Essays on financial macroeconomics

Pinto, Pedro Franco de Campos (2016) Essays on financial macroeconomics. PhD thesis, London School of Economics and Political Science.

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Abstract

In this thesis, I study various aspects of the financial system particularly relevant to macroeconomics, focusing on securitization and financial product complexity. The first chapter is devoted to developing a model dealing with the interaction between securitization and recourse (limited liability) laws, and its effect on the housing market. The model finds that securitization of mortgage loans allows originators to pass on risk. As a consequence, investor borrowers start receiving loans, and when these loans are non-recourse, there is a put option that pushes up house prices during a demand boom. I thus have the novel prediction that the interaction between securitization and non-recourse status should lead to higher house prices. The second chapter proceeds to test this prediction, making use of heterogeneity in recourse laws in US states. I find that non-recourse status roughly doubles the size of the positive relationship between securitization and house prices in a state, and can explain 75% of the difference in prices between recourse and non-recourse states. To address potential endogeneity concerns, I propose a new instrument for securitization, the distance of a housing market to the headquarters of ‘originate and securitize’ institutions, and find further empirical support for the predictions of the model. In the last chapter (joint work with Michel Azulai), we turn our attention away from the behaviour of banks to asking why regulators have difficulties in regulating them. We develop a framework focusing on financial product complexity and how it can make it costly for regulators to screen them. Bad financial products created by banks can lead to moral hazard issues, as banks are bailed out in case of adverse shocks. Thus regulators must incentivise banks so that they do not ’abuse’ complexity by making bad products complex. We show what the optimal contract is like for when regulators can commit, and discuss how the contract would be with limited regulator commitment.

Item Type:	Thesis (PhD)
Additional Information:	© 2016 Pedro Franco de Campos Pinto
Library of Congress subject classification:	H Social Sciences > HB Economic Theory
Sets:	Departments > Economics
Supervisor:	Sheedy, Kevin
URI:	http://etheses.lse.ac.uk/id/eprint/3620

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