Research Statement Freddy Rojas Cama October 2017

I am a Ph.D. candidate at Rutgers, The State University of New Jersey, under the
direction of B. Mizrach. I expect to complete my degree in May of 2018.

My research interests are financial economics, macroeconomics and econometrics. I

focuses on financial regulation in the post Dodd-Frank enforcement era. My research on
regulation intends to apprehend the basic lessons from the great recession and provide a
comprehensive financial-surveillance framework for developed and developing countries.

The title of my job market paper is The Impact of Collateralization on Swaps Rates
Under Clearing. I study the relationship between the price determination of derivatives
and clearing methods in a theoretical framework. This chapter contributes to under-
standing the interplay between derivatives and clearinghouses, a relationship that is still
not well understood in the literature. In the light of the 2008-09 financial crisis and its
aftermath, clearing of derivatives has become central to the modern financial system. In
practice, hedging exposures and collateralization -performed in a clearinghouse- question
the standard practice of valuation as they introduce multilateral netting, compression
and other clearing procedures. Specifically, I show how the exposures are related to
the swap rates in an analytical closed form expression. I analyze this relationship in a
financial structure that allows clearing of positions. Clearing is potentially a tool that
reduces exposures significantly, thus lessening collateral requirements. The impact on
swap rates of this financial structure has not been broadly discussed in the literature.
The simple approach presented in this paper is not intended to capture every move-
ment in swap rates, and more likely changes not captured by the theoretical model are
due to model misspecification, market segmentation, or temporary miss-pricing as fairly
suggested by Johannes and Sundaresan [2007]. The results of my research have the
following implications in terms of policy. First, netting through novation has significant
gains in reducing exposures. The model pinpoints further reductions as a function of
correlation and riskiness of the cleared asset class. I assess these gains using data from
Office of the Comptroller of the Currency (OCC), these gains are larger for one clear-
inghouse in comparison to two specialized clearinghouses. A financial structure with
a clearinghouse can be competitive in terms of prices and collateral requirements thus
turning out to be appealing to more participants. Second, a macro prudential policy
such as capital requirement is becoming a central feature in financial structures in the
aftermath of the recent financial crisis and more clearly after Dodd-Frank act. Clearing
of a fraction of portfolio of derivatives of banks could offer a feasible way to reduce
pressure on these requirements since counter-party risk can be reduced effectively in-
side these clearinghouses. Furthermore, other strategies, such as mutualization (sharing
losses amid participants) can potentially be part of the regulation in the next years.

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Research Statement Freddy Rojas Cama October 2017

In the second chapter of my dissertation (The Effect of Mutualization and Collateral-

ization on Credit Default Swap Premium) I investigate the effects of collateralization
and mutualization on credit default swaps (CDS) premium in a context of high coun-
terparty risk operating through an opaque derivatives market. The literature mostly
analyzes clearing in exchange markets and assumes that terms of trade are invariant
to regulation, my approach explicitly makes clearing practices to affect the size of po-
sitions, recovery rate and premium. Moreover, I study the interplay between clearing
practices and asset pricing in a theoretical framework that allows excessive leverage of
short positions, thus, this environment is realist to the light of causes and propagation
of great recession. I closely follow recent contributions of Koeppl and Monnet [2010],
Koeppl [2013], Acharya and Bisin [2014] and Stephens and Thompson [2011]. I show
the premium is lower when mutualization is part of the clearing policy and particularly
when contingent claims are not too high. Moreover, the allocation is characterized by
high recovery rate and non-defaulting contracts spread significantly relative to a bilateral
agreement. As the literature suggests collateral avoids detrimental outcomes; premium
is higher under collateralization practices since the value of the position (or recovery
rate) increases. Existent empirical literature finds mixed results after controlling for liq-
uidity and dealer networking. This chapter provides answers to this oxymoron. Hence,
my research compresses the asset pricing theory into a material that would be critical
as input in large macroeconomic models.

In the third chapter of my dissertation (Collateralization under clearing: An empirical

approach) I explore the empirics of the impact of collateralization on swap rates. I
use available data to validate the theoretical approach using the setup developed in
previous chapters of my dissertation. In the first sections I review the literature regarding
empirical approaches and I propose a model that captures the relationship between
collateralization and swap valuation. This chapter is still work on progress.

Before joining the PhD program, I worked for international organizations in Washington
D.C such as International Monetary Fund (IMF), World Bank (WB) and InterAmeri-
can Development Bank (IADB). In these institutions I participated in the elaboration
of quantitative assessments of the impact on financial and real markets of specific re-
forms. The assessment covered countries in different stages of development. In many
projects inside these institutions I was in charge of proposing and implementing ad-hoc
econometric models. At IMF, I contributed identifying breaks on structural reforms
and growth for lower-middle income economies. I also was a contributor for Staff Re-
port: Structural Reforms and Macroeconomic Performance, Initial considerations for
the Fund. Also at IMF, I estimated panel data regressions on export quality covering
178 countries and hundreds of products over 1962-2010. Additionally, in the first years

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Research Statement Freddy Rojas Cama October 2017

at IMF I was involved in the project of surveillance of real-exchange-rate misalignments

for Low-Income countries (ERALIC project). At Central Bank of Chile, I made econo-
metric projections using neural network methods for the Chilean Balance-of-Payment
Accounts. At IADB I made research about dollarization, international finance, and cap-
ital markets. At WB I made analysis on extraction of cycles and calculation of output
gaps for developing countries. The enriching experience in these institutions made me
more capable of conducting research on my own. As a result I won an award in 2003
(International Research Contest Doctor Manuel Noriega Morales - Guatemala) for my
coauthored research about remittances, real exchange rate and household preferences.

I consider myself as a researcher with fresh ideas on a given subject and personally
I am ready to learn new topics in my field of financial economics, macroeconomics
and econometrics. I describe myself as an approachable and easygoing professor and
researcher as well as hardworking, meticulous and respectful to others.

I will be available for interviews at the ASSA Annual Meeting in Philadelphia January
5-7th 2018.

Freddy Rojas Cama

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Research Statement Freddy Rojas Cama October 2017

References

Viral Acharya and Alberto Bisin. Counterparty risk externality: Centralized versus
over-the-counter markets. Journal of Economic Theory, 149:153182, 2014.

Michael Johannes and Suresh Sundaresan. The impact of collateralization on swap rates.
The Journal of Finance, 62:383410, 2007.

Thorsten Koeppl. The limits of counterparty clearing: Collusive moral hazard and
market liquidity. Queens Economic Department Working Paper, 2013.

Thorsten Koeppl and Cyril Monnet. The emergence and future of central counterparties.
Queens Economic Department Working Paper No 1241, 24:330, 2010.

Eric Stephens and James R. Thompson. Cds as insurance: Leaky lifeboats in stormy
seas. Working paper, 2011.