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The University of Chicago christian.opp Curriculum
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Research Interests: Asset Pricing, Financial Institutions, Finance and Growth Job Market Paper: “Cycles of Innovation and Financial Propagation,” January 2010 Abstract Episodes of boom-bust cycles tend to occur in sectors with recent arrivals of new technologies and are often related to excessive funding by the financial sector. In this paper, I develop a dynamic general equilibrium model consistent with a role for the financial sector in propagation during such episodes. I extend a standard Schumpeterian growth model by incorporating (a) a monopolistically competitive financial sector and (b) time-varying technological conditions in real sectors. I identify two propagation channels. The first operates through financial firms' acquisition of sector-specific knowledge (skill channel); financial firms chase "hot sectors" and thereby amplify fluctuations. The second channel originates in an interaction between competition in the financial sector and patent races in product markets (competition channel). Financial firms' temporary competitive advantages in access to new ventures imply market segmentation: financial firms maximize the surplus generated by the client firms they can currently attract, anticipating competing financial firms' future screening and funding decisions. Relative to the Pareto optimum, the competition channel generates overinvestment in sectors with temporarily improved technological conditions; excessively high growth in these sectors comes at the cost of lower growth in the economy as a whole. The model links financial propagation to time variation in the cross section of asset prices. Exposures to aggregate risk dampen amplification effects. Working Papers: “Rating Agencies in the Face of Regulation: Rating Inflation and Regulatory Arbitrage,” with M. Opp, November 2009 Abstract This paper develops a rational expectations framework to analyze how rating agencies' incentives are altered when ratings are used for regulatory purposes such as bank capital requirements. Regulations of this kind imply that a better rating is valuable to a regulated investor independent of the information it provides about the riskiness of the security's underlying cash flows. In our model a profit-maximizing rating agency can respond to these regulatory rules by adjusting its information acquisition and its disclosure policy. The model predicts that sufficiently large regulatory distortions can lead to a complete break-down of delegated information acquisition: The rating agency fully engages in rating inflation. This extreme result is more likely to happen for complex securities which are costly to evaluate. For small regulatory distortions full disclosure of information is optimal. In this case, information acquisition can decrease or increase as a response to an increase in regulatory distortions. These comparative statics depend on the distribution of risks in the cross-section. Changes in the composition of the pool towards a larger fraction of bad types decrease the incentive to acquire information. Our model captures stylized facts about the differences between corporate bond ratings and ratings on collateralized debt obligations. “Intertemporal Information Acquisition and Asset Market Dynamics” (Technical Appendix), September 2008 Abstract I analyze the links between intertemporal information acquisition and the dynamics of asset markets. In my model, investors are Bayesian learners who optimally choose how much to consume, how much to invest, and how much information to acquire. The model predicts that investors acquire more information when future capital productivity is expected to be high, the cost of capital is low, new technologies are expected to have a persistent impact on productivity, and the scalability of investments is expected to be high. My results shed light on the economic mechanisms behind various dynamic aspects of information production by the financial sector, such as the sources of variation in returns on information acquisition for investment banks or private equity funds.
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