Research
2024
- 4Asset Pricing, Participation Constraints, and InequalityGoutham Gopalakrishna, Zhouzhou Gu, and Jonathan Payne2024
How do asset returns interact with wealth inequality? Empirical evidence shows that portfolio choices and financial constraints lead to unequal risk exposure across households and financial intermediaries. To understand the dynamic general equilibrium implications, we build a macroeconomic model with heterogeneous households, a financial sector, asset market participation constraints, and endogenous asset price volatility. We develop a new deep learning methodology for characterizing global solutions to this class of macro-finance models. We show that wealth inequality, financial sector recovery, and asset price dynamics depends on which households are able to purchase assets during crisis. This means the government faces a trade-off between tighter leverage constraints and a more equal recovery. In our calibrated model, asset returns and participation constraints account for a large fraction of the change in wealth inequality over the past half-century.
2023
- 3Optimism, Net Worth Trap, and Asset Returns (R&R, Journal of Economic Theory)Goutham Gopalakrishna, Seung Joo Lee, and Theofanis Papamichalis2023
How does optimism about growth prospects affect the stability of the macroeconomy and its transition dynamics? We set out a tractable framework that incorporates optimism about long-run growth, and assess its impact on the amplification of boom-bust cycles. When experts become more optimistic about technological growth, trade gets facilitated, raising investment, asset prices, and leverage considerably. However, when the economy transitions into a crisis, optimism exacerbates aggregate risk, resulting in excess volatility and higher risk-premium. In some cases, the experts’ expectation error stemming from their optimism generates a net worth trap, a situation in which the net worth of optimistic experts is trapped at very low levels indefinitely. Our model explains the excess conditional momentum in asset returns, which is empirically observed in crises, and raises the pricing power in the cross-section of asset returns significantly, beyond the conventional factors proposed by the literature.
2022
- 2ALIENs and Continuous Time EconomiesGoutham Gopalakrishna2022
I develop a new computational framework called Actively Learned and Informed Equilibrium Nets (ALIENs) to solve continuous time economic models with endogenous state variables and highly non-linear policy functions. I employ neural networks that are trained to solve supervised learning problems that respect the laws governed by the economic system in the form of general parabolic partial differential equations. The economic information is encoded as regularizers that disciplines the deep neural network in the learning process. The sub-domain of the high dimensional state space that carries the most economic information is learned actively in an iterative loop, enforcing the random training points to be sampled from areas that matter the most to ensure convergence. I utilize a state-of-the art distributed framework to train the network that speeds up computation time significantly. The method is applied to successfully solve a model of macro-finance that is notoriously difficult to handle using traditional finite difference schemes.
- 1A Macro-Finance model with Realistic Crisis DynamicsGoutham Gopalakrishna2022
Financial recessions are typically characterized by a large risk premium and a slow recovery. However, macro-finance models have trouble quantitatively explaining these empirical features, especially when they are calibrated to simultaneously match both the observed unconditional and conditional macroeconomic and asset pricing moments. In this paper, I build a macro-finance model that quantitatively explains the salient features of a financial crisis, such as a large drop in output, a spike in the risk premium, reduced financial intermediation, and a long duration of economic distress. The model has leveraged intermediaries with stochastic productivity and a state-dependent exit rate that governs the transition into and out of a crisis. A model without these two features suffers from a trade-off between the amplification and persistence of crisis. I show that my model resolves this tension and generates realistic crisis dynamics.
- 0Supply Chain Finance and Firm Capital StructureGoutham Gopalakrishna, Laura Bottazzi, and Claudio Tebaldi2022
We analyze a proprietary dataset of factoring transactions, where a financial intermediary, a factor, provides capital to support customers-supplier trade-credit transactions. At the empirical level, we characterize distinctive features that correlate customer and supplier capital structure determinants with the intensity of observed factoring transactions. Our key finding is that the characteristics of the production-related supply-chain network and downstream competition simultaneously shape the inter-firm trade- and bank-related debt chains and the firm-specific corporate financial policies. To match this evidence, we develop a structural model where the intensity of usage of factoring services is endogenously determined, jointly with the capital structures of the bank, the supplier, and the customer.