Jakub Kastl

Crisis Management: Analyzing Default Risk and Liquidity Demand during Financial Stress

This paper explores the reliability of using prices of credit default swap contracts (CDS) as indicators of default probabilities during the 2007/2008 financial crisis. We use data from the Canadian financial system to show that these publicly available risk measures, while indicative of initial problems of the financial system as a whole, do not seem to correspond to risks implied by the cross-sectional heterogeneity in bank behavior in short-term lending markets. Strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank seem to be more important additional indicators of distress of individual banks, or lack thereof than the CDSs. It therefore seems that central banks should utilize high-frequency data on liquidity demand to obtain a better picture of financial health of individual participants of the financial system.This paper shows that strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank are important indicators of distress of individual banks. We conclude that central banks can benefit from using high-frequency data on liquidity demand to obtain a better picture of the financial health of individual participants of the financial system. For the particular case of Canada, using unique features of the payments system and information from the liquidity facilities we find that the willingness-to-pay for liquidity during the financial crisis stayed at low levels throughout the Canadian financial system and that there was no increase in counterparty risk. A key lesson of our analysis is that transactions-level data can be be valuable in determining the appropriate response of regulators and central banks to a financial crisis.

“When Should Manufacturers Want Fair Trade?”: New Insights from Asymmetric Information when Supply Chains Compete

We study a model of competing manufacturer/retailer pairs where adverse selection and moral hazard are coupled with promotional externalities at the downstream level. In contrast to earlier models mainly focusing on a bilateral monopoly setting, we show that with competing brands a ‘laissez‐faire’ approach towards vertical price control might not always promote productive efficiency. Giving manufacturers freedom to control retail prices is more likely to harm consumers when retailers impose positive promotional externalities on each other, and the converse is true otherwise. Our simple model also suggests that, with competing supply chains, consumers and manufacturers might prefer different contractual modes if promotional externalities have substantial effects on demands.

Selling Information to Competitive Firms

A monopolistic information provider sells an informative experiment to a large number of perfectly competitive firms. Within each firm, a principal contracts with an exclusive agent who is privately informed about his production cost. Principals decide whether to acquire the experiment, that is informative about the agents production cost. While more accurate information reduces agency costs and allows firms to increase production, it also results in a lower market price, which reduces principals willingness to pay for information. We show that, even if information is costless for the provider, the optimal experiment is not fully informative when demand is price-inelastic and agents are likely to be inefficient. This result hinges on the assumption that firms are competitive and exacerbates when principals can coordinate vis-à-vis the information provider. In an imperfectly competitive information market, providers may restrict information by not selling the experiment to some of the principals.

Recent Advances in Empirical Analysis of Financial Markets: Industrial Organization Meets Finance

In this article I provide a selective review of recent empirical work in the intersection of finance and industrial organization. I describe an estimation method, which can be applied quite widely in financial and other markets where a researcher needs to recover agents’ beliefs. Using four applications I illustrate how combining this method with data from auctions and with a theoretical model can be used to answer various economic questions of interest. I start with the primary market for sovereign debt, focusing on treasury bill auctions of the US and Canada. I show how auction data together with standard tools from Industrial Organization can be used to shed light on issues involving market structure, market power and front-running. I continue by looking at the Main Refinancing Operations of the European Central Bank, the main channel of monetary policy implementation in the EURO-zone, and illustrate how auction data can be used to learn about typically opaque over-the-counter lending markets. I also discuss how to use these data indirectly to learn about dynamics of banks’ financial health and of their balance sheets. I then turn to the discussion of recent progress on estimation of systemic risk. I finish with thoughts on how to estimate a whole demand system for financial assets. Thanks to Ali Hortaçsu for continued cooperation and to Ariel Pakes, Rob Porter, Azeem Shaikh and Moto Yogo for their comments. I am grateful for the financial support of the NSF (SES-1352305) and the Sloan Foundation. All remaining errors are mine. Department of Economics, Princeton University, NBER and CEPR