Frictional Unemployment with Stochastic Bubbles (with E. Wasmer), European Economic Review, forthcoming. [Link]
Introducing financial bubbles in the search-and-matching model of the labor market significantly improves its ability to match the data.
Risk Management in Financial Institutions (with A. Rampini and S. Viswanathan), Journal of Finance, forthcoming. [Link]
Net worth is a key determinant of risk management. Banks with higher net worth hedge more, and banks cut hedging when financially constrained.
The Value of Central Clearing, Journal of Finance, forthcoming. [Link]
The first derivatives CCP in history (Le Havre, 1882) changed the geography of trade flows Europe-wide by completing markets and mitigating adverse selection.
Who Bears Interest Rate Risk? (with P. Hoffmann, S. Langfield and F. Pierobon), Review of Financial Studies, Vol. 32, No. 8, pp. 2921-2954 (2019). [Link]
Banks' exposures to interest rate risk are heterogenous cross-sectionally, depend on country-level loan rate conventions, and imply redistributive effects of monetary policy.
The Failure of a Clearinghouse: Empirical Evidence (with V. Bignon), Review of Finance, forthcoming. [Link]
First empirical study of CCP failure and CCP risk-shifting. Also shows evidence of distortions induced by resolution frameworks when supervisors have discretionary powers.
Bank Interest Rate Risk Management, Management Science, forthcoming. [Link]
Interest rate derivative positions positions by banks exhibit surprising features, which can be explained by hedging in the presence of financial frictions.
Wholesale Funding Dry-Ups (with C. Pérignon and D. Thesmar), Journal of Finance, Vol. 73, No. 2, pp. 575-617 (2018). [Link]
Investors in wholesale markets seek information-insensitive debt, and cut funding based on negative news. Adverse selection does not explain bank funding fragility.
Central Clearing and Collateral Demand. (with D. Duffie and M. Scheicher), Journal of Financial Economics, Vol. 116, No. 2, pp. 237-256 (2015). [Link]
Market structure affects the netting and diversification benefits of CCPs. Therefore, the effect of central clearing on collateral demand is ambiguous.
The Network Structure of the CDS Market and its Determinants. (with M. Scheicher and T. Peltonen), Journal of Financial Stability, Vol. 13, pp. 118-133 (2014). [Link]
First empirical study of the CDS network structure using bilateral exposure data. Activity is concentrated in a core of dealers, but risk is shared more broadly.
The Private Production of Safe Assets (with M. Kacperczyk and C. Pérignon), [Link], Revise and resubmit: Journal of Finance
Abstract: How fragile is the production of safe assets by the private sector? We answer this question using high-frequency data on certificates of deposit (CDs) issued in Europe. We show that only short-term CDs benefit from a safety premium. Using two identification strategies, we further show that the issuance of short-term CDs strongly responds to measures of safety demand. During periods of stress, this relation vanishes. However, high-quality issuers are still able to issue safe assets in periods of stress as investors distinguish between high- and low-quality issuers. Therefore, concerns about externalities arising from private safety production may be partially overstated.
Mitigating Fire Sales with Contracts: Theory and Evidence, [Link].
Abstract: Fire sales are a source of severe market inefficiencies. In this paper, I show theoretically that fire sales resulting from coordination failures can be eliminated via private contracting between investors. The contract has two main features: (i) parties pre-commit to buy assets at above-market prices and (ii) free-riding is penalized. This contract can be implemented as a central clearing counterparty (CCP), and explains important features of actual CCP design. I then study the first historical event during which a CCP played an active role in mitigating fire sales, the wool crisis of 1900 in France. The conditions under which the CCP organized coordination between investors to avoid fires sales are consistent with those implied by the model.
Entry in Banking Markets (with M. Traversa), [Link].
Abstract: We empirically show that adverse selection is a key determinant of banking market structure. Using newly-constructed panel data on all US bank branches over the 1981-2016 period, we study banks' decisions to expand or contract geographically. First, we show that banks are more likely to expand in counties that are similar, in terms of industry shares, to those in which they already have branches. Second, we show that banks are more likely to contract in more similar areas. These results are consistent with the theory that banks value diversification, but that informational barriers to entry prevent them from achieving optimal scale. These findings have implications for the assessment of banking competition and for the rise of fintech.
Interest Rate Risk in Banking: A Survey, [Link], Revised version: July 2016.
Abstract: This paper surveys the theoretical and empirical literature on interest rate risk in banking. Theoretically, it considers the origins of interest rate risk and its allocation. Interest rate risk is non-diversifiable and does not originate from the banking sector, but from the potential time inconsistency between future aggregate demand and supply of consumption goods. Empirically, we discuss measurement and stylized facts. Banks bear part of total interest rate risk, but also engage in risk management and risk-sharing with non-financial agents. They transfer large amounts of risk to households and firms, by writing interest rate-contingent loan and deposit contracts. We consider the determinants of the aggregate exposure to interest rate risk and the pricing of marginal units of risk. Finally, interest rate policy, both conventional and non-conventional, is discussed.
See my Google Scholar webpage.