Securities Markets and Macroeconomic Outcomes
Saturday, Jan. 7, 2017 3:15 PM – 5:15 PM
- Chair: Philipp Schnabl, New York University
Macroeconomic Effects of Secondary Market Trading
AbstractThis paper develops a theory of credit cycles to account for recent evidence that capital is increasingly allocated to inefficiently risky projects during credit booms. The model features lenders who sell risky assets to less informed investors in order to relax collateral constraints. When asset prices are high, however, these lenders begin pro- ducing and selling inefficiently risky assets. Asset prices rise during booms because the buyers of risky assets grow wealthy when their risk-taking pay offs, triggering a decline in investment efficiency and an increase in aggregate risk exposure. I study conditions that give rise to credit cycles and consider policy implications.
Risk Taking and Low Longer-Term Interest Rates: Evidence From the United States Syndicated Loan Market
AbstractWe use supervisory data to investigate the ex-ante credit risk taken by different types of lenders in the U.S. syndicated loan market when longer-term interest rates are low. We find that insurance companies, pension funds, and, especially, structured-finance vehicles take higher risk when interest rates decrease. Banks accommodate other lenders' investment choices by originating riskier loans and subsequently divesting them partly. These results are consistent with “search for yield” by certain nonbanks and, if Federal Reserve policies affected longer-term rates, with a risk-taking channel of monetary policy. Longer-term interest rates appear to have a modest effect on loan spreads.
- G2 - Financial Institutions and Services