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Current Working Papers

More Than the Sum of its Parts: The Costs of Multiple Portfolio Constraints 

This paper develops a model with multiple risky assets to study the equilibrium effects of simultaneously binding constraints on investors' portfolios, such as limits on leverage or holdings of particular assets. We show that when constraints coexist and bind simultaneously, their distortive effects are exacerbated, and liquidity provision is impeded. There are two main effects. First, each constraint binds in more states of the economy than if imposed in isolation. Due to the tension between an investor's preference for risk exposure and his being asked to provide liquidity to compensate for others' investment restrictions, the constraint is more likely to bind. Second, the shadow cost of each constraint is higher than in isolation. This means the welfare burden of a constraint is particularly large when it binds because that investor is asked to provide liquidity, i.e. when traditional single-constraint models would predict it to not bind at all. Lower correlation across assets increases the shadow cost of all constraints.

We develop a two-country asset pricing model to explain countries' heterogeneous exposure to global risks. Goods production is specialized and trade is frictionless, as are financial markets. Currency risk premia arise in equilibrium. A 'risky' currency is not simply one whose country contributes disproportionately to aggregate risk due to the size of its economy; rather, it is one that faces systematically volatile demand from its trade partners. How evenly global risks are shared among investors determines how strongly demand for a country's good---and thus its currency---is correlated with the aggregate state of the economy. Uneven risk sharing exacerbates both interest rate differentials and demand risk. A country with high output growth as well as risky demand will then be a popular candidate for the long position in a 'carry trade'. The expected returns to the carry trade are, however, compensation for risk. Preliminary data analysis is supportive, suggesting a positive relation between export concentration and excess currency returns. 

Household investments, limited participation and equity premium with wealth heterogeneity

 (with Dmitry Makarov, NES) 

We develop and solve analytically a general equilibrium model where investors have heterogeneous wealth levels and exhibit uncertainty aversion. The model matches sev- eral salient patterns of household investments: (i) a sizeable fraction of households do not participate in the stock market, (ii) richer households are more likely to partici- pate, and (iii) among the households that do participate, wealthier ones invest a larger share of their wealth into risky assets. These investment patterns determine the rela- tion between the equity premium and market participation as a function of household wealth. For wealth growth that preserves or decreases wealth inequality, the resulting higher participation level is associated with a lower equity premium; whereas a rise in wealth inequality leads to the opposite relationship: lower participation at a lower equity premium. 

[R&R at Review of Finance; paper currently being updated, new version available soon]

International Capital Constraints and Stock Market Dynamics 

In order to explain cross-country differences in the effects of capital market liberalization, this paper proposes a model of international asset markets in which investors in different countries each face constraints on portfolio choice. The model demonstrates that liberalization, i.e. the lifting of constraints, can increase or decrease the liberalized stock market's volatility, depending on how severely the constraint was binding before being removed, and whether markets are fully or only partially liberalized. The same factors also determine whether a market's correlation with world markets increases or decreases, thus linking correlation effects to the magnitude of capital inflows post-liberalization.

Irrelevance of Short-Sale Constraints under Ambiguity Aversion

The model shows that when agents are heterogeneous in their degrees of ambiguity aversion (in the sense of Gilboa and Schmeidler (1989)), short-selling constraints cannot bind in equilibrium when the supply of assets is positive. This implies that in markets with a higher degree of uncertainty about fundamental parameters, such constraints should not be binding. This can aid in distinguishing empirically between forms of pessimism and ambiguity aversion.


Asset Pricing Implications of Exchange Traded Fund Investment (with Michael Gallmeyer, UVA)

Consumption Preferences, International Investment and Current Account Balances (with Anna Pavlova, London Business School)


A Note On Wealth Effect Under CARA Utility 

Financial Research Letters (2010)

There is a simple but overlooked way of capturing the wealth effect under CARA utility 
via making the absolute risk aversion parameter wealth-dependent. Focusing on the setting of Verrecchia (1982), we compare our approach with that of Peress (2004) who instead changes preferences.
We demonstrate that implementing our approach leads to a straightforward, tractable analysis, while Peress has to resort to approximate methods. Importantly, our closed-form solution reveals that the relation between wealth and wealth share invested in a risky asset can be negative, while Peress’s main result is that this relation is uniquely positive.

Seminars and Conferences

WFA, Lake Tahoe (discussant)
BI Oslo, Norway
SKEMA, Lille, France
4Nations Cup, representing France, London

CEPR Seventh Annual Workshop on Macroeconomics of Global Interdependence (MGI), Paris (discussant)

Bank of Spain & Bank of Canada Workshop on Financial Stability, Madrid

Bank of Canada Conference on Financial Globalization, Ottawa
Goethe Universitaet, Frankfurt, Germany
Copenhagen Business School, Denmark
ESSFM, Studienzentrum Gerzensee: European Summer Symposium in Financial Markets with CEPR
IESEG Asset Pricing Workshop, Paris

University of New South Wales, Sydney, Australia
University of Technology Sydney, Australia
University of Syndey, Australia
European Finance Association Meetings, EFA 2009, Bergen 
ESSFM, Studienzentrum Gerzensee: European Summer Symposium in Financial 
Markets with CEPR 
Bank of Canada  Simon Fraser University Conference on Financial Market Stability, Vancouver
Imperial College, London
American Finance Association Meetings, AFA 2009, San Francisco (Discussant)

European Finance Association Meetings, EFA 2008, Athens (Discussant)

Amsterdam University
HEC Paris
HEC Lausanne
IESE, Barcelona
INSEAD, Fontainebleau
McGill University, Montreal
Rochester University
Tilburg University

Transatlantic Doctoral Conference, London

ESF Exploratory Workshop — Dynamic Portfolio Choice, Asset Pricing and Mathematical Finance, London (Discussant)