|  | |
Dissertation Papers:
Cross-border equity investment and the business cycle (Job Market Paper)
Abstract: I present new evidence that gross foreign assets and liabilities in equity investments, measured at market value, are positively correlated over the business cycle in each of the Group of Seven industrialized countries (G7). The close comovement of assets and liabilities, in turn, reflects strong cross-country correlation between equity prices and moderate comovement of gross outflows and inflows. I analyze an international real business cycle (IRBC) model to evaluate possible causes of these correlations: diminishing marginal product of capital, imperfect substitutability of goods, incomplete markets, and investment project duration. A complete markets model with diminishing returns to capital predicts positive cross-country correlation between equity prices. I show that imperfect substitutability between goods strengthens this correlation, and I show that cross-border financial costs lead to negative correlation between gross capital outflows and inflows. Finally, I develop a model that distinguishes foreign direct investment (FDI) in new projects from portfolio equity. The model suggests that assets and liabilities should be more closely correlated in portfolio equity than in FDI.
Capital structure over the business cycle
Abstract: Why are aggregate equity payouts and debt issued positively correlated over the business cycle in U.S. data? Standard real business cycle (RBC) models have few predictions about capital structure, because they assume that financial markets are frictionless. On the other hand, the tradeoff theory of capital structure argues that financial frictions determine firms' optimal mix of debt and equity financing. I develop an RBC model with financial frictions and use it to explain some stylized facts about aggregate U.S. debt and equity flows. I document that debt issued and equity payouts are (i) positively correlated with output, (ii) positively correlated with investment, and (iii) positively correlated with each other. My model can account for these stylized facts. I also calibrate the model to the periods 1952 - 1983 and 1984 - 2007 in order to explain the finding that real variables have become less volatile in the later sub-period, while financial variables have become more volatile. By varying both the scale of technology shocks and the degree of financial frictions, the model can account for both results.
International diversification in debt vs equity
Abstract: Can a standard open economy macro model generate realistic international diversification in debt and equity? I address this question by solving for steady-state portfolios in a two-country, two-good DSGE endowment model with consumption home bias. I compare two different asset trading regimes. In the first, households in each country trade equity claims on their underlying stochastic endowments; in the second, households trade locally-denominated bonds. I derive locally accurate closed-form solutions for steady-state portfolios under each regime. The model can predict realistic equity home bias and bond diversification if the elasticity of substitution between home and foreign goods is sufficiently low. However, for commonly used parameter values, the standard two-good model understates bond diversification and overstates equity diversification.
Discussant Slides:
Den Haan, W. and P. Rendahl, Solving the incomplete markets model with aggregate uncertainty using explicit aggregation (2008)
| |
