Three Essays in Financial Economics
Abstract
This dissertation consists of three essays on financial economics. In the first essay, I build a theoretical model for pricing collateralized debt obligations (CDO) based on varying precision of credit ratings. A credit rating agency (CRA) produces noisy ratings to maximize the proportion of firms with high ratings but still ensures that firms choose lower risk projects. Increased fundamental volatility in bad times makes high-risk choices more appealing to firms, which the CRA responds to by increasing the precision of ratings. Only firms that can call existing bonds and issue new ones will choose low risk projects at such times. Therefore, the resulting high risk strategy for constrained firms in such periods implies that junior tranches get seriously impacted. In contrast, senior tranches are more exposed to growth shocks, which increase the risk of all firms' projects. I structurally estimate the parameters of the model and show that the model is able to explain the levels and a significant fraction of the volatilities of CDO tranche spreads.
In the second essay, I take the user cost approach to modelling a banking firm and analyze banks' optimal response to monetary and regulatory changes. The bank maximizes its profit choosing the quantities of financial goods such as deposits, loans, and investments based on their user costs. I estimate the system of demand and supply of financial goods using data on U.S. banks over the 1992-2013 period. The policy tools change the user costs of the financial goods and, therefore, bank's demand and supply of financial goods. I report the effects of an increase in interest paid on reserves, federal funds rate and others.
In the third essay, I develop a framework for estimating demand systems with autoregressive conditional heteroscedasticity (ARCH). In this setup, the conditional variance is a random variable depending on current and past information. Since most economic and financial time series are nonlinear, using parametric nonlinear demand systems with an ARCH-component can significantly improve the quality of a model. I prove the invariance of the maximum likelihood estimator with respect to the choice of an estimated demand subsystem.
Description
Keywords
Education--Finance
Citation
Isakin, M. (2016). Three Essays in Financial Economics (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca. doi:10.11575/PRISM/28438