Research

Working papers

Bank Opacity and Deposit Rates with Ana Babus and Maryam Farboodi PDF

Abstract

We propose a novel mechanism for why bank portfolios are opaque: banks choose opacity to secure cheaper long-term funding while trading off insolvency and illiquidity risks. We show that while opacity lowers deposit rates, it also leaves depositors with only noisy information about the bank’s solvency, making them cautious about keeping their funds in the bank—particularly when interest rates are high. Counterintuitively, opacity raises bank profits even though it forces the bank to tolerate a high risk of illiquidity. As a result, in high-rate environments, banks have stronger incentives to adopt excessive opacity to further reduce deposit rates—at the cost of more frequent early failures.

Peer Effects in Multi-Layer Networks: Evidence from Financial Behavior with Olga Balakina SSRN

Abstract

We provide evidence of how multiple social groups jointly influence financial behavior, focusing on buying and selling decisions across stocks and mutual funds. Using Danish administrative data, we construct a three-layer social network—co-workers, family, and neighbors—for each individual and estimate their simultaneous effects. Peer effects are positive, heterogeneous, and behavior-specific. Neighbors exert the strongest influence, followed by co-workers and family. Effects are larger for stocks than for mutual funds, and among wealthier and less financially sophisticated investors. Co-workers primarily affect buying, while neighbors influence both buying and selling - pointing to distinct channels of influence across peer groups. To interpret these results, we develop a simple multi-layer network model. Our findings underscore the importance of social structure in shaping distinct dimensions of financial behavior.

Asset Pricing and Re-sale in Networks PDF

Abstract

I study asset pricing when re-trade can take place in co-existing and interconnected markets. In my framework, there is a divisible asset and a finite set of traders. They are distributed over a trading network. Traders can acquire shares at a common price, and then they may trade with their connections at possibly different prices. I find that trading centrality, a novel network metric, is a sufficient statistic for the equilibrium. Trading centrality processes information about expected re-trade equilibria, and maps it to traders’ behavior before trade. A trader’s asset acquisition is proportional to his centrality, and the asset common price is defined by aggregating centrality globally. For the re-trades in the network, a trader demands the gap between his optimal level of asset and his centrality; while each price is defined by aggregating centrality locally in the seller’s network. I investigate what market outcomes and welfare arise at different trading networks. Implications for asset issuance and interdealer markets are examined.

Social Beliefs and Stock Price Booms and Busts PDF

Abstract

I develop a dynamic asset pricing model in which subject beliefs about stock price behavior are heterogeneous and susceptible to peer effects. Two types of traders optimally learn from past price realizations and share beliefs in a social network. I show that, at each period, the equilibrium price is a function of traders’ beliefs and the net- work structure. As a result, booms and busts of the price-dividend ratio emerge. The most (least) speculative trader is the most influential during booms (busts). More con- nected networks exhibit less volatile price dividend ratio, booms and busts episodes last longer, and the average price realization is higher. Also, there is less disagreement in beliefs. However, if traders of the same type are highly interconnected stock mar- ket volatility is higher and booms and busts are shorter. The model captures relevant empirical features of stock prices and returns, and it is also consistent with the survey evidence on investor expectations.

Work in progress

Asset Pricing and Information on Social Networks with Victoria Vanasco