My Research
"The classical theorists resemble Euclidean geometry in a non-Euclidean world, who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight -- as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required in economics." --Keynes (1936, p.16)
"The sense in which I am using the terms (uncertainty) is that …there is no scientific basis on which to form any calculable probability whatever. We simply do not know." -- Keynes (1937, p. 113)
Published or
Forthcoming Papers
Abstract: This paper describes a pure-exchange, continuous-time economy with two heterogeneous agents and complete markets. A novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to Frank Knight. The equilibrium is described completely in closed-form. In particular, closed-form solutions are obtained for the equilibrium processes describing individual consumption, the interest rate, the market price of uncertainty, security prices and trading strategies. After identifying agents as countries, the model is applied to address the consumption home-bias and equity home-bias puzzles.
Abstract: This paper characterizes informed trade when speculators can acquire distinct signals of varying quality about an asset’s value at different dates. The most reasonable characterization of private information about stocks is that while information is long-lived, new information will arrive over time, information that may be acquired by other agents. Hence, while a speculator may know more than others at a moment, in the future, his information will become stale, but not valueless. In an environment that allows for arbitrary correlations among signals, we characterize equilibrium outcomes including trading, prices, and profits. We provide explicit numerical characterizations for different informational environments.
Working
Papers:
Abstract: Many economic decisions can
be described by an option exercise problem. The standard real options approach
emphasizes the importance of uncertainty in determining option value and timing
of option exercise. No distinction between risk and uncertainty is made.
Motivated by the experimental evidence such as the Ellsberg Paradox, we follow
Knight (1921) and distinguish risk from uncertainty. To afford this
distinction, we adopt the multiple-priors utility model to analyze an option
exercise problem. We also provide several examples to illustrate that our model
can explain some phenomena that are hard to reconcile with the standard real
options model. These examples include real investment, job search, firm exit,
firm default, and youth suicide.
Abstract: This paper studies
consumption/saving problem under Knightian uncertainty in a two period setting.
The multiple-priors utility model is adopted. The effects of income uncertainty
and capital uncertainty on optimal savings are analyzed by deriving closed form
solutions.
Abstract:
This paper
develops a framework for analyzing the impact of macroeconomic conditions on
credit risk and dynamic capital structure choice. We begin by observing that
when cash flows from assets in place depend on current economic conditions,
there will be a benefit for firms to adapt their default and financing policies
to the position of the economy in the business cycle phase. We then demonstrate
that this simple observation has a wide range of implications for corporations
and financial institutions. Notably, we examine the impact of economic
conditions on the default rate of firms, credit spreads on corporate debt,
optimal leverage ratios, the pace and size of capital structure change, and
capital requirements for financial institutions. A number of new predictions
follow.
Abstract: This paper presents an equilibrium
model of industry dynamics and capital structure decisions. The unique
stationary equilibrium is derived in closed-form. The analysis reveals that the
interaction between capital structure and production decisions influences the
stationary distribution of surviving firms and their survival probabilities.
Under reasonably calibrated parameter values, the model predicts a low industry
average leverage ratio which is in line with that observed in practice.
Comparative static analysis demonstrates that the model can generate the
relation between capital structure and firms’ entry, exit and production
decisions documented in the evidence. The model also provides a number of new
predictions regarding industry dynamics and capital structure.
Abstract: Under the real options
approach to investment under uncertainty, agents formulate optimal policies
under the assumption that firms’ growth prospects do not vary over time. This
paper proposes and solves a model of investment decisions in which the growth
rate and volatility of the decision variable shift between different states at
random times. A value-maximizing investment policy is derived such that in each
regime the firm’s investment policy is optimal and recognizes the possibility
of a regime shift. Under this policy, investment is intermittent and increases
with marginal q. Moreover, the rate of investment typically is very small but
exhibits some spurts of growth. Implications for marginal q and the user cost
of capital are also examined.
·
Stationary Equilibria of Economies with a
Continuum of Heterogeneous Consumers, March 2002, PDF
Abstract: This paper studies stationary equilibria of a production economy with a continuum of heterogeneous consumers subject to borrowing constraints and individual Markov endowment shocks. The existence of a stationary equilibrium is established. The equilibrium interest rate is less than the rate of time preference of the most patient consumer provided a constraint that restricts the borrowing limit is satisfied. Properties of stationary equilibria including wealth distribution, precautionary savings and comparative statics are analyzed
Abstract: This paper studies competitive equilibria of a production economy with aggregate productivity shocks and with a continuum of consumers subject to borrowing constraints and individual labor endowment shocks. The dynamic economy is described in terms of sequences of aggregate distributions. The existence of competitive equilibrium is proven and a recursive characterization is established. In particular, it is shown that for any competitive equilibrium, there is a first period payoff equivalent competitive equilibrium that is generated by a recursive equilibrium with the state space including expected discounted utilities.
My second year
paper as a Ph.D student at the University of Rochester
Abstract: This paper studies optimal consumption and portfolio choice in a Merton-style model with incomplete information when there is a distinction between ambiguity and risk. The latter distinction is afforded by adoption of recursive multiple-priors utility. The fundamental issues are: (i) How does the agent optimally estimate the unobservable processes as new information arrives over time? (ii) What are the effects of ambiguity and incomplete information on behavior? This paper shows that it is optimal to first use any prior to perform Bayesian estimation and then to maximize expected utility with that prior based on the resulting estimates. Finally, the paper shows that a hedging demand arises, that is affected by both ambiguity and estimation risk.