Publications
11 results found
Walther A, Davila E, 2023, Prudential policy with distorted beliefs, The American Economic Review, Vol: 113, Pages: 1967-2006, ISSN: 0002-8282
This paper studies leverage regulation when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal regulation responds to arbitrary changes in investors'/creditors' beliefs, relating our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors/creditors, calls for tighter leverage regulation. Our results apply to environments with (i) planners with imperfect knowledge of investors'/creditors' beliefs, (ii) monetary policy, (iii) bailouts and pecuniary externalities, and (iv) endogenous beliefs.
Fuster A, Goldsmith-Pinkham P, Ramadorai T, et al., 2022, Predictably unequal? The effect of machine learning on credit markets, The Journal of Finance, Vol: 77, Pages: 5-47, ISSN: 0022-1082
Innovations in statistical technology have sparked concerns about distributional impacts across categories such as race and gender. Theoretically, as statistical technology improves, distributional consequences depend on how changes in functional forms interact with cross-category distributions of observable characteristics. Using detailed administrative data on US mortgages, we embed the predictions of traditional logit and more sophisticated machine-learning default prediction models into a simple equilibrium credit model. Machine learning models slightly increase credit provision overall, but increase rate disparity between and within groups; effects mainly arise from flexibility to uncover structural relationships between default and observables, rather than from triangulation of excluded characteristics. We predict that Black and Hispanic borrowers are disproportionately less likely to gain from new technology.
Walther A, Kohlhas A, 2021, Asymmetric attention, The American Economic Review, Vol: 111, Pages: 2879-2925, ISSN: 0002-8282
We document that the expectations of households, firms, and professional forecastersin standard surveys simultaneously extrapolate from recent events and underreact to newinformation. Existing models of expectation formation, whether behavioral or rational,cannot account for these observations. We develop a rational theory of extrapolationbased on limited attention, which is consistent with this evidence. In particular, we showthat limited, asymmetric attention to procyclical variables can explain the co-existenceof extrapolation and underreactions. We illustrate these mechanisms in a microfoundedmacroeconomic model, which generates expectations consistent with the survey data,and show that asymmetric attention increases business cycle fluctuations.
Walther A, Allen H, 2021, Financial architecture and financial stability, Annual Review of Financial Economics, ISSN: 1941-1375
This paper studies the links between financial stability and the architecture of financial systems. We review the existing literature and provide organizing frameworks for analyzing three empirically important aspects of financial architecture: The rise of non-bank financial intermediaries, the regulatory response to these structural changes, and the emergence of complex interbank networks. One of our main new results is a necessary and sufficient condition for whether non-bank intermediaries are immune to runs in an extended version of the Diamond-Dybvig model.
de Montjoye Y-A, Ramadorai T, Valletti T, et al., 2021, Privacy, adoption, and truthful reporting: A simple theory of contact tracing applications, Economics Letters, Vol: 198, Pages: 1-4, ISSN: 0165-1765
This paper analyzes the trade-offs associated with the deployment of contact tracing applications to support policy responses in a pandemic. In many jurisdictions, the government cannot force individuals to adopt such applications. We therefore analyze a simple model that highlights the importance of individuals’ incentives to voluntarily adopt a reporting application and reveal their infection status to the government who can then undertake contact monitoring. We discuss the consequences of various policy options, such as security, communication and anonymization policies, in terms of the size and representativeness of the sample of infection data that contract tracing applications generate.
Walther A, White L, 2020, Rules versus discretion in bank resolution, The Review of Financial Studies, Vol: 33, Pages: 5594-5629, ISSN: 0893-9454
Recent reforms give regulators broad powers to “bail-in” bank creditors during financial crises.We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoidsignaling negative private information to creditors. Therefore, optimal bail-ins in bad times dependonly on public information. As a result, the optimal policy cannot be implemented if regulatorshave wide discretion, due to an informational time-inconsistency problem. Rules mandating toughbail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. Wefurther show that bail-in and bailout policies are complementary: if bailouts are possible, thendiscretionary bail-ins are more effective.
Jiao P, Veiga A, Walther A, 2020, Social media, news media and the stock market, Journal of Economic Behavior & Organization, Vol: 176, Pages: 63-90, ISSN: 0167-2681
We study the effect on stock volatility and turnover of coverage by traditional news media and social media. We find that coverage by traditional news media predicts decreases in subsequent volatility and turnover, but coverage by social media predicts increasesin volatility and turnover. We show that these patters are consistent with a model of “echo chambers”, where social networks repeat news, but some investors interpret repeated signals as genuinely new information.
Davila E, Walther A, 2020, Does size matter? Bailouts with large and small banks, Journal of Financial Economics, Vol: 136, Pages: 1-22, ISSN: 0304-405X
We explore how large and small banks make funding decisions when system-wide bailouts arepossible. We show that bank size, purely on strategic grounds, is a key determinant of banks’leverage choices, even when bailout policies treat large and small banks symmetrically. Large banksleverage more than small banks because they internalize that their decisions directly affect bailoutpolicies. In equilibrium, this effect is amplified by strategic spillovers to small banks, since banks’leverage choices are strategic complements. Overall, the presence of large banks makes bailoutsmore likely. The optimal regulation features size-dependent policies that disproportionately restrictlarge banks’ leverage.
Morrison A, Walther A, 2020, Market discipline and systemic risk, Management Science, Vol: 66, Pages: 764-782, ISSN: 0025-1909
We analyze a general equilibrium model in which financial institutions generate endogenoussystemic risk. Banks optimally select correlated investments and thereby expose themselves tofire sale risk so as to sharpen their incentives. Systemic risk is therefore a natural consequence ofbanks’ fundamental role as delegated monitors. Our model sheds light on recent and historicaltrends in measured systemic risk. Technological innovations and government-directed lendingcan cause surges in systemic risk. Strict capital requirements and well-designed governmentasset purchase programs can combat systemic risk.
Walther A, 2016, Jointly Optimal Regulation of Bank Capital and Liquidity, JOURNAL OF MONEY CREDIT AND BANKING, Vol: 48, Pages: 415-448, ISSN: 0022-2879
- Author Web Link
- Cite
- Citations: 19
Ritz RA, Walther A, 2015, How do banks respond to increased funding uncertainty?, Journal of Financial Intermediation, Vol: 24, Pages: 386-410, ISSN: 1042-9573
The 2007–9 financial crisis began with increased uncertainty over funding conditions in money markets. We show that funding uncertainty can explain diverse elements of commercial banks’ behavior during the crisis, including: (i) reductions in lending volumes, balance sheets, and profitability; (ii) more intense competition for retail deposits (including deposits turning into a “loss leader”); (iii) stronger lending cuts by more highly extended banks with a smaller deposit base; (iv) weaker pass-through from changes in the central bank’s policy rate to market interest rates; and (v) a binding “zero lower bound” as well as a rationale for unconventional monetary policy.
This data is extracted from the Web of Science and reproduced under a licence from Thomson Reuters. You may not copy or re-distribute this data in whole or in part without the written consent of the Science business of Thomson Reuters.