Publication:
Journal of Financial Economics, February 2016, Vol. 119 (2), pp. 249–283.
Working papers:
Risk Reallocation in OTC Derivatives Networks (paper available upon request)
Over-the-counter (OTC) derivatives markets are the key venue for quickly reallocating exposures to key risk factors such as interest rates, exchange rates, and credit amongst market participants. These markets are very large, and are characterized by a complex trading network with disperse prices. In this paper, we ask how the structure of the OTC derivatives trading network, the preferences and technologies of the participants, and the distribution of endowed exposures to the underlying risk factor, jointly determine the observed patterns of trade, post-trade exposures, and prices. Finally, we estimate the key parameters of our model, and we use the model to study comparative statics related to risk management and regulation.
In this paper, I examine asset pricing in a multisector model with sectors connected through an input-output network. Changes in the network are sources of systematic risk reflected in equilibrium asset prices. Two characteristics of the network matter for asset prices: network concentration and network sparsity. These two production-based asset pricing factors are determined by the structure of the network and are computed from input-output data. Consistent with the model predictions, I find a return spreads of 4.6% and -3.2% per year on sparsity and concentration beta-sorted portfolios, respectively.
We study information acquisition from peers when agents’ actions balance adaptation and coordination motives. Agents acquire information personally and may obtain additional information by connecting to other agents. Although equally informative regarding adaptation, the source’s relative position in the information structure is relevant to form expectations about actions of other players. In our setting, information sources are not perfectly substitutable, and the information of an “opinion maker”—an agent whose information is more public—is more informative of how others act. We show that, when players choose their connections, (i) it is always preferable to connect to opinion makers, and (ii) opinion makers have less incentives to form links. These two results characterize the endogenous shape of the network: Any strict equilibrium of the network formation game generates a hierarchical information structure. Furthermore, if the marginal cost of acquiring information is increasing, the information structure is “core-periphery”. We take advantage of the simplicity of the equilibrium information structure to provide two applications. First, we use data on earnings-per-share forecasts to provide an example of how much of the aggregate volatility of forecast can the information structure account for. Second, we focus on the origins of leadership: how individual characteristics influence the role of the agent in the information structure.
This paper investigates the implications of affirmative action in college admissions for welfare, aggregate output, educational investment decisions and intergenerational persistence of earnings. We construct an overlapping-generations model in which parents choose how much to invest in their child’s education, thereby increasing both human capital and likelihood of college admission. Motivated by a recent policy implemented in Brazil, we calibrate the model to quantify affirmative action long-run effects. We find that affirmative action targeting the bottom quintile of the income distribution is a powerful policy to reduce intergenerational persistence of earnings and improve welfare and aggregate output.

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