Looking behind the aggregates: a reply to “Facts and Myths about the Financial Crisis of 2008”
As Chari et al (2008) point out in a recent paper, aggregate trends are very hard to interpret. They examine four common claims about the impact of financial sector phenomena on the economy and conclude that all four claims are myths. We argue that to evaluate these popular claims, one needs to look at the underlying composition of financial aggregates. Our findings show that most of the commonly argued facts are indeed supported by disaggregated data.
Your house or your credit card, which would you choose?: personal delinquency tradeoffs and precautionary liquidity motives
This paper finds strong evidence that many individuals choose to pay credit card bills even at the cost of mortgage delinquencies and foreclosures. While the popular press and some recent literature have suggested that this choice may emerge from steep declines in housing prices, we find evidence that individual-level liquidity concerns are at least as important in the decision. That is, choosing credit cards over housing suggests a precautionary liquidity preference. ; By linking the mortgage delinquency decisions to individual-level credit conditions, we are able to assess the compound ...
Demonstration effects in preventive care
Using a unique dataset composed of female employees at a large medical organization, this paper explores the role of social interactions among female co-workers and neighbors in the decision to obtain breast cancer screening exams. In our theoretical framework, the experience of other women is salient because it alters the tolerance for ambiguity about their own vulnerability, via a comparative ignorance effect. We find that the social multiplier ranges from 2 to 3: the equilibrium effect of an exogenous shock that impacts the probability of performing a mammogram is two to three times the ...
Loss distribution estimation, external data and model averaging
This paper will discuss a proposed method for the estimation of loss distribution using information from a combination of internally derived data and data from external sources. The relevant context for this analysis is the estimation of operational loss distributions used in the calculation of capital adequacy. We present a robust, easy-to-implement approach that draws on Bayesian inferential methods. The principal intuition behind the method is to let the data itself determine how they should be incorporated into the loss distribution. This approach avoids the pitfalls of managerial choice ...
Household bankruptcy decision: the role of social stigma vs. information sharing
Using a large sample of individual credit information provided by a US credit bureau, this paper investigates the empirical relevance of stigma and information sharing on household bankruptcy and its trend. Many observers of bankruptcy patterns have conjectured that there exists an increased willingness to default that reflects a diminution of social stigma. In this paper, we use a new methodology to disentangle stigma and social learning?two acknowledgedly important social factors affecting default. Although our results indicate a large and important role for stigma, changes in information ...
Model uncertainty and the deterrent effect of capital punishment
The reintroduction of capital punishment after the end of the Supreme Court moratorium has permitted researchers to employ state level heterogeneity in the use of capital punishment to study deterrent effects. However, no scholarly consensus exists as to their magnitude. A key reason this has occurred is that the use of alternative models across studies produces differing estimates of the deterrent effect. Because differences across models are not well motivated by theory, the deterrence literature is plagued by model uncertainty. We argue that the analysis of deterrent effects should ...
Asset liquidity, debt valuation and credit risk
This paper presents a structural debt valuation model that links default probabilities and recovery rates of corporate securities to asset market liquidity. This linking is advantageous for risk management and regulation of financial institutions in that it provides a method of calibrating the relationship between probability of default (PD) and loss given default (LGD). Two innovations in the paper are the placing of the default point in a model of debt valuation into general equilibrium and conditioning this point on market factors such as asset liquidity. These allow one to derive ...
Unpacking social interactions
As empirical work in identifying social effects becomes more prevalent, researchers are beginning to struggle with identifying the composition of social interactions within any given reference group. In this paper, we present a simple econometric methodology for the separate identification of multiple social interactions. The setting under which we achieve separation is special, but is likely to be appropriate in many applications.
The option value of consumer bankruptcy
This paper aims to contribute to the growing literature on the causes of consumer bankruptcy. It presents the consumer bankruptcy decision as an irreversible choice that has an embedded real option value. This allows the use of well known framework for the study of decision making under uncertainty. The principal empirical finding is that cross-sectional variances of economic factors, such as unemployment, are strong predictors of bankruptcy rates and are consistent with the implications of the real options model. This supports anecdotal evidence that individuals are facing increased economic ...
In noise we trust? Optimal monetary policy with random targets
We show that a monetary policy in which the central bank commits to a randomized inflation target allows for potentially faster-expectations convergence than with a fixed target. The randomized target achieves faster convergence in particular in transition environments: those demonstrating either particularly high or low inflation. ; Quantitative Analysis Unit Working Paper QAU07-1