How Credible is Hong Kong's Currency Peg? (with Urban Jermann and Vivian Z. Yue)
[SSRN][Latest Results]
In this paper, we develop an asset-pricing model for the Hong Kong dollar (HKD) exchange rate. The model assumes that the HKD-USD peg is not fully credible, and financial markets assign a nonzero probability to its breakdown. We derive an analytical formula for model-implied option prices and use HKD options to estimate the model. Our estimation results suggest that financial markets perceive an increased risk of the peg breaking, driven by recent U.S. interest rate hikes and Hong Kong's slowing economy.
Screen More, Sell Later: Screening and Dynamic Signaling in the Mortgage Market (with Manuel Adelino and Feng Zhao) [PDF] [UPDATED 2025/03]
We build on previous work and provide a dynamic model of asset markets with asymmetric information where higher originator screening effort leads to more signaling through delay of sale. We test this theoretical prediction using the mortgage market as a laboratory and processing time as a measure of screening. Our findings are threefold: First, and in line with the theory, mortgage processing time and the delay of sale after origination are strongly positively related in the data. Second, processing time is longer for mortgages with higher ex ante credit risk, i.e., observably riskier loans are processed slower. Finally, both processing time and delay of sale are negatively related to conditional mortgage default, indicating that more screening effort leads to unobservably higher quality loans that are also sold with a longer delay.
Forward Guidance and Its Effectiveness: A Macro-Finance Shadow-Rate Framework? (with Junko Koeda) [PDF]
NFA 2023
Forward guidance provides monetary policy communication for an economy at the effective lower bound (ELB). In this paper, we consider both calendar- and outcome-based forward guidance about the timing of liftoff. We develop a novel macro-finance shadow rate term structure model by introducing unspanned macro factors and an outcome-based liftoff condition. We estimate the model using the maximum likelihood method with extended Kalman filter. Based on the estimation results, we show that outcome-based forward guidance is indeed effective and has significant monetary easing effects on the real economy in both ELB periods of the global financial crisis (GFC) and the COVID-19 pandemic. In particular, we find that the overall impact on the unemployment rate is about 0.8% during both the GFC and the pandemic, but outcome-based forward guidance contributes more in the former than in the latter ELB period (about 0.30% versus 0.15%).
Quantifying Forward Guidance and Yield Curve Control (with Junko Koeda) [PDF]
This paper evaluates the effectiveness of Japanese unconventional monetary policies over the past quarter century within a unified term structure framework. Forward guidance accounted for most of the policy impact in the early stages of unconventional monetary policies and remained influential throughout. YCC, since its introduction in 2016 until March 2022, contributed to over a third of the policy impact.
Quantifying "Quantitative Tightening" (QT): How many rate hikes is QT equivalent to? [slides]
In this paper, we examine the question of quantifying how many interest rate hikes “quantitative tightening” (QT) is equivalent to. We estimate that a $2.2 trillion passive roll-off of nominal Treasury securities from the Federal Reserve’s balance sheet over 3 years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times, but 74 basis points during crisis periods.
Ambiguity, Long-Run Risks, and Asset Prices
FMA 2020
We generalize the long-run risks (LRR) model in Bansal and Yaron (2004) by incorporating the recursive smooth ambiguity aversion preferences and time-varying ambiguity. The generalized LRR model matches reasonably well key asset pricing moments, particularly those of the variance premium , with risk aversion under 5.