Martin Kuncl

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Working Papers

Securitization under Asymmetric Information over the Business Cycle [Appendix]

Older versions:
Bank of Canada Staff Working Paper 2015-9
CERGE-EI Working paper 506, 2014

Abstract: This paper studies the efficiency of financial intermediation through securitization in a model with heterogeneous investment projects and asymmetric information about the quality of securitized assets. Issuers of securitized assets can signal asset quality by retaining part of the risk. I find that signaling contributes to the variation in the degree of asymmetric information over the business cycle, which creates the documented growth asymmetry in the cycle. In particular, in the boom stage of the business cycle, signaling is inefficient and lower-quality assets accumulate on the balance sheets of financial intermediaries. This implies a deeper drop in output in a subsequent recession proportional to the length of the preceding boom.

Awards:
Young Economist of the year 2013, 1st place, Czech Economics Society (Dec 2013)
Young Economist Best Paper Award, XXI International Conference on Money, Banking and Finance, Rome (Dec 2012)

Presentations: 8th CEPR - SFI - UZH - UNISG - ETH - RoF Swiss Winter Conference on Financial Intermediation (Apr 2015); Bank of England, London (Jan 2014); Bank of Spain, Madrid (Jan 2014); Comisión Nacional del Mercado de Valores, Madrid (Jan 2014); Vrije Universiteit Amsterdam (Jan 2014) and Bank of Canada, Ottawa (Jan 2014); Warwick Business School (Jan 2014); Econometric Society European Winter Meeting, Helsinki (Nov 2013); European Central Bank, Frankfurt (Oct 2013); Goethe University, Frankfurt (Oct 2013); 28th Annual Congress of the European Economic Association, Gotenburg (Aug 2013); 5th International IFABS Conference, Nottingham (Jun 2013); 17th Annual International Conference in Macroeconomic Analysis and International Finance 2013, University of Crete (May 2013); 6th RGS Doctoral Conference, Bochum (Feb 2013); XXI International Conference on Money, Banking and Finance, CASMEF, LUISS Guido Carli University, Rome (Dec 2012); PhD Student Macroeconomics Workshop, Princeton University (May 2012)

Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases
Previous title: Adverse Selection in Resale Markets for Securitized Assets
Bank of Canada Staff Working Paper 2016-46

Abstract: Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators. This supports investment and output. However, in a deep recession, characterized by high dispersion of asset qualities, there is a sudden surge in adverse selection due to an economy-wide default on reputation-based guarantees, which persistently depresses the output in the economy. Government policy of asset purchases limits the negative effects of adverse selection on the real economy, but may create a negative moral hazard problem.

Presentations: "Securitization: The way forward?" conference at the Banque de France, Paris (Oct 2015); 11th World Congress of the Econometric Society, Montreal (Aug 2015); 23rd Annual Symposium of the Society for Nonlinear Dynamics and Econometrics, Oslo (Mar 2015)


Work in progress

In or Out: Do Bail-In Bonds Really Decrease Bailouts? (with Kinda Hachem)

Abstract: Bail-in bonds have gained a lot of attention among bank regulators. These bonds supposedly raise the hurdle for a government bailout by converting into loss-absorbing capital once the issuing bank runs into trouble. We argue that banks can short-circuit bail-in requirements by offering investors off-balance-sheet insurance against conversion. The bond itself appears as a bail-in bond on the issuer's balance sheet while the insurance is booked off balance sheet until the bond converts. The government can deter insurance provision by imposing penalties when insurance is discovered, but these penalties may not be credible. We find conditions for an equilibrium in which insurance against conversion is provided by banks and bailed out by the government rather than penalized upon discovery. We also present new empirical evidence in support of our model.

Presentations: SED Annual Meeting, Warsaw under previous title "Regulation and Reputation" (Jun 2015)

Government-backed mortgage insurance in a New-Keynesian model with moral hazard

Abstract:What are the macroeconomic and policy implications of government-backed mortgage default insurance? A New-Keynesian DSGE model with heterogeneous lenders and borrowers and information frictions is constructed and calibrated to answer this question. The model endogenizes the moral hazard implications of government-backed mortgage insurance and shows that insurance results in weaker lending standards, higher mortgage origination to low-quality borrowers, more frequent mortgage defaults and greater housing market exuberance. But the model also identifies a positive effect of mortgage insurance in reducing the adverse selection in securitization markets, which results in cheaper and more stable mortgage funding. For this benefit of mortgage insurance to outweigh its moral hazard costs, mortgage insurance needs to be complemented with sufficiently strict minimum lending standards.

Presentations: AEA/ASSA (Jan 2018)

Screening, adverse delection and loan insurance (with Toni Ahnert)

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