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Financial Intermediation

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Marriott Philadelphia Downtown, Meeting Room 413
Hosted By: Econometric Society

Where Has All the Big Data Gone?

Maryam Farboodi
,
Princeton University
Adrien Matray
,
Princeton University
Laura Veldkamp
,
New York University

Abstract

As the size of the financial sector has increased and ever more technology is deployed to process and transmit financial data, this could benefit society by allowing capital to be allocated more efficiently. Recent work supports this notion. Bai, Philippon, and Savov (2013) document an improvement in the ability of financial prices to predict firms' future earnings. This "price informativeness" rises for firms in the S&P 500. We show that most of this rise comes from a composition effect. S&P 500 firms are getting older and larger. In contrast, the ability of the market to price new, small and growing firms, from whom most of productivity growth comes, is deteriorating. To understand the causes and social consequences of this shift, we formulate a model designed to show why investors prefer to process large firm data. We then use the model to explore why individual investors might make data processing decisions that deviate from the social optimum. The model provides a possible explanation for why the ever-growing reams of data processed by the financial sector have not delivered tangible, real, economic benefits, for the vast majority of firms.

Financial Fragility with SAM?

Daniel Lewis Greenwald
,
Massachusetts Institute of Technology
Tim Landvoigt
,
University of Texas-Austin
Stijn Van Nieuwerburgh
,
New York University

Abstract

Shared Appreciation Mortgages (SAMs) feature mortgage payments that adjust with house prices. Such mortgage contracts can stave off home owner default by providing payment relief in the wake of a large house price shock. SAMs have been hailed as an innovative solution that could prevent the next foreclosure crisis, act as a work-out tool during a crisis, and alleviate fiscal pressure during a downturn. They have inspired Fintech companies to other home equity contracts. However, the home owner's gains are the mortgage lender's losses. We consider a model with financial intermediaries who channel savings from saver households to borrower households. The financial sector has limited risk bearing capacity. SAMs pass through more aggregate house price risk and lead to financial fragility when the shock happens in periods of low intermediary capital. We compare house prices, mortgage rates, the size of the mortgage sector, default and refinancing rates, as well as borrower and saver consumption between an economy with standard mortgage contracts and an economy with SAMs.

Security Design, Informed Intermediation, and the Resolution of Borrowers' Financial Distress

John Chi-Fong Kuong
,
INSEAD
Jing Zeng
,
Frankfurt School of Finance & Management

Abstract

Banks as informed intermediaries have information about their borrowers to make efficient liquidation versus restructuring decisions for distressed loans, but their information also creates an adverse selection problem when they seek financing from uninformed investors. We demonstrate that a bank with high-quality loans faces incentives to distort its resolution policy in order to improve allocative efficiency and to signal information about loan quality, with the direction of the distortion depending on whether the security issued to uninformed investors is concave or convex. We find that the bank's equilibrium resolution policy is biased towards liquidation when it optimally designs and sells a debt (concave) security to raise financing. Regulations aimed at promoting ex post efficient liquidation may increase banks' financing costs and discourage their screening effort, thereby reducing welfare.
Discussant(s)
Vincent Glode
,
University of Pennsylvania
Timothy James McQuade
,
Stanford University
Manuel Adelino
,
Duke University
JEL Classifications
  • A1 - General Economics