Research
Publications
Wealth Inequality, Stock Market Participation, and the Equity Premium, Journal of Financial Economics, March 2013, Vol. 107 (3), pp. 740-759
An Estimation of Economic Models with Recursive Preferences, with Xiaohong Chen and Sydney Ludvigson, Quantitative Economics, March 2013, Vol 4 (1), pp. 39-83
International Capital Flows and House Prices: Theory and Evidence, with David Kohn, Sydney Ludvigson and Stijn Van Nieuwerburgh, in: Housing and the Financial Crisis, NBER, Cambridge, MA. Chapter 8. 2013
Long Run Productivity Risk and Aggregate Investment, with Xiaoji Lin, Journal of Monetary Economics, September 2013, Vol. 60 (6), pp. 737-751. Online Appendix
Wage Rigidity: A Quantitative Solution to Several Asset Pricing Puzzles, with Xiaoji Lin, Review of Financial Studies, January 2016, Vol. 29 (1), pp. 148-192. Online Appendix
Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability, with Xiaoji Lin, Journal of Monetary Economics, April 2016, Vol. 78, pp. 80-95. Online Appendix
The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk Sharing in General Equilibrium, with Sydney Ludvigson and Stijn Van Nieuwerburgh, Journal of Political Economy, Jan 2017, Vol. 125 (1), pp. 140-223.
The Elephant in the Room: the Impact of Labor Obligations on Credit Risk, with Xiaoji Lin and Xiaofei Zhao, American Economic Review, June 2020, Vol. 110 (6), pp. 1673-1712. Online Appendix
Out-of-town Home Buyers and City Welfare, with Stijn Van Nieuwerburgh, Journal of Finance, Oct 2021, Vol 76 (5), pp. 2577-2638.
Media coverage: New York Times, The Globe and Mail, Global News, Vancouver Courier, Business Vancouver, Vancouver Real Estate Podcast.
Affordable Housing and City Welfare, with Pierre Mabille and Stijn Van Nieuwerburgh, Jan 2023, Review of Economic Studies Vol 90 (1), pp. 293-330.
Media coverage: LA Times, NPR, NY Daily News, Gothamist, VoxEU, PR Newswire.
Why Momentum concentrates among overvalued assets, with Terry Zhang. Sept 2023, Review of Finance Forthcoming.
Working Papers
Evaluating the impact of portfolio mandates with Lorenzo Garlappi and Raman Uppal. September 2023.
Abstract: This paper evaluates the effectiveness of portfolio mandates on capital allocation. We argue that a firm's cost of capital is not a good measure of mandate effectiveness. Instead, evaluating the real impact of mandates requires examining their effect on sectoral capital allocation. Contrary to the prediction of endowment-based models, we show that mandates may have a negligible impact on the cost of capital and yet significantly influence the allocation of capital across sectors. Using a production-based model calibrated to match key asset-pricing and macroeconomic moments, we estimate that a significant portion of the mandate remains effective in shaping equilibrium capital allocation, even when there is little disparity in the cost of capital across sectors.
Why zoning is too restrictive with Jaehee Song. August 2023.
Abstract: Hsieh and Moretti (2019) estimate that zoning restrictions lowered aggregate growth by 36%. If restrictions are so costly, why do they exist? We propose a novel theory for why zoning restrictions are more stringent than the social optimum. The more administrative entities – each making its own zoning decisions – that a metro is fragmented into, the more restrictive zoning is in the metro. When zoning decisions are made locally, voters choose restrictive zoning due to local congestion externalities but fail to internalize the effects of restrictive zoning on metro-level affordability. Empirically, the HHI of administrative entities within a metro alone explains 18% of the variation in zoning restrictions across the U.S. This theory also provides clear policy advice – zoning decisions should be at a more global level. Indeed, facing housing affordability crises, several cities, states, and nations have begun to do exactly this.
The Great Resignation was caused by the Covid-19 housing boom with Gen Li. January 2023.
Abstract: Following the Covid-19 pandemic, U.S. labor force participation declined significantly in 2020, slowly recovering in 2021 and 2022 -- this has been referred to as the Great Resignation. The decline has been concentrated among older Americans. By 2022, the labor force participation of workers in their prime returned to its 2019 level, while older workers' participation has continued to fall, responsible for almost the entire decline in the overall labor force participation rate. At the same time, the U.S. experienced large booms in both the equity and housing markets. We show that the Great Resignation among older workers can be fully explained by increases in housing wealth. MSAs with stronger house price growth tend to have lower participation rates, but only for home owners around retirement age -- a 65 year old home owner's unconditional participation rate of 44.8% falls to 43.9% if he experiences a 10% excess house price growth. A counterfactual shows that if housing returns in 2021 would have been equal to 2019 returns, there would have been no decline in the labor force participation of older Americans.
Do bankers matter for main street? The financial intermediary labor channel with Yuchen Chen, Xiaoji Lin, and Xiaofei Zhao. June 2022.
Abstract: Financial intermediary (FI) stress, measured by leverage and collateral constraints, is emphasized as an important driver of asset prices and quantities by financial economists. We identify a new and equally important channel through which FIs affect risk and the real sector: FIs are stressed when their labor share is high. FIs labor share negatively forecasts growth of aggregate output, investment, and credit; it positively forecasts market excess returns and cost of credit. In the cross-section, banks with higher labor share lend less and have higher credit risk. Firms connected to such banks borrow less, pay more to borrow, have higher credit risk, and lower earnings growth; they also invest less if they are financially constrained. We explain these findings in a DSGE model where FIs face shocks to the quantity of labor needed to intermediate capital.
Profiting from Real Estate: So Easy a Congressman can do it with Markus Baldauf, Lorenzo Garlappi, and Keling Zheng. May 2022.
Abstract: We use financial disclosures to construct the returns on real estate transactions by U.S. Congress members. Active Congress members outperform non-Congress members by 3.25% per year. They outperform financial professionals, doctors, and former Congress members by similar amounts. About 1/3 of the total outperformance is due to national-level market timing. Consistent with this, a Buy-Sell index of transactions of active Congress members forecasts the returns on the aggregate U.S. housing index, but a similar index of transactions of inactive Congress members does not. Another 1/2 of the total outperformance is due to city- or neighborhood-level timing, with the remainder being either hyper-local or specific to the actual house purchased. In regards to the latter, an analysis of transactions prior to, or subsequent to the Congress member's fails to find broad based evidence of bribery.
Foreign Ownership of U.S. Debt: Good or Bad? with Sydney Ludvigson and Stijn Van Nieuwerburgh. Jan 2016. Revise and Resubmit at Journal of Finance.
Abstract: The last 20 years have been marked by a sharp rise in international demand for U.S. reserve assets, or safe stores-of-value. This paper analyzes the welfare consequences of these fluctuations in international capital flows in a two-sector general equilibrium model with uninsurable idiosyncratic and aggregate risks. The model implies that such fluctuations have potentially sizable welfare consequences for individuals that vary by agae, wealth, and income. The young benefit from a capital inflow due to lower interest rates, which reduce the costs of home ownership and of borrowing against higher expected future income. Middle-aged savers are hurt because they are crowded out of the safe bond market and exposed to greater systematic risk in equity and housing markets. Although they are partially compensated for this in equilibrium by higher risk premia, they still suffer from lower expected rates of return on their savings. By contrast, retired individuals, who are drawing down assets and who receive social security income that is least sensitive to the current aggregate state, benefit handsomely from the rise in asset values that accompanies a capital inflow. Under the "veil of ignorance," newborns gain from foreign purchases of the safe asset and would be willing to forgo up to 1% oflifetime consumption in order to avoid a large capital outflow.
Are Demographics Responsible for the Declining Interest Rates? Evidence from U.S. Metropolitan Areas, with Jinfei Sheng. July 2019.
Abstract: Interest rates have declined dramatically over the past 30 years. At the same time the birth rate has declined, and life expectancy has increased. Demographic changes leading to an older population have been proposed as an explanation for the decline in rates. However, this conjecture is difficult to test because demographics change slowly over time, and are correlated with other country characteristics. We show that in a cross-section of U.S. MSAs, the relationship between interest rates and demographics is only partially consistent with the above conjecture, and with existing models, which predict a negative association between age and interest rates. This association is, indeed, negative for lending rates, but positive for deposit rates. We rationalize this pattern by extending an OLG model where the banking sector is not perfectly competitive.
Tax-Loss Carry Forwards and Firms' Risk, with Ron Giammarino and Jose Pizarro. March 2024.
Abstract: Tax loss carry forwards (TLCF), the accumulated corporate loss that can be applied to future taxable income, forms an important and risky corporate asset. We first show theoretically that a firm's TLCF are a complex contingent claim that affects equity risk: If TLCF are so low that they will be used with near certainty, equity risk is decreasing with TLCF because TLCF represent a safe cash flow. On the other hand, if TLCF are high, equity risk is increasing in TLCF because firms are more likely to see their TLCF left unused after negative cash flow shocks. Under reasonable conditions, the model predicts the latter to dominate, and for the relationship to be mostly increasing. Empirically, TLCF positively and significantly forecast measures of equity risk, as well as future returns controlling for standard risk measures, indicating that TLCF are risky for the typical firm.
The Carry Trade and UIP when Markets are Incomplete, with Lorenzo Garlappi and Sajjad Neamati. May 2015.
Abstract: Many of the leading models of the carry trade imply that, contrary to the empirical evidence, a country's currency depreciates in times of high consumption and output growth, a manifestation of the Backus and Smith (1993) puzzle. We propose a modification of these models to account for financial market incompleteness and show that such a modification can induce positive correlation between currency appreciation and consumption or output growth while, at the same time, helping resolve the Backus and Smith (1993) and Brandt, Cochrane, and Santa-Clara (2006) puzzles. Furthermore, in many of the existing models, the assumed fundamental cross-country differences responsible for interest rate differentials also appear at odds with the data. We show that default risk and financial openness are strongly related to interest rate differentials and carry trade profits in the data. The incomplete markets model we propose is consistent with these novel empirical facts.
New In Town: Demographics, Immigration, and the Price of Real Estate, with Dragana Cvijanovic and Christopher Polk. April 2010.
Abstract: We link cross-sectional variation in both realized and expected state-level house price appreciation to cross-sectional variation in demographic changes. In particular, we extract two components of expected population growth: 1) a natural component due to predictable demographic changes related to fertility and mortality rates and 2) a non-natural component due to immigration. Our analysis shows that only the second component forecasts cross-sectional variation in state-level house price appreciation. We find that the sensitivity of both realized and expected returns to these demographic changes is stronger for states with greater population density, consistent with population growth actually causing the price appreciation rather than merely being correlated with some other phenomenon. We also document that building permits anticipate a portion of future population growth and house price appreciation. However, lagged measures of building activity do not subsume the ability of our expected immigration proxy to forecast price appreciation. Our findings are consistent with fundamentals driving an economically important portion of cross-sectional variation in state-level housing returns. However, markets appear to significantly under-react to the component of fundamentals that is arguably more difficult for market participants to anticipate.