Research 

Working papers

Endogenous Ambiguity in Nonlinear Macro-Finance Models (2025, draft) 

Previously circulated as "Model Uncertainty as Partial-Identification Problems: Application to Policy Promises during Crises"

This paper introduces a belief-formation mechanism under ambiguity embedded in a nonlinear macro-finance model with a financial intermediary sector, and shows that it rationalizes several survey-based deviations from rational expectations. Individual intermediaries use the equilibrium price functions to endogenously construct observationally equivalent models that match asset prices but imply different distributions of future returns. The resulting worst-case subjective beliefs overestimate aggregate capital in the sector until financial frictions trigger crises through nonlinear drops in risky asset prices; once crises unfold, this overoptimism disappears and subjective risk perceptions and premia spike. The model also generates an acyclical subjective risk premium and attributes asset-price fluctuations to countercyclical subjective cash-flow expectations, consistent with recent survey evidence. Compensation for endogenous ambiguity accounts for roughly half of the increase in risk premia during the 2007–2009 financial crisis.

A Risk-Based Liquidity Theory of International Currency (2025, draft, slides)

This paper develops a risk-based liquidity theory of international currency, grounded in the endogenous ranking of currencies as media of exchange. These rankings emerge from their asymmetric hedging properties against counterparties' future income shocks within an open-economy search model featuring multiple currencies. The model rationalizes various currency payment patterns as equilibrium outcomes, including single-currency dominance and the coexistence of multiple currencies. Empirical evidence supports the model’s prediction that the share of the dollar in international trade settlements and currency holdings is more prevalent in countries with more procyclical valuations of local currencies against the US dollar. The calibrated three-region model successfully replicates the observed dominance of the US dollar in the U.S. and Latin American regions due to its superior insurance properties against local economic conditions, alongside the local adoption of the euro in the Eurozone. Furthermore, the model underscores the significant welfare costs of de-dollarization policies, which result from the deterioration of terms of trade caused by the exclusion of optimal foreign currency payment arrangements, particularly as risk aversion increases.

 Dynamic Portfolio Choice under Nonlinear Dynamics, (2022, draft) 

This paper investigates a nonlinear dynamic portfolio choice of an investor endowed with recursive preferences. I estimate a quadratic autoregressive (QAR) process for the evolution of the investment opportunity set, including the aggregate vacancy rate as a return predictor. Jointly incorporating multivariate nonlinear dynamics in conditional means and stochastic volatility substantially improves standard measures of portfolio performance relative to using a linear time series model: the cumulative wealth path between 1972 and 2014 by 93%, Sharpe ratio by 20%, and utility-based economic welfare by 48%. Methodologically, I derive an analytical approximation of the optimal dynamic portfolio in a multivariate nonlinear environment embedded in the QAR model.

Publications

The First Arrow Hitting the Currency Target: A Long-Run Risk Perspective, with Takashi Kano (2017, Link),  Journal of International Money and Finance, 74: 337-352. 

This paper reconsiders the successful currency outcome of the first arrow of Abenomics. The Japanese yen depreciation against the U.S. dollar after the introduction of the first arrow co-moves tightly with long-term yield differentials between Japan and the United States. The estimated term structure of the sensitivity of the currency return of the Japanese yen to the two-country interest rate differential indeed shifts up and becomes steeper after the onset of Abenomics. To explain this structural change in the term structure of the Fama regression coefficient, we employ a long-run risk model endowed with real and nominal conditional volatilities as in Bansal and Shaliastovich (2013). Under a plausible calibration, the model replicates the structural change when nominal uncertainty dominates real uncertainty in the U.S. bond market. We conjecture that the arrow was shot off from the U.S. side, not the Japan side.

Working in Progress

Global Banks’ Subjective Beliefs and Systematic Debt Cycles in Emerging Economies, with  Chun-Che Chi 

Macroeconomic Dynamics with Trend Inflation under Diagnostic Expectations, with Donghoon Yoo  

Macro-Finance Resilience with Illiquid Capital Reallocations, with Tak-Yuen Wong