Essays on Market Frictions and Securitization

This dissertation provides a novel theory of securitization based on intermediaries minimizing the moral hazard that insiders can misuse assets held on-balance sheet. The model predicts how intermediaries finance different assets. Under deposit funding, the moral hazard is greatest for low-risk assets that yield sizable returns in bad states of nature; under securitization, it is greatest for high-risk assets that require high guarantees and large reserves. Intermediaries thus securitize low-risk assets. In an extension, I identify a novel channel through which government bailouts exacerbate the moral hazard and reduce total investment irrespective of the funding mode. This adverse effect is stronger under deposit funding, implying that intermediaries finance more risky assets off-balance sheet. The dissertation discusses the implications of different forms of guarantees. With explicit guarantees, banks securitize assets with either low information-intensity or low risk. By contrast, with implicit guarantees, banks only securitize assets with high information-intensity and low risk. Two extensions to the benchmark static and dynamic models are discussed. First, an extension to the static model studies the optimality of tranching versus securitization with guarantees. Tranching eliminates agency costs but worsens adverse selection, while securitization with guarantees does the opposite. When the quality of underlying assets in a certain security market is sufficiently heterogeneous, and when the highest quality assets are perceived to be sufficiently safe, securitization with guarantees dominates tranching. Second, in an extension to the dynamic setting, the moral hazard of misusing assets held on-balance sheet naturally gives rise to the moral hazard of weak ex-post monitoring in securitization. The use of guarantees reduces the dependence of banks' ex-post payoffs on monitoring efforts, thereby weakening monitoring incentives. The incentive to monitor under securitization with implicit guarantees is the weakest among all funding modes, as implicit guarantees allow banks to renege on their monitoring promises without being declared bankrupt and punished.

Evolution of strength and physical properties of ultramafic and carbonate rocks under hydrothermal conditions

Interaction of rocks with fluids can significantly change mineral assemblage and structure. This so-called hydrothermal alteration is ubiquitous in the Earth’s crust. Though the behavior of hydrothermally altered rocks can have planet-scale consequences, such as facilitating oceanic spreading along slow ridge segments and recycling volatiles into the mantle at subduction zones, the mechanisms involved in the hydrothermal alteration are often microscopic. Fluid-rock interactions take place where the fluid and rock meet. Fluid distribution, flux rate and reactive surface area control the efficiency and extent of hydrothermal alteration. Fluid-rock interactions, such as dissolution, precipitation and fluid mediated fracture and frictional sliding lead to changes in porosity and pore structure that feed back into the hydraulic and mechanical behavior of the bulk rock. Examining the nature of this highly coupled system involves coordinating observations of the mineralogy and structure of naturally altered rocks and laboratory investigation of the fine scale mechanisms of transformation under controlled conditions. In this study, I focus on fluid-rock interactions involving two common lithologies, carbonates and ultramafics, in order to elucidate the coupling between mechanical, hydraulic and chemical processes in these rocks. I perform constant strain-rate triaxial deformation and constant-stress creep tests on several suites of samples while monitoring the evolution of sample strain, permeability and physical properties. Subsequent microstructures are analyzed using optical and scanning electron microscopy. This work yields laboratory-based constraints on the extent and mechanisms of water weakening in carbonates and carbonation reactions in ultramafic rocks. I find that inundation with pore fluid thereby reducing permeability. This effect is sensitive to pore fluid saturation with respect to calcium carbonate. Fluid inundation weakens dunites as well. The addition of carbon dioxide to pore fluid enhances compaction and partial recovery of strength compared to pure water samples. Enhanced compaction in CO2-rich fluid samples is not accompanied by enhanced permeability reduction. Analysis of sample microstructures indicates that precipitation of carbonates along fracture surfaces is responsible for the partial restrengthening and channelized dissolution of olivine is responsible for permeability maintenance.

THE IMPACT OF UPPER-LEVEL PROCESSES ON THE INTENSITY AND STRUCTURAL CHANGES OF HURRICANE SANDY (2012)

The first part of this study examines the relative roles of frontogenesis and tropopause undulation in determining the intensity and structural changes of Hurricane Sandy (2012) using a high-resolution cloud-resolving model. A 138-h simulation reproduces Sandy’s four distinct development stages: (i) rapid intensification, (ii) weakening, (iii) steady maximum surface wind but with large continued sea-level pressure (SLP) falls, and (iv) re-intensification. Results show typical correlations between intensity changes, sea-surface temperature and vertical wind shear during the first two stages. The large SLP falls during the last two stages are mostly caused by Sandy’s moving northward into lower-tropopause regions associated with an eastward-propagating midlatitude trough, where the associated lower-stratospheric warm air wraps into the storm and its surrounding areas. The steady maximum surface wind occurs because of the widespread SLP falls with weak pressure gradients lacking significant inward advection of absolute angular momentum (AAM). Meanwhile, there is a continuous frontogenesis in the outer region during the last three stages. Cyclonic inward advection of AAM along each frontal rainband accounts for the continued expansion of the tropical-storm-force wind and structural changes, while deep convection in the eyewall and merging of the final two survived frontal rainbands generate a spiraling jet in Sandy’s northwestern quadrant, leading to its re-intensification prior to landfall. The physical, kinematic and dynamic aspects of an upper-level outflow layer and its possible impact on the re-intensification of Sandy are examined in the second part of this study. Above the outflow layer isentropes are tilted downward with radius as a result of the development of deep convection and an approaching upper-level trough, causing weak subsidence. Its maximum outward radial velocity is located above the cloud top, so the outflow channel experiences cloud-induced long-wave cooling. Because Sandy has two distinct convective regions (an eyewall and a frontal rainband), it has multiple outflow layers, with the eyewall’s outflow layer located above that of the frontal rainband. During the re-intensification stage, the eyewall’s outflow layer interacts with a jet stream ahead of the upper-level trough axis. Because of the presence of inertial instability on the anticyclonic side of the jet stream and symmetric instability in the inner region of the outflow layer, Sandy’s secondary circulation intensifies. Its re-intensification ceases when these instabilities disappear. The relationship between the intensity of the secondary circulation and dynamic instabilities of the outflow layer suggests that the re-intensification occurs in response to these instabilities. Additionally, it is verified that the long-wave cooling in the outflow layer helps induce symmetric instability by reducing static stability.