Department of Finance, Tsinghua SEM
Beijing 100084, China
Information about this author at RePEc
NBER Working Papers and Publications
|September 2016||Optimal Monetary Policy in a Collateralized Economy|
with Gary Gorton: w22599
In the last forty or so years the U.S. financial system has morphed from a mostly insured retail deposit-based system into a system with significant amounts of wholesale short-term debt that relies on collateral, and in particular Treasuries, which have a convenience yield. In the new economy the quality of collateral matters: when Treasuries are scarce, the private sector produces (imperfect) substitutes, mortgage-backed and asset-backed securities (MBS). When the ratio of MBS to Treasuries is high, a financial crisis is more likely. The central bank’s open market operations affect the quality of collateral because the bank exchanges cash for Treasuries (one kind of money for another). We analyze optimal central bank policy in this context as a dynamic game between the central bank and pr...
|March 2006||Asset Prices When Agents are Marked-to-Market|
with Gary Gorton, Lixin Huang: w12075
"Risk management" in securities markets refers to the oversight of portfolio managers and professional traders when they trade on behalf of investors in security markets. Monitoring of their trading performance, profit and loss, and risk-taking behavior, is measured by principals using security market prices. We study the optimality of the practice of marking-to-market and provide conditions under which investing principals should optimally monitor their agent traders using market prices to measure traders' performance. Asset prices, however, can be affected by mark-to-market contracts. We show that such contracts introduce an externality when there are many traders. Traders may rationally herd, trading on irrelevant information. Ironically, this causes asset prices to be less informative ...
|Agency-Based Asset Pricing|
with Gary Gorton: w12084
We analyze the interaction between managerial decisions and firm value/asset prices by embedding the standard agency model of the firm into an otherwise standard asset pricing model. When the manager-agent's compensation depends on the firm's stock price performance, stock prices are set to induce the creation of future cash flows, instead of representing the discounted value of exogenous cash flows, as in the standard model. In our case, stock prices are formed via trading in the market to induce the managers to hold the number of shares consistent with the optimal effort level desired by the outside investors. We compare two price formation mechanisms, corresponding to two firm ownership structures. In the first, stock prices are formed competitively among a continuum of dispersed invest...
Published: Gorton, Gary B. & He, Ping & Huang, Lixin, 2014. "Agency-based asset pricing," Journal of Economic Theory, Elsevier, vol. 149(C), pages 311-349. citation courtesy of
|May 2005||Bank Credit Cycles|
with Gary Gorton: w11363
Private information about prospective borrowers produced by a bank can affect rival lenders due to a "winner%u2019s curse" effect. Strategic interaction between banks with respect to the intensity of costly information production results in endogenous credit cycles, periodic "credit crunches." Empirical tests are constructed based on parameterizing public information about relative bank performance that is at the root of banks%u2019 beliefs about rival banks%u2019 behavior. Consistent with the theory, we find that the relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, we show that the relative bank performance of commercial and industrial loans is an autonomous s...
Published: Gorton & Ping He, 2008. "Bank Credit Cycles," Review of Economic Studies, Blackwell Publishing, vol. 75(4), pages 1181-1214, October. citation courtesy of