PhD Candidate in Economics
Tepper School of Business
Carnegie Mellon UniversityT: (571) 230-0197
Research InterestsInformational, agency, and search frictions in financial markets, sovereign debt, and macroeconomics.
I am on the job market this year and will be at the AEA/AFA Meetings in Philadelphia.
Job Market Paper
A central policy debate during the recent European sovereign debt crisis became whether to ban naked trading of credit default swaps (CDS), and how that would affect liquidity of the underlying bond market. In this paper, I build a dynamic search model of bond and CDS markets and show that naked CDS trading can improve bond market liquidity. The ability to simultaneously search and trade in the CDS market lowers the opportunity cost of searching for a trade in the bond market. The existence of naked CDS buyers, as a result, has a positive externality in the bond market: it increases bond market liquidity by attracting traders into both the CDS and the bond market. I use naked CDS bans in Europe to empirically identify how naked CDS trading affects bond liquidity. The model mechanism helps to explain contradictory patterns in naked CDS trading and sovereign bond market liquidity.
Completed Working Papers
Currency Risk and Pricing Kernel Volatility (with Federico Gavazzoni & Chris Telmer, 2012)
Presented at SED (2012), Wharton (2013), WFA (2013), EFA (2013).
A basic tenet of lognormal asset pricing models is that a risky currency is associated with a low pricing kernel volatility. Empirical evidence implies that a risky currency is associated with a relatively high interest rate. Taken together, these two statements associate high-interest-rate currencies with low pricing kernel volatility. We document evidence suggesting that the opposite is true. We approximate the volatility of the pricing kernel with the volatility of the short-term interest rate. We find that, across currencies, relatively high interest rate volatility is associated with relatively high interest rates. This contradicts the prediction of lognormal models. One possible reason is that our approximation of the volatility of the pricing kernel is inadequate. We argue that this is unlikely, in particular for questions involving currencies. We conclude that lognormal models of the pricing kernel are inadequate for explaining currency risk and that future work should place increased emphasis on distributions that incorporate higher moments.
Presented at the Midwest Macro (2011), Tepper (2011), AEA (2012), SED (2012).
A defining friction of sovereign debt is the lack of collateral that can support sovereign borrowing. In this paper, I show that credit default swaps (CDS) can serve as collateral and thereby support more sovereign borrowing. By giving more bargaining power to lenders in ex-post renegotiations, CDS becomes a commitment device for lenders to extract more repayment from the debtor country. This ex-post disciplining effect during renegotiations better aligns the sovereign's ex-ante incentives with that of the lender. CDS alleviates agency frictions that are present in any lending contracts but are particularly difficult to mitigate in sovereign debt context. As a result, CDS enables the borrower to raise more external capital.
This paper analyzes the effect of political instability on net capital outflow, debt accumulation, and the welfare of a sovereign borrower. Political instability is proxied by the sovereign's impatience. The loan contract is constrained by two frictions characteristic to international lending: 1) moral hazard where the lender cannot observe whether the borrower efficiently uses the loan and 2) risk of repudiation. I show that a politically unstable country achieves higher utility, borrows more and experiences less capital outflow than a stable borrower. The difference in the borrower and the lender discount factors allows for an intertemporal trade that benefits the borrower.
Work in Progress
Matching Shocks (with Laurence Ales and Nicolas Petrosky-Nadeau, 2011)