Hassan Naqvi - Academia.edu (original) (raw)
Papers by Hassan Naqvi
Social Science Research Network, 2012
are also appreciated. We also acknowledge Hanh Le and Michelle Zemel for research assistance.
Journal of Banking & Finance
We examine how the banking sector may ignite the formation of asset price bubbles when there is a... more We examine how the banking sector may ignite the formation of asset price bubbles when there is access to abundant liquidity. Inside banks, given limitedliabilityandlackofobservabilityofeffort, loan officers (or risk takers) are compensated based on the volume of loans. Outside banks, when there is heightened macroeconomic risk, investors reduce direct investment and hold more bank deposits. This ‘flight to quality ’ leaves banks flush with liquidity, lowering the sensitivity of managerial payoffs to the downside risk of loans and inducing excessive credit growth and asset price bubbles. The seeds of a crisis are thus sown. A Central Bank, that can detect the macroeconomic risk or the flight to quality effect, can curb the risk-taking incentives at banks with a contractionary monetary policy that draws out excess bank liquidity. Conversely, an expansionary monetary policy in such times only enhances the liquidity insurance enjoyed by banks, aggravating their risktaking incentives.
THE LAHORE JOURNAL OF ECONOMICS, 2000
One of the most important developments of modern finance is the Capital Asset Pricing Model (CAPM... more One of the most important developments of modern finance is the Capital Asset Pricing Model (CAPM) of Sharpe, Lintner and Mossin. Although the model has been the subject of several academic papers, it is still exposed to theoretical and empirical criticisms. The CAPM is based on Markowitz’s (1959) mean variance analysis. Markowitz demonstrated that rational investors would hold assets, which offer the highest possible return for a given level of risk, or conversely assets with the minimum level of risk for a specific level of return.
SSRN Electronic Journal, 2015
To economize on space, all the proofs of our paper "On Reaching for Yield and the Coexistence of ... more To economize on space, all the proofs of our paper "On Reaching for Yield and the Coexistence of Bubbles and Negative Bubbles" have been relegated to this appendix.
SSRN Electronic Journal, 2015
Part of this paper was written while Hassan Naqvi was a Visiting Scholar at MIT Sloan School of M... more Part of this paper was written while Hassan Naqvi was a Visiting Scholar at MIT Sloan School of Management, whose hospitality is warmly acknowledged. We would like to thank Nittai Bergman for his invaluable comments. To economize on space we have relegated all the proofs to an online Appendix.
New Perspectives on Asset Price Bubbles, 2012
SSRN Electronic Journal, 2011
The appendix extends the bank's objective function in the presence of fire-sale prices for as... more The appendix extends the bank's objective function in the presence of fire-sale prices for assets liquidated prematurely. It also formalizes the cost of a bubble.
SSRN Electronic Journal, 2010
This article develops a model of bank runs and crises and analyses how the presence of a lender o... more This article develops a model of bank runs and crises and analyses how the presence of a lender of last resort (LOLR) affects the solvency of the banking system. We obtain a one to one mapping from the depositors' equilibrium strategy to an optimal contract prevailing in the economy. The study finds that the difference between a perfectly informed and an imperfectly informed LOLR can be crucial. Our results indicate that a perfectly informed LOLR is a Pareto improvement. However, if the supervisory process of the LOLR is subject to noise, then the gains from ex post efficiency may be outweighed by ex ante inefficiency induced by moral hazard which is conducive to lower lending rates in the economy.
SSRN Electronic Journal, 2007
This article values equity and corporate debt by taking into account the fact that in practice th... more This article values equity and corporate debt by taking into account the fact that in practice the default point differs from the liquidation point and that it might be in the creditors' interest to delay liquidation. The article develops a continuous time asset pricing model of debt restructuring which explicitly considers the inalienability of human capital. The study finds that even though in general the creditors will not liquidate the firm on the incidence of default, but nevertheless would liquidate the firm prematurely relative to the first best threshold. This agency problem leads to the breakdown of the capital structure irrelevance result. * I would like to thank Ronald Anderson for his support and encouragement. I would also like to thank Hyun Song Shin and Abhijeet Singh for valuable comments. Comments from the participants of FMG doctoral seminar are also appreciated. Any errors remain my responsibility. Correspondence to be addressed to Hassan Naqvi, Room R4z17A, Financial Markets Group,
Journal of Financial Economics, 2012
are also appreciated. We also acknowledge Hanh Le and Michelle Zemel for research assistance.
Journal of Economic Dynamics and Control, 2010
This paper develops a continuous time asset pricing model of debt and equity in a framework where... more This paper develops a continuous time asset pricing model of debt and equity in a framework where equityholders decide when to default but creditors decide when to liquidate. This framework is relevant for environments where creditors exert a significant influence on the timing of liquidation, such as those of countries with creditor-friendly bankruptcy regimes, or in the case of secured debt. The interaction between the decisions of equityholders and creditors introduces an agency problem whereby equityholders default too early and creditors subsequently liquidate too early. Our model allows us to assess quantitatively how this problem affects the timing of default and liquidation, optimal capital structure, and spreads.
When liquidity chasing banks is high, loan o¢ cers (or risk-takers) inside banks expect future lo... more When liquidity chasing banks is high, loan o¢ cers (or risk-takers) inside banks expect future losses to be readily rolled over. This insurance e¤ect induces them to relax lending standards. The resulting access to cheap credit can fuel asset price bubbles in the economy. To curb such risk-taking incentives at banks and the resulting asset bubbles, Central Banks should "lean against bank liquidity". In particular, Central Banks should adopt a contractionary monetary policy in times of excessive bank liquidity.
International Review of Finance, 2014
ABSTRACT This article analyses the impact of IMF conditionality on the intertemporal allocation o... more ABSTRACT This article analyses the impact of IMF conditionality on the intertemporal allocation of resources in an emerging market economy. The study identifies a principal agent problem between the government of the emerging market and its citizens and shows that conditionality has the potential to mitigate the resulting misallocation of resources. Nevertheless, the analysis indicates that if IMF lending were influenced by geopolitical motives then the suboptimal allocation of resources will remain notwithstanding IMF conditionality.
Social Science Research Network, 2012
are also appreciated. We also acknowledge Hanh Le and Michelle Zemel for research assistance.
Journal of Banking & Finance
We examine how the banking sector may ignite the formation of asset price bubbles when there is a... more We examine how the banking sector may ignite the formation of asset price bubbles when there is access to abundant liquidity. Inside banks, given limitedliabilityandlackofobservabilityofeffort, loan officers (or risk takers) are compensated based on the volume of loans. Outside banks, when there is heightened macroeconomic risk, investors reduce direct investment and hold more bank deposits. This ‘flight to quality ’ leaves banks flush with liquidity, lowering the sensitivity of managerial payoffs to the downside risk of loans and inducing excessive credit growth and asset price bubbles. The seeds of a crisis are thus sown. A Central Bank, that can detect the macroeconomic risk or the flight to quality effect, can curb the risk-taking incentives at banks with a contractionary monetary policy that draws out excess bank liquidity. Conversely, an expansionary monetary policy in such times only enhances the liquidity insurance enjoyed by banks, aggravating their risktaking incentives.
THE LAHORE JOURNAL OF ECONOMICS, 2000
One of the most important developments of modern finance is the Capital Asset Pricing Model (CAPM... more One of the most important developments of modern finance is the Capital Asset Pricing Model (CAPM) of Sharpe, Lintner and Mossin. Although the model has been the subject of several academic papers, it is still exposed to theoretical and empirical criticisms. The CAPM is based on Markowitz’s (1959) mean variance analysis. Markowitz demonstrated that rational investors would hold assets, which offer the highest possible return for a given level of risk, or conversely assets with the minimum level of risk for a specific level of return.
SSRN Electronic Journal, 2015
To economize on space, all the proofs of our paper "On Reaching for Yield and the Coexistence of ... more To economize on space, all the proofs of our paper "On Reaching for Yield and the Coexistence of Bubbles and Negative Bubbles" have been relegated to this appendix.
SSRN Electronic Journal, 2015
Part of this paper was written while Hassan Naqvi was a Visiting Scholar at MIT Sloan School of M... more Part of this paper was written while Hassan Naqvi was a Visiting Scholar at MIT Sloan School of Management, whose hospitality is warmly acknowledged. We would like to thank Nittai Bergman for his invaluable comments. To economize on space we have relegated all the proofs to an online Appendix.
New Perspectives on Asset Price Bubbles, 2012
SSRN Electronic Journal, 2011
The appendix extends the bank's objective function in the presence of fire-sale prices for as... more The appendix extends the bank's objective function in the presence of fire-sale prices for assets liquidated prematurely. It also formalizes the cost of a bubble.
SSRN Electronic Journal, 2010
This article develops a model of bank runs and crises and analyses how the presence of a lender o... more This article develops a model of bank runs and crises and analyses how the presence of a lender of last resort (LOLR) affects the solvency of the banking system. We obtain a one to one mapping from the depositors' equilibrium strategy to an optimal contract prevailing in the economy. The study finds that the difference between a perfectly informed and an imperfectly informed LOLR can be crucial. Our results indicate that a perfectly informed LOLR is a Pareto improvement. However, if the supervisory process of the LOLR is subject to noise, then the gains from ex post efficiency may be outweighed by ex ante inefficiency induced by moral hazard which is conducive to lower lending rates in the economy.
SSRN Electronic Journal, 2007
This article values equity and corporate debt by taking into account the fact that in practice th... more This article values equity and corporate debt by taking into account the fact that in practice the default point differs from the liquidation point and that it might be in the creditors' interest to delay liquidation. The article develops a continuous time asset pricing model of debt restructuring which explicitly considers the inalienability of human capital. The study finds that even though in general the creditors will not liquidate the firm on the incidence of default, but nevertheless would liquidate the firm prematurely relative to the first best threshold. This agency problem leads to the breakdown of the capital structure irrelevance result. * I would like to thank Ronald Anderson for his support and encouragement. I would also like to thank Hyun Song Shin and Abhijeet Singh for valuable comments. Comments from the participants of FMG doctoral seminar are also appreciated. Any errors remain my responsibility. Correspondence to be addressed to Hassan Naqvi, Room R4z17A, Financial Markets Group,
Journal of Financial Economics, 2012
are also appreciated. We also acknowledge Hanh Le and Michelle Zemel for research assistance.
Journal of Economic Dynamics and Control, 2010
This paper develops a continuous time asset pricing model of debt and equity in a framework where... more This paper develops a continuous time asset pricing model of debt and equity in a framework where equityholders decide when to default but creditors decide when to liquidate. This framework is relevant for environments where creditors exert a significant influence on the timing of liquidation, such as those of countries with creditor-friendly bankruptcy regimes, or in the case of secured debt. The interaction between the decisions of equityholders and creditors introduces an agency problem whereby equityholders default too early and creditors subsequently liquidate too early. Our model allows us to assess quantitatively how this problem affects the timing of default and liquidation, optimal capital structure, and spreads.
When liquidity chasing banks is high, loan o¢ cers (or risk-takers) inside banks expect future lo... more When liquidity chasing banks is high, loan o¢ cers (or risk-takers) inside banks expect future losses to be readily rolled over. This insurance e¤ect induces them to relax lending standards. The resulting access to cheap credit can fuel asset price bubbles in the economy. To curb such risk-taking incentives at banks and the resulting asset bubbles, Central Banks should "lean against bank liquidity". In particular, Central Banks should adopt a contractionary monetary policy in times of excessive bank liquidity.
International Review of Finance, 2014
ABSTRACT This article analyses the impact of IMF conditionality on the intertemporal allocation o... more ABSTRACT This article analyses the impact of IMF conditionality on the intertemporal allocation of resources in an emerging market economy. The study identifies a principal agent problem between the government of the emerging market and its citizens and shows that conditionality has the potential to mitigate the resulting misallocation of resources. Nevertheless, the analysis indicates that if IMF lending were influenced by geopolitical motives then the suboptimal allocation of resources will remain notwithstanding IMF conditionality.