Essays in Financial Economics
Das, Sreyoshi
2017
Abstract
My dissertation is a collection of three essays relating to three important aspects of financial markets - assets, firms, and households. While the first two chapters focus on financial linkage between asset markets (emerging country CDS and bonds), and firms (US financial system), the last chapter explores how households form beliefs about the stock markets and macroeconomy in general. In the first chapter I show that the emerging market CDS-bond basis systematically declines when US interest rates fall. This is intriguing because in a frictionless market, the CDS-bond basis, defined as CDS spread minus bond spread should be zero. The basis deviations are temporary and occur in both pre and post the financial crisis of 2008-09, although the effect is arguably stronger post crisis. The relationship is driven by a rise in investor demand to sell CDS when US rates are low and the investor motive is most consistent with reaching for yield. Aggregate outstanding sovereign CDS positions held by investors show net CDS sold increases when the rates fall. I also find the largest mutual funds in the emerging debt market are net sellers of CDS during 2006-2016 and show similar sensitivity to interest rates. The second chapter is joint work with Sumanta Basu, George Michailidis, and Amiyatosh Purnanandam. We introduce and estimate a model that leverages a system-wide approach to identify systemically important financial institutions. Our Lasso penalized Vector Auto-regressive (LVAR) model explicitly allows for the possibility of connectivity amongst all institutions under consideration: this is in sharp contrast with extant measures of systemic risk that, either explicitly or implicitly, estimate such connections using pair-wise relationships between institutions. Using simulations we show that our approach can provide considerable improvement over extant measures. We estimate our model for large financial institutions in the U.S. and show its usefulness in detecting systemically stressful periods and institutions. The third chapter is joint work with Camelia M. Kuhnen and Stefan Nagel. We show that individuals' macroeconomic expectations are influenced by their socioeconomic status (SES). Individuals with higher income or higher education levels are more optimistic about future macroeconomic developments, including business conditions, the national unemployment rate, and stock market returns. In the time series, the spread in beliefs between high-SES and low-SES individuals diminishes significantly during recessions. We document that SES-related differences in macroeconomic expectations are in part driven by different recent changes in people's personal finances, the type of news they attend to, and the economic conditions in their county of residence. Moreover, we find that SES-driven expectations can help explain why, during non-recession periods, individuals with higher socioeconomic status have more exposure to the stock market and are more inclined to purchase homes, durable goods, or cars.Subjects
Emerging market Financial sector connectivity Socioeconomic status and beliefs
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