Revise and resubmit , Review of Financial StudiesLast updated: May 2018Selected presentations: EFA 2018, 2nd European Capital Markets Workshop (Cass), WFA 2018, Frontiers of Finance 2018*, Adam Smith Asset Pricing 2018*, HEC-McGill Winter Finance workshop 2018*
Abstract: We develop a tractable rational expectations model that allows for general price-dependent portfolio constraints and study a setting where constraints arise because of margin requirements. We argue that constraints affect and are affected by informational efficiency, leading to a novel amplification mechanism. A decline in wealth tightens constraints and reduces investors’ incentive to acquire information, lowering price informativeness. Lower informativeness, in turn, increases the risk borne by financiers who fund trades, leading them to further tighten constraints. This information spiral implies that risk premium, return volatility, and Sharpe ratio may rise significantly as investors’ wealth declines.
Revise and resubmit , Review of Financial Studies
Winner of Deutsche Bank Prize in Financial Risk Management and Regulation 2014
Abstract: This paper shows that collateralised short-term debt, although privately optimal for reducing borrowers' moral hazard, can cause fragility (multiple equilibria) when the collateral market is illiquid. A new form of coordination failure between borrowers' ex ante margin and risk-taking decisions engenders a systemic run in the collateralised debt market: large changes in credit rationing, margins, repo spreads, etc. The model also captures the large (small) cross-sectional differences between safe and risky collateral in bad (good) times. Finally, I show that asset price guarantees could improve welfare and promote stability but repealing repo contracts' ``automatic stay'' exemption might do the opposite.
Last updated: December 2017.Selected presentations: FIRS 2018*, 1st Bristol Banking Workshop, Financial Stability Conference 2016* (Washington DC), 8th European Banking Center network conference* (Tilburg), Inaugural Young Scholars Finance Consortium* (Texas A&M), Chicago Financial Institutions Conference 2016*, OxFIT 2015*, CICF 2015*
Abstract: Banks as informed intermediaries have information about their borrowers to make efficient liquidation versus restructuring decisions for distressed loans, but their information also creates an adverse selection problem when they seek financing from uninformed investors. We demonstrate that a bank with high-quality loans faces incentives to distort its resolution policy in order to improve allocative efficiency and to signal information about loan quality, with the direction of the distortion depending on whether the security issued to uninformed investors is concave or convex. We find that the bank's equilibrium resolution policy is biased towards liquidation when it optimally designs and sells a debt (concave) security to raise financing. Regulations aimed at promoting ex post efficient liquidation may increase banks' financing costs and discourage their screening effort, thereby reducing welfare.
Agency frictions in dealer's funding and market liquidity (with Max Bruche)