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Issues, " San Francisco Fed conference " Financial Innovations and the Real Economy, " and seminar participants at SUNY-Binghampton and the New York Fed for valuable comments. The authors thank Sarita Subramanian for outstanding research assistance. Part of the work for this project was done while Santos was on sabbatical leave at Universidade Nova de(More)
Collateral constraints imply that financing and risk management are fundamentally linked. The opportunity cost of engaging in risk management and conserving debt capacity to hedge future financing needs is forgone current investment, and is higher for more productive and less well-capitalized firms. More constrained firms engage in less risk management and(More)
There is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets: there is significant price dispersion even when products are homogeneous. Also, despite the large number of firms in the market, prices remain above marginal cost and may even rise as more firms enter. In a non-cooperative oligopoly pricing(More)
and seminar participants at GSIA, Wis-consin, NBER (2003) Microstructure meetings, and IFM2 (Montréal). We are especially grateful to Tony Smith for ideas generated in a project on simulating limit order books. The current version of this paper is maintained at Abstract We model a dynamic limit order market as a stochastic sequential game. Since the model(More)
Firms raise money from banks and the bond market. Banks sell loans in a secondary market to recycle their funds or to trade on private information. Liquidity in the loan market depends on the relative likelihood of each motive for trade and affects firms’ optimal financial structure. The endogenous degree of liquidity is not always socially optimal: there(More)
We present a model of an unsecured loan market. Many lenders simultaneously ooer loan contracts a debt level and an interest rate to a borrower. The borrower may accept more than one contract. Her incentive to default increases in the total amount borrowed. If this incentive is high enough, deterministic zero proot equilibria are unsustainable. Lenders earn(More)
This paper models and provides empirical evidence for the quality of assets that are se-curitized through bankruptcy remote special purpose vehicles (SPVs). The model predicts that assets sold to SPVs will be of lower quality (" lemons ") compared to assets that are not sold to SPVs. We find strong empirical support for this prediction using a comprehensive(More)
After making a loan, a bank finds out if the loan needs contract enforcement (" monitoring "); it also decides whether to lay off credit risk in order to release costly capital. A bank can lay off credit risk by either selling the loan or by buying insurance through a credit default swap (CDS). With a CDS, the originating bank retains the loan's control(More)