with Christian Julliard and Carlo Rosa
Journal of International Economics, 77(1), March 2016, 78-96

We study the implications of human capital hedging for international portfolio choice. First, we document that, at the household level, the degree of home country bias in equity holdings is increasing in the labor income to financial wealth ratio. Second, we show that a heterogeneous agent model in which households face short selling constraints and labor income risk, calibrated to match both micro and macro labor income and asset returns data, can both rationalize this finding and generate a large aggregate home country bias in portfolio holdings. Third, we find that the empirical evidence supporting the belief that the human capital hedging motive should skew domestic portfolios toward foreign assets, is driven by an econometric misspecification rejected by the data.

Paper presented at: NBER International Seminar on Macroeconomics (2015), LFE-ICEF Moscow Finance confernce (2015), Paul Woolley Seminar LSE

with Lukas Schmid and Andrea Vedolin
Forthcoming at the Review of Financial Studies

We revisit the evidence on real effects of uncertainty shocks in the context of interest rate uncertainty, which can be hedged in the swap market. We document that adverse movements in interest rate uncertainty predict significant slowdowns in real activity, at the aggregate and at the firm-level. We develop a dynamic model of corporate investment and risk management to examine how firms cope with interest rate uncertainty and test it using a rich dataset on corporate swap usage. Our results suggest that interest rate uncertainty depresses financially constrained firms' investment in spite of hedging opportunities, as for these firms risk management through swaps is, effectively, risky.

Paper presented at: Arne Ryde Workshop on Financial Economics (2015) , Econometric Society World Congress (2015), CEPR ESSFM (2015), EFA (2015), Santiago Finance Workshop (2015), CEPR First Annual Spring Symposium in Financial Economics (2016), 3rd International Conference on Sovereign Bond Markets (2016), WFA (2016), SITE Summer Workshop (2016)

Working Papers

Winner of the Nasdaq/EFA Doctoral Tutorial Best Paper Award, EFA 44th Annual Meeting Mannheim

Winner of the Unicredit & Universities Foundation Best Paper Award, Young Economists Conference Belgrade

Industries differ in the extent to which they can offshore their production. I document that industries with low offshoring potential have 7.31% higher stock returns per year compared to industries with high offshoring potential, suggesting that the possibility to offshore affects industry risk. This risk premium is concentrated in manufacturing industries that are exposed to foreign import competition. Put differently, the option to offshore effectively serves as an insurance against import competition. A two-country general equilibrium dynamic trade model in which firms have the option to offshore rationalizes the return patterns uncovered in the data: Industries with low offshoring potential carry a risk premium which is increasing in foreign import penetration. Within the model, the offshoring channel is economically important and lowers industry risk up to one-third. I find that an increase in trade barriers is associated with a drop in asset prices of model firms. The model thus suggests that the loss in benefits from offshoring outweighs the benefits from lower import competition. Importantly, the model prediction that offshorability is negatively correlated with profit volatility is strongly supported by the data.

Paper presented at: Swiss Economists Abroad (2016), Young Economists Conference (2017) , CEPR Second Annual Spring Symposium in Financial Economics (2017, Poster Session), EFA Doctoral Tutorial (2017)

R&R at the Journal of Finance

We study the impact of fiscal policy shocks on bond risk premia. Government spending level shocks generate positive covariance between marginal utility and inflation (term structure level effect) making nominal bonds a poor hedge against consumption risk leading to positive inflation risk premia. Volatility shocks to spending have strong slope effects (steepening) on the yield curve, producing positive nominal term premia. For level and volatility shocks to capital income tax, term structure level effects dominate, delivering negative risk premia. Fluctuations in term premia are entirely driven by volatility shocks. Lastly, fiscal shocks are amplified at the zero lower bound.

Paper presented at:  SNDE Paris (2017), South Carolina FIFI Conference (2017), SFS Cavalcade (2017), SED (2017), WFA (2017), EFA (2017), NFA (2017), AFA (2018)

with Alex Hsu and Andrea Tamoni

Degree of risk aversion (RA) determines the impact of second moment shocks in DSGE models featuring stochastic volatility. Ceteris paribus, higher risk aversion leads to stronger responses of macroeconomic variables to volatility shocks, in contrast to the Tallarini (2000) irrelevance result, which still holds with respect to level shocks. The output, consumption, and investment responses roughly double in our model following volatility shocks of the same magnitude as RA increases from 5 to 15, making volatility shocks as economically signi.cant as level shocks in the model. Our result adds another dimension of complication in extending macro-.nance models that employ stochastic volatility, such as Bansal and Yaron (2005), from endowment economies to full general equilibrium as macroeconomic and asset pricing moments need to be calibrated simultaneously.

Paper presented at: 25th AEFIN Finance Forum (2017), SITE Summer Workshop (2017), MMF 49th Annual Meeting (2017), MFA (2018)

with Alex Hsu and Andrea Tamoni

We highlight a state variable misspecification with one accepted method to implement stochastic volatility (SV) in DSGE models when transforming the nonlinear state-innovation dynamics to its linear representation.  Although the technique is more efficient numerically, it is not correct in general when the magnitude of SV is large.  Not correcting for this potential error may induce substantial spurious volatility in macroeconomic series, which could lead to incorrect inference about the performance of the model. We also show that, by simply lagging and expanding the state vector, one can obtain the correct state-space specification.  Finally, we validate our augmented implementation approach against an established alternative through numerical simulation.

This paper examines limits to arbitrage and mispricing in Treasury protected securities (TIPS). To this end, I construct two different measures of disparity in bond prices from the smooth yield curve. I find that deviations in prices are highly correlated for different maturities and also between nominal Treasury bonds and TIPS. This suggests that arbitrage capital is efficiently allocated across markets and also along the yield curve. I then study the relative mispricing of nominal bonds and TIPS. While flight-to-liquidity explains well the mispricing for nominal bonds it does not for TIPS. In fact, TIPS mispricing is driven by short-term Treasury bond liquidity and the slope of the term structure of expected inflation. Moreover, TIPS mispricing predicts short-term excess returns of TIPS during the crises. This findings can be rationalized with investors who opt for more liquid nominal bonds whenever the short-term expected inflation is very low, i.e. short-term nominal bonds and short-term TIPS are close to perfect substitutes.

Paper presented at: Swiss Economists Abroad (2014) 

Work in Progress

News Shocks and Asset Prices
with Aytek Malkhozov and Andrea Tamoni

Risky Arbitrage
with Paul Whelan