Essays in macro-finance

Raja, Akash (2023) Essays in macro-finance. PhD thesis, London School of Economics and Political Science.

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Abstract

This thesis consists of four chapters. The first chapter (co-authored with Sigurd Galaasen) studies the stock market entry and exit decisions of retail investors. Using Norwegian administrative data, we show that transitory spells in the stock market are common. A workhorse portfolio choice model requires sizable per-period participation costs to generate these patterns. We propose a theory of experience effects, whereby agents form beliefs over future stock returns based on their own realised returns. This model can explain the short-term dynamics in participation without requiring high costs. The second chapter analyses how banks respond to capital regulation using data on bank-specific requirements in the UK. I find that actual capital ratios adjust following changes in requirements, though the pass-through is incomplete. The adjustment occurs primarily through capital accumulation and the risk composition of the asset portfolio. I find that the reaction of banks depends on the sign of the regulatory change and has changed since the financial crisis. The third chapter exploits the implementation of the Basel I capital regulations in the US to study how bank capital affects lending. Using a difference-in-differences strategy, I show that undercapitalised banks reduced the size of their balance sheet to adjust to the new capital requirements. This decline in total assets is concentrated in loans, particularly commercial & industrial and non-residential real estate loans, with residential mortgage lending remaining unaffected. The final chapter (co-authored with David Aikman, Jonathan Bridges, Sinem Hacioğlu Hoke, and Cian O’Neill) explores the relationship between financial vulnerabilities and downside risks to economic growth. Using quantile regressions applied to cross-country panel data, we show that credit and property price booms and wide current account deficits increase downside risks to GDP growth in the medium term. Such risks can be partially mitigated by increasing banking sector capitalisation.

Item Type:	Thesis (PhD)
Additional Information:	© 2023 Akash Raja
Library of Congress subject classification:	H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
Sets:	Departments > Economics
Supervisor:	Ilzetzki, Ethan and Moll, Benjamin and Peng, Cameron and Reis, Ricardo
URI:	http://etheses.lse.ac.uk/id/eprint/4707

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