Essays in Financial Economics

Abstract

This dissertation consists of three independent essays. Chapter 1, "The Effect of Mortgage Securitization on Foreclosure and Modification," assesses the impact of mortgage securitization on foreclosure and modification. My primary innovation is using the freeze of private mortgage securitization in the third quarter of 2007 to instrument for the probability that a loan is securitized. I find that privately securitized mortgages are substantially more likely to be foreclosed and less likely to be modified. Chapter 2, "Disagreement and Liquidity," analyzes how disagreement between investors affects the relationship between trading, liquidity, and asymmetric information. Traditional models predict that asymmetric information should destroy trade and liquidity. In contrast, I document empirical evidence that asymmetric information increases trading volumes in stock, corporate bond, and option markets. To resolve this puzzle, I propose a model of overconfident disagreement trading in which private information enhances trading and liquidity. Chapter 3, "Is Real Interest Rate Risk Priced? Theory and Empirical Evidence," asks whether investors demand compensation for holding assets whose returns covary with real interest rate shocks. Empirically, there is little evidence that real interest rate risk is priced in the cross section of stocks or across asset classes. Theoretically, interest rate risk can be positively or negatively priced depending on whether interest rate changes are due to time preference shocks or consumption growth shocks.