Vishal Mangla

Curriculum Vitae
(PDF 75 KB / 3 pages)

Research Interests: Financial Intermediation and Regulation, Macro-Finance, Financial Market Frictions, Market Microstructure

Job Market Papers:

1. "Optimal Capital Regulation with Two Banking Sectors" , with Taejin Kim
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   We present the case for procyclical capital requirement policy -- lower requirement during booms and higher requirement during recessions -- as opposed to the generally accepted countercyclical requirement in the current literature. Our argument is based on the fact that banks shift their capital into and out of the ambit of regulation depending on the severity of the regulation. The banks trade off the benefit of being regulated -- cheaper funding/insurance -- with the cost -- restriction on the portfolio risk. Tightening the capital requirement during a boom (as in a countercyclical policy) forces the banks to move to the shadow banking sector where they take too much risk. Therefore, the policy aimed at controlling the risk banks take during booms should incentivize the banks to be regulated by relaxing the capital requirement. These forces are reversed during recessions. The policy specifies the level of capital requirement as a function of the relative size of the two banking sectors. Under this specification, the right mix of the two sectors is achieved even when, in equilibrium, the banks are indifferent between being regulated and unregulated. We show that the regulation policy is robust to estimation errors in the model parameters in that small errors lead to welfare loss that is an order smaller.


2. "Investment Behavior under Uncertainty in Number of Competitors" , with Taejin Kim
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   One explanation for why investors crowd into a given strategy, as in the Quant Crisis of 2007, even when they understand its negative implication is that they are often simply not aware of the extent of crowding. In this paper, we build a simple model that formalizes this intuition. To derive excessive crowding, our model relies on two ingredients: (i) an investor's investment decision imposes a negative externality on other investors, and (ii) investors are uncertain about the amount of competing capital at play. The model then allows us to analyze regulations regarding disclosure of capital committed to a strategy. Interestingly, we find that it is suboptimal to disclose the amount of capital perfectly to the investors to mitigate the crowding, and that there is a case for strategic blocking of the information. We show that the implementation of the optimal disclosure policy requires a commitment device without which it suffers a policy trap.