Jaime Luque

Securities market theory: Possession, repo and rehypothecation

By introducing repo markets we understand how agents need to borrow issued securities before shorting them: (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium: the repo rate becomes special and the security price higher than expected discounted cash-flows. Existence of equilibrium is guaranteed under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.

Dollar Shortage, Central Bank Actions, and the Cross Currency Basis

In our model, cross-currency basis, which captures the deviations from covered interest rate parity (CIP), reflects the relative value of the scarcer currency (US dollar) as collateral in funding constraints. Our empirical evidence shows that measures of dollar shortage derived from ECB tenders, and actions to move to fixed-rate tenders with full allotment and to expand the eligible collateral by the ECB have significant power in explaining the cross currency basis. We show that the relaxation of Euro funding constraints through 3-year Long Term Re-financing Operations (LTROs) does not contribute to the narrowing of the cross-currency basis, consistent with the theory developed in the paper.

Cross-listed Securities and Multiple Exchange Memberships: Demand Differentiability and Equilibrium Existence

Abstract The previous literature on general equilibrium has assumed that all traders belong to a single market. However, traders often participate in more than one exchange to diversify their portfolios. Moreover, there is evidence that the security listings of exchanges overlap. Our model captures these facts: there are multiple exchanges, the same security is listed in different exchanges, and traders can belong to more than one exchange. We show that, in the presence of convex transaction costs, there exists an equilibrium, and that individual demand is a continuously differentiable function in prices.

Geographic Concentration of Industry

If I wanted to manufacture aluminum, I would set up a factory in Washington. Why? Aluminum production involves heavy use of electricity and Washington has the lowest electricity prices in the country. That brings us to the question: does natural advantage explain agglomeration? In other words, do industries become geographically concentrated due to locational proximity to inputs that contribute to higher and more efficient production?

Homeless in California

Anyone who lives in a metropolitan area is very likely to encounter homelessness every day, it constitutes a part of city life often considered normal. But have you ever wondered what drives people into homelessness? What could be the cause or reason for someone to live on the streets rather than in a home? Quigley et al. (2001) claim that in all previous work the effect of pivotal “monetary” factors had been downplayed, namely those of housing prices and income inequality. Thus, the article tests the alternate hypothesis that variations in homelessness arise from changed circumstances in the housing market and in the income distribution rather than from changes in society.

Did the Euro Change the Effect of Fundamentals on Growth and Uncertainty

Abstract We present empirical evidence on whether the introduction of the euro has changed the effect of economic fundamentals on the growth rates of euro countries’ GDPpc and GDPpc volatility. We find that there is a statistically significant structural break in the impact of increments in government debt on both economic growth and uncertainty. In particular, after adoption of the euro increments in government debt decreased growth and increased uncertainty. These results are robust to a battery of checks, including exclusion of the recent financial crisis period, comparison with non-euro European countries, and controlling for different debt/GDP ratios.

Cross-Border Residential Lending: Theory and Evidence from the European Sovereign Debt Crisis

We examine bank strategies to rebalance residential mortgage portfolios toward other geographical regions in the context of the European sovereign debt crisis. For banks in Greece, Ireland, Cyprus, Italy, Portugal, and Spain (GICIPS), we find evidence of flight-to-quality if banks were undercapitalized and had high funding cost, and evidence of risky-lending if banks were undercapitalized but without funding problems. For banks in core safe European countries, we find evidence of flight-to-quality among banks with high capital ratios, and risky-lending among banks with low funding cost. We rationalize these empirical results with a general equilibrium model of cross-border mortgage lending. This article is protected by copyright. All rights reserved

Mortgage Credit Expansion

Written in 2009 in the midst of the greatest economic recession since the Great Depression, “The Consequences of Mortgage Credit Expansion: Evidence From the U.S. Mortgage Default Crisis”, by Atif Mian and Amir Sufi, analyzes the primary reasons for the increase in sub-prime mortgage lending leading up the housing bubble burst of 2007 and the subsequent drastic rise in mortgage defaults. The goal of the paper is to empirically examine three competing explanations for the subprime mortgage expansion and the resulting default crisis.

Weather and Migration

Why do people seem to move to nicer weather in higher rates? Within Jordan Rappaport’s article, “Moving to Nice Weather”, Rappaport attempts to determine what factors influence the decision to move to nicer weather in the United States.

Poverty and the Role of Public Transportation

This paper, published in 2008 and featured in the Journal of Urban Economics, was authored by Edward Glaeser, Matthew Kahn, and Jordan Rappaport and investigates the influence of access to public transportation on the urbanization of poverty. The authors sought to explain why the poor tend to populate dense cities within metropolitan areas versus the surrounding suburbs. Through the use of statistical regression and selected data from surveys and censuses the authors were able to prove with statistical significance that, while not the only factor, access to public transportation is the primary reason for central city poverty. The goal of the research was to develop a theory of urban centralization that should explain the separation of the poor and non-poor, and why given this relationship the poor choose to live in the center of cities.