Essays in finance and macroeconomics
- This dissertation explores various issues in finance and macroeconomics. The first two chapters deal with the workings of the prime brokerage and repo markets, with a special emphasis on the relationship between broker-dealers and hedge funds through collateral re-use in particular. The last chapter, co-authored with Daniel Garcia-Macia, deals with the impact of energy transitions on economic growth with a focus on the Industrial Revolution in the United Kingdom and has potential implications for the energy transitions in general. In the first chapter, I analyze the relationship between prime brokers and hedge funds. Prime brokers and hedge funds form relationships in a matching market. In particular, the research questions are: What are the determinants of these matches? How did they change after the financial crisis? I estimate a matching model in which part of the profits of prime brokers and hedge funds depends on variables that are defined at the level of the entire portfolio of clients that a prime broker serves. I show that prime brokers and their client hedge funds choose to have trading relationships with each other in a manner that reflects the benefits of specialization. Moreover, prime brokers preferred risky clients before the crisis, while they were averse to risky clients after the crisis. Identification follows from pairwise matching stability. I analyze the potential underlying economic mechanisms, mainly the cost advantages to a prime broker of collateral re-use between hedge fund clients. This is known as internalization. I estimate that the value of internalization for major prime brokers, such as Goldman Sachs, is around \$100-200 million annually. In the second chapter, I offer a theory by which dealer banks obtain funding liquidity by serving as intermediaries between hedge funds and cash investors in the markets for repurchase (repo) agreements. The model explains how the demand by dealer banks for funding liquidity determines repo haircuts and repo pricing. A dealer bank obtains liquidity to the extent of the spread between the haircut on its repos with cash investors and the haircut on its reverse repos with hedge funds. Dealer banks optimally choose the extent to which they use this funding mechanism over alternatives such as cash holdings and fire sales of illiquid assets. Rehypothecation and over-collateralization might expose hedge funds to the bankruptcy risk of dealer banks. The model pins down repo haircuts and interest rates jointly. Haircut spreads are low and hedge funds are not exposed to the bankruptcy risk of dealers when liquidity is abundant. When liquidity is relatively scarce, haircut spreads are high and hedge funds are exposed to the bankruptcy risk of dealers. The model highlights the volume of lending by cash investors and dealer balance sheets as key determinants of haircut spreads. The model yields further testable implications consistent with the data. In the last chapter, co-authored with Daniel Garcia-Macia, we study the impact of energy transitions on economic growth. We focus on the United Kingdom during the Industrial Revolution which has switched from wood as the main energy source to coal. The research questions we ask are: Why did the Industrial Revolution happen in England and at that time, but not somewhere else and around a different time? By using an endogenous growth model of directed technical change and natural resources, we provide an explanation of the Industrial Revolution as a transition from wood to coal as the main source of energy. We calibrate the model to historical data on energy uses and growth in England. Switching to the wood and coal stocks of France, the model matches the income gap between the two countries in 1600 and slightly overpredicts the gap in their 1600-1900 growth rates.
|Type of resource
|electronic; electronic resource; remote
|1 online resource.
|Stanford University, Department of Economics.
|Statement of responsibility
|Submitted to the Department of Economics.
|Thesis (Ph.D.)--Stanford University, 2016.
- © 2016 by Egemen Eren
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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