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Asset Pricing Challenges: Bubbles, Fire Sales, Liquidity Spirals, Segmented Markets

Explore the complexities of asset pricing, including the impact of bubbles, fire sales, liquidity spirals, and segmented markets. Understand the role of financing constraints in the corporate and macro sectors. Analyze the different security classes and investor behavior in intermediated markets.

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Asset Pricing Challenges: Bubbles, Fire Sales, Liquidity Spirals, Segmented Markets

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  1. The challenge: Asset pricing:“bubbles” “fire sales” “liquidity spirals” “segmented markets” Corporate/macro: “financing/capital constraints”

  2. Segmented markets Security class Security class ? Investor Investor Investor Investor Investor Intermediated markets Security class Intermediary Intermediary ? “Equity” “Debt” “Equity” “Debt” Investor Investor Investor Investor Other assets Other assets

  3. Bubbles: Definitions and facts

  4. Home Price-to-Rent: First American, Case-Shiller, FHFA http://www.deptofnumbers.com/affordability/us/

  5. Frictionless macro asset pricing: A useful benchmark or a hopeless anachronism? 1. Consumption Habits are one model of time-varying risk premium 2. Investment I/k=f(Q)

  6. AA nonfinancial fine. “dysfunctional market” or “credit risk premium”

  7. “Arbitrage” The cake, or the frosting?

  8. Source: Fontana (2010)

  9. Source: Fontana 2010

  10. Source: Baba and Packer 2008

  11. Banks, credit channel, financial frictions

  12. A credit crunch: Banking system cannot make new loans. Interest rate Supply (savings) System Doesn’t Work Demand (investment, mortgages) Loans Capital requirement

  13. View 3: Investor Fear + Recession Supply Of risky debt Interest rate Demand Loans A fall in loans need not mean a credit crunch

  14. Flow of new lending r r Loan Loan Broken intermediary system? Banks or securitized debt markets? Higher risk aversion, less demand? Banks or securitized debt markets? Borrowing Does Decline, a lot! Flow of funds ($billion)

  15. Banks Can And Do Raise Capital! (source: Bloomberg.com)

  16. Banks Can and Do Raise Capital Source :Anil Kashyap Includes Treasury Purchase

  17. Summary: Bank constraint vs. Credit market Or risk premium view r r Loan Loan • Want to lend but can’t? Vs. no good borrowers, higher r? • Little decline in banking system lending. • Banks can and do raise equity. • Banks can and do fail / get taken over. • Treasury purchase/debt guarantee did not stop it in tracks. • “Recapitalized banks” pay dividends, buy other banks. • High risk premiums in nonfinancial, non-intermediated assets. • So…why is borrowing so much lower?

  18. US Non-Agency MBS Issuance

  19. 1930 . 2006: 2008

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