The Price of Property Rights: Institutions, Finance, and Growth (with Ron Alquist & Ben Chabot)
Journal of International Economics, July 2022
Credit Risk and the Transmission of Interest Rate Shocks (with Dino Palazzo)
Journal of Monetary Economics, September 2022
Sovereign Credit Risk, Monetary Policy, and the Role of Financial Intermediaries (with Johannes Poeschl & Ivan Shaliastovich)
Using sovereign credit default swap (CDS) data, we show that U.S. monetary policy shocks have a significant and persistent effect on sovereign credit risk. A 25 basis point surprise in the two-year interest rate is associated with a 6.7 b.p. increase in sdropbpreads, lasting over 30 days on average. The mean estimate masks significant heterogeneity in the cross section and variation in response over time. A one standard deviation increase in a country's ex-ante risk, measured by its prior CDS level, CDS beta with respect to a world index, or political risk, increases the sovereign spread response to a U.S. interest rate shock by an additional 4.5 to 7.3 b.p. The magnitudes are further affected by the health of large financial institutions. A one standard deviation drop in the net worth of global intermediaries, particularly broker-dealers, doubles interest rate pass through. We develop an economic model of foreign investors, global intermediaries, and heterogeneous sovereigns to rationalize these findings. The model suggests that the degree of intermediary constraints directly impacts equilibrium, sovereign credit spreads and the monetary pass through.
Aggregate Risk in the Term Structure of Corporate Credit (with Johannes Poeschl)
Recent global crises have brought to light the risks that corporate credit markets are exposed to, particularly in the tails of the distribution. Using firm-level, credit default swap (CDS) data across maturities, we discuss two stylized facts. First, while the term structure of credit spreads is upward sloping on average, firms that are close to default exhibit a negative slope. Second, shorter-term credit spreads display greater counter-cyclicality to aggregate risks, a fact that is driven by the behavior of financially constrained firms. To better understand these dynamics, we construct a novel, dynamic model of firm behavior where corporations issue short and long maturity debt to finance investment. The model generates an endogenous credit spread term structure that matches these facts across a distribution of firms. Moreover, we find that dis-investment by the most financially constrained firms, in order to gain additional cash in recessions, can actually amplify stress.
Hedge Funds and US Treasury Price Impact: Evidence from Direct Exposures (with Ron Alquist)
Financial intermediaries play a key role in the formation of asset prices. More specifically, the increasing importance of non-bank financial intermediaries has raised new questions about the risks that hedge funds pose to the financial system. We focus on the role that changes in hedge fund exposures play in driving U.S. Treasury prices and the yield curve. Using confidential hedge-fund data from the SEC’s Form Private Fund (PF), we calculate hedge funds’ aggregate, net Treasury exposures, and their fluctuations over time. We find economically significant and consistent evidence that changes in aggregate hedge fund exposures are related to Treasury yield changes. In the cross-section of hedge funds, we also show that particular strategy groups and lower-levered hedge funds display a larger estimated price impact on Treasuries. Finally, asset pricing tests show evidence of positive risk compensation associated with shifts in hedge fund Treasury demand.
How do firms manage debt maturity in the presence of investment opportunities? I document empirically that US corporations lengthen their average maturity of debt when output and investment rates are larger. To explain these findings, I construct an economic model where firms dynamically choose investment, short-term debt, and long-term debt. In equilibrium, long-term debt is more costly than short-term debt and is only used when investment opportunities present themselves in peaks of the business cycle. Economic stability and lower credit risk are reflected in firms that are able to hold more leverage and a higher proportion of long-term debt.
Work in Progress:
The Real Effects of Corporate Bond Illiquidity (with Stefano Pegoraro & Sriram Rajan)
Monetary Policy Risks in the Bond Markets and Macroeconomy (with Ivan Shaliastovich)
The Asset Pricing Implications of Contracting Frictions (with Joao Gomes & Amir Yaron)