Financial Engineering

This paper attempts to contribute to two rapidly growing branches in economic theory: asset pricing and “overlapping generations” models. The model is formulated and it is shown that equilibrium prices exist, and some of their properties are discussed. Then the model is applied to an asymmetric information environment to see if randomness in the number of informed agents could confuse the uninformed. Surprisingly, it could not.

In this paper, we analyze the behavior of equilibrium real interest rates in an identical consumer economy in which the preferences are represented by time additive logarithmic utility functions and production technologies are Cobb-Douglas with stochastic constant returns to scale. The following main results are established. (i) When there is no relative price uncertainty, it is shown that the equilibrium interest rate exhibits a mean reverting tendency. A nontrivial steady state distribution is found to exist for the equilibrium interest rate.

We show that any triangulation of the 5-cube I5 by complete truncation, i.e., "slicing off" the even (or the odd) vertices, cannot use less than 67 or more than 68 pieces.

This paper is a theoretical investigation of equilibrium forward and futures prices. We construct a rational expectations model in continuous time of a multigood, identical consumer economy with constant stochastic returns to scale production. Using this model we find three main results. First, we find formulas for equilibrium forward, futures, discount bond, commodity bond and commodity option prices.

Bank balance sheet lending is commonly viewed as the predominant form of lending. We document and study two margins of adjustment that are usually absent from this view using microdata in the $10 trillion U.S. residential mortgage market. We first document the limits of the shadow bank substitution margin: shadow banks substitute for traditional “deposit-taking” banks in loans which are easily sold, but are limited from activities requiring on-balance-sheet financing.

In this paper, I estimate the magnitude of an informational friction limiting credit reallocation to firms during the 2007 to 2009 financial crisis. Because lenders rely on private information when deciding which relationship to end, borrowers looking for a new lender are adversely selected. I show how to separately identify private information from information common to all lenders but unobservable to the econometrician by using bank shocks within a discrete choice model of relationships.