstract

This dissertation studies the interaction between the financial sector and real economy. The first chapter develops a parsimonious continuous time model to study the role of endogenously varying financial competition during periods of crisis. Our analysis provides strong support for “bad bank” solutions among similarly targeted government interventions. The second chapter characterizes the connection between two strongly related frictions for financial firms: the principal-agent conflict with their collateral managers, and the asymmetric information problem affecting their collateral portfolios. Solving the principal-agent conflict requires banks to pledge away payoffs to prevent shirking–however, pledging away these payoffs provides a debt-like structure that incentivizes banks to unload high quality assets. These transactions exacerbate the quality of banks’ collateral portfolios, especially during times of crisis. The third chapter, co-authored with Jeong-Ho Kim, provides an empirical analysis of the unintended consequences of quantitative easing and low interest rate policy. Specifically, we find that conditions in the wealth management industry interacted strongly with low-interest rates to provide incentives for mutual funds to “reach for yield” by taking on greater risk.