On optimal security design and financial contract

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In this research project, we investigate several aspects of optimal security design and financial contract empirically and theoretically. First, using the data of publicly placed Japanese ABSs (asset backed securities), we analyze the effect of adverse selection (i.e., sellers/issuers of ABSs have more precise information than buyers/investors) on swap spreads of the ABSs, and find significantly negative relationship between excess subordination by issuers and swap spreads at the issuance. We also investigate the effect of asymmetric information and design of trading system on stock prices by using the data of stock lending fees in Tokyo Stock Exchange, and show that short-sales constraints reduce the adjustment speed of stock prices to negative information.Second, we theoretically analyze several problems in risk sharing through security design (optimal risk transfer, optimal consumption, optimal investment policy, and so on) in the setting where agents have stochastic differential utilities (SDU). We show that the optimal policies are characterized as solutions of forward-backward stochastic differential equations (FBSDE) and obtain the necessary and sufficient conditions for optimal policies. We also analyze the case where timing of risk-transfer is uncertain, and investigate risk transfer in the Knightian economy by using the robust utility maximization method proposed by Hansen and Sargent.In addition, we develop a model to describe stochastic movements of electricity prices and demands, and investigate desirable design of weather derivatives for electricity companies to hedge the risks of uncertain electricity prices and demands. Moreover, as an issue of financial contracting, we survey the relation between fund managers' fee schedule and their incentives, and investigate the relation between capital structures and stock returns to evaluate the benchmark for fund managers' performance measure.