The Term Structure of Capital Costs by Qiheng Guo (PSTAT)

Event Date: 

Monday, November 26, 2018 - 3:30pm to 4:30pm

Title: The Term Structure of Capital Costs

Speaker: Steve (Qiheng) Guo, Visiting Assistant Professor, PSTAT

Abstract: We develop a dynamic pro?t maximization model for a ?nancial institution with liabilities of varying maturity, and use it for determining the term structure of capital costs. As a key contribution, our theoretical, numerical, and empirical results show that liabilities with different terms are assessed differently, depending on the company’s ?nancial situation. In particular, we ?nd that for a ?nancially constrained ?rm,value-adjustments due to ?nancial frictions for liabilities in the far future are less pronounced than for short-term obligations, resulting in a strongly downward sloping term structure. Our ?ndings provide guidance for performance measurement in ?nancial institutions.