CARLOS RAMIREZ                                                                                  Home       Vita

I study the issue of basket securities in a model with segmented markets, showing that a profit maximizing issuer will either issue a security focusing on one of the market segments or issue a security that replicates the market portfolio. With a monopoly issuer, the equilibrium may not be constrained efficient. Increasing competition between issuers increases the variety of baskets issued but does not always improve investors welfare.

The model provides a framework to both rationalize the creation of Exchange Traded Funds (ETFs) and index funds during the last decade and to evaluate the resulting welfare impacts. Finally, I use the model to compute estimates of the effective segmentation an investor faces when investing in commonly traded index funds. The segmentation on index funds that follow the S&P 100 is almost two times bigger than funds that follow the S&P 500 Index. Furthermore, the segmentation on index funds that follow the S&P Small Cap 600 Index is almost 4.5 times bigger than index funds that follow the S&P 500.

I analyze how market liquidity and business cycles affect the incentives of investors with different information to monitor securities in financial markets. I use a dynamic competitive model in which there are initially two types of investors (informed and uninformed) and the private information is long-lived. I show under mild conditions that illiquid markets are more prone to generate the concentration of information among few investors. Furthermore, among illiquid markets, the concentration of information tends to increase in economic booms. This analysis may help a government to both design trading regulations as well as identify which (and when) markets need more attention provided their tendency to concentrate information.

The 2003-2007 economic expansion, which preceeded the 2007 financial crisis, marked the time period of rapid growth of markets for collateralized debt obligations. Several empirical papers document that securitization contributed to laxer screening standards, therefore proposing a factor that contributed to the crisis. We develop a general equilibrium model with borrowers, investors, and banks endowed with access to an imperfect rating technology, which allows for some information transmission between banks and investors. It is the price differential on loans with a good rating and loans with a bad rating that disciplines the banks screening activity. We identify that both the rise in collateral values and the increase in asset complexity unambiguously contribute to laxer screening standards. The mechanism is consistent with and provides new insight into the following empirical observations prior to the 2007 crisis: (1) a historically low spread between high yield and investment grade CDOs, (2) the rise in default probability conditional on investment grade rating, (3) the rise in the fraction of assets receiving an investment grade rating.