Jochen Lawrenz

Deposit finance as a commitment device and the optimal debt structure of commercial banks

We consider a regulated bank with access to bond and insured deposit financing. Bank manager-owners have specific abilities, which allows them to extract rents. We show that deposit finance acts as a commitment device, that has the potential to raise the overall debt capacity of the bank and increases pledgable assets. Our focus is on the optimal mix of bond and deposit financing. We find that in the optimum, the bank chooses a debt structure so as to align internal incentives with external constraints. The model predicts that banks with more risky assets or with more specific abilities use deposit financing to a lesser extent.

Time-series properties of the dividend–price ratio with social dynamics

We model an exchange economy where a finite number of standard identical agents interact locally and analyse the time-series properties of the simulated dividend–price ratio dp t . Our results document that a sufficient degree of social dynamics induces high persistence in dp t which leads to the failure to reject the null of a unit root, as well as the failure to reject the null that dividends and prices are not cointegrated. At the same time, we find that returns are not significantly autocorrelated, thus, being consistent with weak-form market efficiency. Finally, we document that although dp t is highly persistent, econometric tests may still find predictability of future returns by current dividend–price ratios.

Contingent Convertible Bonds in a General Equilibrium Model

This contribution discusses bail-in instruments in a general equilibrium model with a continuum of banks and households. We show that if banks are already endowed with bail-in securities, they are effective in mitigating debt overhang and increase household financial wealth. However, a pure private sector debt restructuring is not sustainable and needs public sector intervention. If a bail-in program is implemented it creates incentives for high default probability banks to invest. In comparison to other interventions such as an asset purchase program, implementing a bail-in program induces larger redistributions and therefore potentially larger social costs.

Local Interaction, Incomplete Information and Properties of Asset Prices

In this article, we introduce local interaction in a pure exchange economy where the endowment process follows a simple hidden Markov chain and risk-averse agents have incomplete information about the regime. We show that the interplay between internal, external local and external global effects (a) can account for different temporal behavior of the price-dividend ratio, (b) can reproduce some stylized facts of price changes and (c) suggest that market efficiency in the sense of return predictability may be inversely related to the information precision.