Working Papers
Implications of State-Contingent Mortgage Contracts in Housing Markets, Job Market Paper
This paper quantifies the effect of government intervention in the U.S. housing market to determine whether it can explain the nonexistence of mortgage contracts that are contingent on house prices, which are found to be optimal in the mortgage design literature. In the model, contract and down payment choices, and the corresponding mortgage interest rates, are endogenous for heterogeneous households that are subject to idiosyncratic income and house price shocks, as well as to an aggregate house price shock. I find that the funding advantage of government-sponsored enterprises leads to the dominance of fixed-rate mortgages in the U.S. housing market, and in a world without government intervention, mortgage contracts that are contingent on house prices emerge endogenously. In this world, contingent contracts decrease the cyclicality of foreclosure rate by adjusting the value of debt during a housing crisis. However, they increase the average foreclosure rate in normal times due to endogenously decreasing the down payment of households, since contingent contracts are relatively cheaper for low down payment options in equilibrium.
Discretizing a Process with Non-zero Skewness and High Kurtosis, with Simone Civale and Luis Diez Catalan
- Codes
We develop and test a discretization method to calibrate a Markov chain that features non-zero skewness and high kurtosis. The proposed method applies the logic of Tauchen (1986) to a first-order autoregressive process with normal mixture innovations, which, as we discuss, can be calibrated to feature non-zero skewness and high kurtosis. We then illustrate an application of our method in an Aiyagari economy. We find that an idiosyncratic shock with higher kurtosis decreases the equilibrium interest rate, whereas higher left skewness increases it.
The Discount for Lack of Marketability: Analysis of Current Controversies, Work in Progress
- Slides
Discount for lack of marketability is a key concept in valuing a closely held firm, and restricted stock studies provide benchmark estimates for this discount. This study summarizes the evolution of practitioner and academic approaches to restricted stock studies and analyzes the sources of controversies between these literatures.
A Threshold Model for the Exchange Rate Behavior of Turkey, Master's Thesis, 2009
This thesis analyzes the effects of global risk appetite and interest rate policy on $/T.L. exchange rate. Estimating the impact of unexpected policy rate changes without a nonlinear framework may lead to misleading results regarding the effectiveness of monetary policy especially in emerging economies. Using a nonlinear framework, I find that when the exchange rate risk is below a threshold level, exchange rate is sensitive to both unexpected interest rate change and VIX (Chicago Board Options Exchange Volatility Index). On the other hand, when the exchange rate risk is high, it becomes insensitive to unexpected interest rate change and significantly more sensitive to VIX.
Publication
Chadwick, Meltem Gülenay & Fazilet, Fatih & Tekatli, Necati, 2015. "Understanding the common dynamics of the emerging market currencies," Economic Modelling, Elsevier, vol. 49(C), pages 120-136.
The aim of this study is twofold. First, we examine if there exists a common movement among the currencies of emerging markets that implemented flexible exchange rate regime after 2000. Second, we examine whether this comovement is closely related to financial market conditions and macroeconomic fundamentals in emerging market economies. Our findings suggest that currencies of the emerging market economies have a common movement, which we name as “Exchange Rate Index”. We find that the Exchange Rate Index can be explained to a great extent by financial market indicators while macroeconomic fundamentals have relatively less power in understanding this common exchange rate pattern. The results particularly underline the importance of sovereign debt risk, equity return differentials and risk appetite. The relationship between financial variables and the Exchange Rate Index is significantly nonlinear, while the results for macroeconomic fundamentals do not show any nonlinearity.
Implications of State-Contingent Mortgage Contracts in Housing Markets, Job Market Paper
This paper quantifies the effect of government intervention in the U.S. housing market to determine whether it can explain the nonexistence of mortgage contracts that are contingent on house prices, which are found to be optimal in the mortgage design literature. In the model, contract and down payment choices, and the corresponding mortgage interest rates, are endogenous for heterogeneous households that are subject to idiosyncratic income and house price shocks, as well as to an aggregate house price shock. I find that the funding advantage of government-sponsored enterprises leads to the dominance of fixed-rate mortgages in the U.S. housing market, and in a world without government intervention, mortgage contracts that are contingent on house prices emerge endogenously. In this world, contingent contracts decrease the cyclicality of foreclosure rate by adjusting the value of debt during a housing crisis. However, they increase the average foreclosure rate in normal times due to endogenously decreasing the down payment of households, since contingent contracts are relatively cheaper for low down payment options in equilibrium.
Discretizing a Process with Non-zero Skewness and High Kurtosis, with Simone Civale and Luis Diez Catalan
- Codes
We develop and test a discretization method to calibrate a Markov chain that features non-zero skewness and high kurtosis. The proposed method applies the logic of Tauchen (1986) to a first-order autoregressive process with normal mixture innovations, which, as we discuss, can be calibrated to feature non-zero skewness and high kurtosis. We then illustrate an application of our method in an Aiyagari economy. We find that an idiosyncratic shock with higher kurtosis decreases the equilibrium interest rate, whereas higher left skewness increases it.
The Discount for Lack of Marketability: Analysis of Current Controversies, Work in Progress
- Slides
Discount for lack of marketability is a key concept in valuing a closely held firm, and restricted stock studies provide benchmark estimates for this discount. This study summarizes the evolution of practitioner and academic approaches to restricted stock studies and analyzes the sources of controversies between these literatures.
A Threshold Model for the Exchange Rate Behavior of Turkey, Master's Thesis, 2009
This thesis analyzes the effects of global risk appetite and interest rate policy on $/T.L. exchange rate. Estimating the impact of unexpected policy rate changes without a nonlinear framework may lead to misleading results regarding the effectiveness of monetary policy especially in emerging economies. Using a nonlinear framework, I find that when the exchange rate risk is below a threshold level, exchange rate is sensitive to both unexpected interest rate change and VIX (Chicago Board Options Exchange Volatility Index). On the other hand, when the exchange rate risk is high, it becomes insensitive to unexpected interest rate change and significantly more sensitive to VIX.
Publication
Chadwick, Meltem Gülenay & Fazilet, Fatih & Tekatli, Necati, 2015. "Understanding the common dynamics of the emerging market currencies," Economic Modelling, Elsevier, vol. 49(C), pages 120-136.
The aim of this study is twofold. First, we examine if there exists a common movement among the currencies of emerging markets that implemented flexible exchange rate regime after 2000. Second, we examine whether this comovement is closely related to financial market conditions and macroeconomic fundamentals in emerging market economies. Our findings suggest that currencies of the emerging market economies have a common movement, which we name as “Exchange Rate Index”. We find that the Exchange Rate Index can be explained to a great extent by financial market indicators while macroeconomic fundamentals have relatively less power in understanding this common exchange rate pattern. The results particularly underline the importance of sovereign debt risk, equity return differentials and risk appetite. The relationship between financial variables and the Exchange Rate Index is significantly nonlinear, while the results for macroeconomic fundamentals do not show any nonlinearity.
