Working Papers
The Marginal Value of Public Pension Wealth: Evidence from Border House Prices (R&R, Journal of Financial Economics)
(with Darren Aiello, Asaf Bernstein, Mahyar Kargar, and Ryan Lewis)
We study effects of state pension windfalls on property prices near state borders, where theory suggests real estate reflects the value of additional public resources. Windfalls have grown to half the size of total state tax revenues and provide plausibly well-identified variation in fiscal conditions. We find one dollar of exogenous variation in pension asset returns increases border house prices by approximately two dollars. These estimates suggest governments, rather than wasting incremental resources, allocate additional funds towards high value projects or tax abatement. Evidence of larger effects in financially constrained municipalities highlight how fiscal resources amplify welfare effects of economic shocks.
The Factor Multiverse: The Role of Interest Rates in Factor Return Measurement
(with Jules van Binsbergen and Liang Ma)
We study the equity factor zoo using an alternative excess return definition, which measures factor performance in excess of a duration-matched government bond portfolio and quantifies the realized return premium for investing in a stream of risky cash flows relative to a fixed cash flow counterfactual. We document different average excess returns than those previously reported. Among commonly used factors, the value, investment, and profitability premia become larger, while the market and size premia become smaller. Further, the effect varies with rising versus declining interest rate environments. Finally, we evaluate the sensitivity of factor discovery to the excess return definition.
Interest Rates and the Design of Financial Contracts
(with Michael Roberts)
We show that the partial response of loan rates to interest rate changes, referred to in the bank lending literature as ``stickiness,'' is a feature of perfect capital markets. No-arbitrage models of credit risk are able to replicate empirical interest rate sensitivities. However, the widespread use of interest rate floors in the low-rate environment of the last decade is a result of risk-sharing and incentive considerations arising from market imperfections. Floors reallocate cash flows across states in a way that loan spreads cannot. They insure lenders against losses if rates fall, while mitigating borrower moral hazard if rates rise.
The Effects of Transparency on OTC Market-Making
(with Ryan Lewis)
We examine the effects of post-trade transparency on intermediation in the over-the-counter corporate bond market using the staggered introduction of TRACE as a natural experiment. Post-trade transparency leads to increased trading volume and more connected dealer networks. Transparency reduces dealers' profitability but also their portfolio risk and adverse selection costs. In contrast to prior research suggesting that TRACE benefits customers at the expense of dealers, we show that the net effect on dealer welfare is ambiguous. Bond spreads are less predictive of default in a transparent market, consistent with reduced profitability of informed trade weakening incentives to produce information.
Leverage and Systematic Risk (with Ilya Strebulaev)
Systematic risk is an important determinant of corporate capital structure. A one standard deviation increase in asset beta corresponds to a decrease in leverage of 13%, controlling for total asset volatility. This evidence is consistent with recent dynamic capital structure models that relate financing decisions to macroeconomic factors and provides further impetus for exploring the impact of systematic risk on corporate decisions.