Martin Kuncl

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Working Papers

Securitization under Asymmetric Information over the Business Cycle

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 heterogenous investment projects and asymmetric information about the quality of securitized assets. I show that, in general, when retaining part of the risk, the issuer of securitized assets may credibly signal its quality. However, in boom stages of the business cycle this practice is inefficient, information on asset quality remains private, and lower quality assets accumulate on balance sheets. This prolongs and deepens a subsequent downturn with an intensity proportional to the length of the preceding boom. I present empirical evidence from securitization deal-level data consistent with this result. In recessions, the model also produces amplification of adverse selection problems on re-sale markets for securitized assets. These are especially severe after a prolonged boom period and when securitized assets of high-quality are no longer traded. Finally, this general equilibrium model suggests that improperly designed regulation requiring higher explicit risk-retention may become counter-productive, i.e., may adversely affect both quantity and quality of investment in the economy.

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)

Asset Pricing with Durable Goods and External Habit Formation (with Michal Pakoš)

Abstract: We propose a model which tries to explain in a unified framework both time and cross-section variation in the conditional asset pricing moments on the stock market. We combine two strands of literature on asset pricing: external habit formation and literature on asset pricing where investors' large share of consumption consists of service flows from stock of durable goods. We develop a theoretical model as a generalization of Campbell and Cochrane (1999) external habit formation model, where we introduce durable goods and estimate its parameters using the GMM methodology on the set of 6 Fama-French portfolios. The estimated weight of durables in the utility function is significantly different from zero.

Securitization under Asymmetric Information and Macro-prudential Regulation

Abstract: This paper presents a small scale DSGE model where banking sector raises deposits, participates in the interbank market and issues and trades securitized products. The model contains externality related to bank failures the costs of which are not fully internalized by banks and asymmetric information related to securitization process which give rise to adverse selection problems and which are most severe in a recession. But similarly as in Kuncl (2014) the inefficiencies build-up mainly in the boom stage of the business cycle. The presence of externality justifies the introduction of macro-prudential regulation. I study the effect of various macro-prudential tools on the welfare.

Presentations: European Central Bank, Frankfurt (Nov 2013)

The views expressed on this website are my own. No responsibility for them should be attributed to the Bank of Canada.