Uncertain Booms and Fragility

Abstract

I develop a framework of the build-up and outbreak of financial crises in an asymmetric information setting. In equilibrium, two distinct economic states arise endogenously: normal times -periods of modest investment, and booms -periods of expansionary investment. Normal times occur when the intermediary sector realizes moderate investment opportunities. Booms occur when the intermediary sector realizes many investment opportunities, but also occur when it realizes very few opportunities. As a result, investors face greater uncertainty in booms. During a boom, subsequent arrival of negative information about an intermediary asset results in large downward shifts in investors' confidence about the underlying quality of long-term assets. A crisis of confidence ensues. Investors collectively force costly early liquidation of the intermediated assets and move capital to safe assets, in a flight-to-quality episode. Degree Type DissertationDegree Name

Funding Shocks and Credit Quality

“…Our insight is that opacity of bank balance sheets (perhaps justified by optimal risk sharing (Dang et al, 2017)) may be an important factor obstructing the interpretation of price and quantity signals by market participants. A related effect is suggested by Thakor (2016), who shows that uncertainty over banker quality may result in under-or overestimation of risk, and by Lee (2016) where investors are unable to recognize the quality of bank lending by observing bank funding demand alone.…”