Research

Working Papers

Democratizing Private Markets? Private Equity Performance of Individual Investors with Federico Mainardi, Sangmin S. Oh, and Petra Vokata 

Using novel data on U.S. households, we provide the first systematic study of private equity performance by individual investors. On average, individual investments in private equity perform similarly to institutions. However, the most affluent investors outperform the least affluent by 9 percentage points in public market equivalent. Advisor fixed effects explain two-thirds of the variation in private equity performance and 75% of the wealth performance gap, as wealthier investors have better advisors that deliver persistently higher returns. Intermediary fees impose a sizable drag on performance, especially for less affluent investors.

Asset Allocations and Returns in the Portfolios of the Wealthy with Julian Richers  

Using a novel database of individual portfolios at the security level, this paper documents the investment allocations and returns of wealthy U.S. households. Wealthier households take more risk, not only through portfolio allocation but also via riskier security-level asset selection. Although larger portfolios earn higher returns, we find little persistence in returns at the portfolio level, and no differences in returns by wealth in equities or bonds. By contrast, wealthier investors earn higher returns on alternatives and private businesses, diversification within alternatives allows the very wealthy to increase risk-adjusted returns, and the private equity premium depends on wealth.

Inflows and Spillovers: Tracing the Impact of Bond Market Liberalization [Revisions requested Review of Financial Studies]

This paper explores how bond markets affect macroeconomic outcomes. Following reforms in 1980s Japan that gave borrowers access to bond markets, firms issued bonds to repay bank debt. This led banks to lend to small firms and real estate, and contributed to both Japan's real estate bubble in the 1980s and bank problems in the 1990s. I propose a model consistent with the empirical evidence to characterize interactions between firm financial frictions, bank leverage and bond markets. Bond markets can amplify risk-free rate and firm borrowing shocks, in contrast to the supposed inherent stability of market-based finance. 

Low Rates and Bank Loan Supply:  Theory and Evidence from Japan with Yann Koby

Using the protracted period of low interest rates in Japan, we show that banks with higher market power face relatively higher funding costs, have lower profitability, and decrease loan supply in a low nominal rate environment. We build a macroeconomic model that rationalizes our empirical findings and show that due to lending frictions, the optimal nominal rate is higher than suggested by the Friedman rule. The calibrated model shows that low rates resulted in lower aggregate lending, negatively affecting output. Tiering bank reserves marginally alleviates the negative effects of low rates, while taxing cash is more effective.

Making Sense of Negative Nominal Interest Rates with Yann Koby and Mauricio Ulate. SF Fed Working Paper 2022-12

Several advanced economies implemented negative nominal interest rates in the middle of the last decade, seeking to provide further monetary accommodation once cuts in positive territory had been exhausted. Negative rates affect banks in novel ways, mostly because during times of negative policy rates the interest rate that banks pay households on their deposits usually remains close to zero. In this review, we analyze the large literature that studies the impact of negative nominal interest rates, proceeding in four steps. First, we explain the theoretical channels through which negative rates affect banks. Second, we discuss the empirical findings about bank outcomes under negative rates. Third, we describe the aggregate transmission channels that influence the macroeconomic implications of a policy rate cut in negative territory. Finally, we compare the general-equilibrium models that have been used to quantify the effectiveness of negative rates and highlight why they have obtained mixed results. We conclude that, if properly implemented, negative rates are a valuable tool that central banks should not discard outright. However, negative rates can have quantifiable costs for the financial sector, and their effectiveness is likely to decline if implemented for long periods.

Leverage Limits in Good and Bad Times with Juanita Gonzalez-Uribe

How do leverage limits affect lending? We examine a regulatory change to the business development company (BDC) lending sector, which allowed lenders to double their regulatory leverage constraint. Exploiting the staggered timing of approvals, we show that this allowed firms to slowly adjust loan portfolios and increase leverage, but suddenly increase the unrealized losses reported on their loans. These patterns around approvals suggest that the slackness of regulatory constraints has important effects on lenders’ incentives to accurately assess fair value. In addition, we explore how the pandemic differentially affected BDCs that were close to or far from their leverage limits. Our results shed light on an important lending sector for small businesses, which has grown dramatically since the Great Recession.

Default, Commitment, and Domestic Bank Holdings of Sovereign Debt

How do the incentives of domestic banks and sovereign governments interact? This paper presents a model of government default and banks that invest in the debt of their own sovereign. In the model, banks demand safe assets to use as collateral, and default affects bank equity. These losses inhibit banks' ability to attract deposits, leading to lower private credit provision, and lower output. This disincentivizes the sovereign from defaulting. The extent of output losses depends on characteristics of the banking system, including sovereign exposures, equity, and deposits. In turn, bank exposures are affected by default risk. The model is also used to show that policies such as financial repression can improve welfare, but worsen output losses in the event of default.

Bank-Firm Matching, Leverage, and Credit Quality [draft coming soon]

We observe considerable differences between banks in practice. What effects do these differences have, in theory? This paper explores the effect of bank heterogeneity on lending in a static assignment model, in which borrowers are assumed to be heterogeneous firms. Firms are assumed to differ in terms of productivity, and borrow from banks and uninformed investors in order to invest and produce. Banks are assumed to vary in terms of monitoring efficiency, and faced with the problem of deciding to whom to lend, among heterogeneous firms. The model is then used to explore patterns of bank-firm matching, and demonstrate why it may be that changes in the characteristics of banks and firms lead to changes in lending, leverage, and credit quality.

Work In Progress

Subjective Beliefs and Portfolio Choice: Evidence from Financial Advisors with Cameron Peng

Book Chapters

A Restart Procedure to Deal with COVID-19 in Simeon Djankov and Ugo Panizza, eds.: Covid-19 in Developing Economies, 2020, CEPR E-Book. (with Simeon Djankov, Juanita Gonzalez-Uribe, and Dimitri Vayanos).

Governments around the world are assisting firms to deal with the adverse effects of Covid-19. Most forms of government assistance provided so far reduce firms’ operating costs. Firms’ debts keep accumulating, however, and the resulting debt overhang will be a drag on economic recovery. In this chapter we argue that policies are needed to restructure the debt of a large number of firms throughout the economy. We propose one such policy, which includes an extended bankruptcy stay, followed by a write-down of government claims on a firm conditionally on a comparable write-down agreed by the firm’s private creditors. Our procedure makes efficient use of fiscal resources, discourages healthy firms from claiming to be distressed, and can be combined with debt-equity swaps for large firms.