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)

I develop an open-economy monetary model with multiple currencies, where the ranking of currencies as media of exchange in international trade is endogenously determined in decentralized bilateral meetings. The ranking is driven by the currencies' ability to hedge against counterparties' uninsured income shocks, maximizing trade gains. Supporting the theory, countries with procyclical local currency valuations settle more trades in U.S. dollars, as observed in the data. The calibrated model explains the global role of the dollar as a vehicle currency, facilitating trades not directly involving the U.S., and the euro’s role as a local medium of exchange in the Eurozone. Flight-to-quality, driven by risk aversion, increases demand for the USD as the global medium of exchange, highlighting the welfare consequences of its dominance.

 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