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Working Paper
Optimal Bidder Selection in Clearing House Default Auctions
Garratt, Rodney; Murphy, David; Nesmith, Travis D.; Wu, Xiaopeng (2024-08-01)
Central counterparties' ability to hold successful default auctions is critically important to financial stability. However, due to the unique features of these auctions, standard auction theory results do not apply. We present a model of CCP default auctions that incorporates both the vital, but non-standard, objective of minimizing the likelihood it suffers reputationally damaging losses and the potential for information leakage to affect CCP members' private portfolio valuations. This gives insight into the key question of how CCPs should select auction participants. In particular, we ...
Finance and Economics Discussion Series , Paper 2023-033r1

Working Paper
Optimal Taxation with Endogenous Default under Incomplete Markets
Pouzo, Demian; Presno, Ignacio (2020-08-20)
How are the optimal tax and debt policies affected if the government has the option to default on its debt? We address this question from a normative perspective in an economy with noncontingent government debt, domestic default and labor taxes. On one hand, default prevents the government from incurring future tax distortions that would come along with the service of the debt. On the other hand, default risk gives rise to endogenous credit limits that hinder the government's ability to smooth taxes. We characterize the fiscal policy and show how the option to default alters the near-unit ...
International Finance Discussion Papers , Paper 1297

Working Paper
Improving Sovereign Debt Restructurings
Dvorkin, Maximiliano; Sapriza, Horacio; Sanchez, Juan M.; Yurdagul, Emircan (2021-10-01)
The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings, and the recent global pandemic crisis has further reignited this discussion. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that incorporates two essential features: maturity choice and debt ...
Working Papers , Paper 2019-36

Working Paper
Do student loan borrowers opportunistically default? Evidence from bankruptcy reform
Darolia, Rajeev; Ritter, Dubravka (2015-04-09)
Bankruptcy reform in 2005 eliminated debtors? ability to discharge private student loan debt in bankruptcy. This law aimed to reduce costly defaults by diminishing the perceived incentive of some private student loan borrowers to declare bankruptcy even if they had sufficient income to service their debt. Using a unique, nationally representative sample of anonymized credit bureau files, we examine the bankruptcy filing and delinquency rates of private student loan borrowers in response to the 2005 bankruptcy reform. We do not find evidence that the nondischargeability provision reduced the ...
Working Papers , Paper 15-17

Working Paper
The dynamics of subprime adjustable-rate mortgage default: a structural estimation
Li, Wenli; Kim, You Suk; Fang, Hanming (2016-01-11)
We present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions, taking into account possible consequences of different degrees of delinquency from their lenders. We empirically implement the model using unique data sets that contain information on borrowers' mortgage payment history, their broad balance sheets, and lender responses. Our investigation of the factors that drive borrowers' decisions reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, the interest rate resets associated with ARMs as well as the ...
Working Papers , Paper 16-2

Working Paper
On Default and Uniqueness of Monetary Equilibria
Vardoulakis, Alexandros; Tsomocos, Dimitrios P.; Lin, Li (2015-05-08)
We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. ...
Finance and Economics Discussion Series , Paper 2015-34

Discussion Paper
Who is More Likely to Default on Student Loans?
Chakrabarti, Rajashri; Jiang, Michelle; Gorton, Nicole; Van der Klaauw, Wilbert (2017-11-20)
This post seeks to understand how educational characteristics (school type and selectivity, graduation status, major) and family background relate to the incidence of student loan default. Student indebtedness has grown substantially, increasing by 170 percent between 2006 and 2016. In addition, the fraction of students who default on those loans has grown considerably. Of students who left college in 2010 and 2011, 28 percent defaulted on their student loans within five years, compared with 19 percent of those who left school in 2005 and 2006. Since defaulting on student loans can have ...
Liberty Street Economics , Paper 20171120

Briefing
Sovereign CDS Dealers as Market Stabilizers
Mullin, John; Sultanum, Bruno (2020-12)
Economists at the Richmond Fed analyze the role of dealer-provided liquidity in sovereign credit default swap markets. Using newly available data from the Depository Trust and Clearing Corporation, they track the positions held by large dealers during crises in Ukraine, Venezuela, and Argentina. The researchers find that large dealers tended to increase their provision of insurance as risk increased during those episodes — a finding that is consistent with the notion that they tend to act as market stabilizers during times of turmoil.
Richmond Fed Economic Brief , Volume 20 , Issue 13 , Pages 6 pgs.

Working Paper
Recourse and residential mortgages: the case of Nevada
Oswald, Florian; Li, Wenli (2014-12-01)
The state of Nevada passed legislation in 2009 that abolished deficiency judgments for purchase mortgage loans made after October 1, 2009, and collateralized by primary single-family homes. In this paper, we study how the law change affected lenders? decisions to grant mortgages and borrowers? decisions to apply for them and subsequently default. Using unique mortgage loan-level application and performance data, we find strong evidence that lenders tightened their lending standards for mortgages affected by the new legislation. In particular, lenders reduced approval rates and loan sizes for ...
Working Papers , Paper 15-2

Working Paper
Student Loans and Repayment: Theory, Evidence and Policy
Monge-Naranjo, Alexander; Lochner, Lance (2014-11-03)
Rising costs of and returns to college have led to sizeable increases in the demand for student loans in many countries. In the U.S., student loan default rates have also risen for recent cohorts as labor market uncertainty and debt levels have increased. We discuss these trends as well as recent evidence on the extent to which students are able to obtain enough credit for college and the extent to which they are able to repay their student debts after. We then discuss optimal student credit arrangements that balance three important objectives: (i) providing credit for students to access ...
Working Papers , Paper 2014-40

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