Publication
Measuring Climate Transition Risk at the Regional Level with an Application to Community Banks (with Mitchell Berlin, Pablo D'Erasmo, Edison Yu), European Economic Review, Volume 170, November 2024, 104834.
We develop a measure of climate transition risk for regional economies in the U.S., based on the mix of firms that produce emissions in each region. To quantify transition risks, we consider the introduction of an emissions tax levied on companies emitting greenhouse gases and estimate changes in the market values of industries due to a carbon tax using Merton's (1974) model. We find that transition risks are highly concentrated in a few sectors and counties with heavy exposures to transition-sensitive sectors. The size and geographic concentration of the tax effects depend significantly on assumptions about the elasticity of demand for inputs in the production chain. When applying county-level estimates for transition risks to banks' deposit footprint, we find mild to moderate transition risks for community banks as a whole, although transition risks are high for a few banks.
Heterogeneity in the Dynamic Effects of Uncertainty on Investment (with Soojin Jo), Canadian Journal of Economics, 2018, 51(1), pp. 127-155.
How does aggregate profit uncertainty influence investment activity at the firm level? To address this question, we introduce a Panel-ARCH process for aggregate profit volatility exploiting via a factor structure information in a large panel of firm sales. We include the resulting measure for profit uncertainty, interacted with firm fixed effects, in an investment forecasting model designed to examine the compositional effects of profit uncertainty on individual firms' investment activity. We find that higher profit uncertainty induces firms to lower future capital expenditure on average, yet to a different degree depending on firm characteristics, such as size, liability ratio, and sub-industry classification. This finding points to significant and substantial heterogeneity in the uncertainty transmission mechanism, a feature not highlighted in recent studies of uncertainty at the aggregate level.
Speculation in Commodity Futures Market, Inventories and the Price of Crude Oil [Online Appendix], Energy Journal, 2017, 38(5).
This paper examines the role of inventories in refiners' gasoline production and develops a structural model of the relationship between crude oil prices and inventories. Using data on inventories and prices of oil futures, I show that convenience yields decrease at a diminishing rate as inventories increase, consistent with the theory of storage. In addition to exhibiting seasonal and procyclical behaviors, I show that the historical convenience yield averages about 18 percent of the oil price from March 1989 to November 2014.
Although some have argued that a breakdown of the relationship between crude oil inventories and prices following increased financial investors' participation after 2004 was evidence of an effect of speculation, I find that the proposed price-inventory relationship is stable over time. The empirical evidence indicates that crude oil prices remained tied to oil-market fundamentals such as inventories, suggesting that the contribution of financial investors' activities was weak.
The Usefulness of Cross-sectional Dispersion for Forecasting Aggregate Stock Price Volatility, Journal of Empirical Finance, 36 (March 2016), pp. 162-180: DOI 10.1016/j.empfin.2016.01.013.
Does cross-sectional dispersion in the returns of different stocks help forecast volatility of the S&P 500 index? This paper develops a model of stock returns where dispersion in returns across different stocks is modeled jointly with aggregate volatility. Although specifications that allow for feedback from cross-sectional dispersion to aggregate volatility have a better fit in sample, they prove not to be robust for purposes of out-of-sample forecasting. Using a full cross-section of stock returns jointly, however, I find that use of cross-sectional dispersion can help improve parameter estimates of a GARCH process for aggregate volatility to generate better forecasts both in sample and out of sample. Given this evidence, I conclude that cross-sectional information helps predict market volatility indirectly rather than directly entering in the data-generating process.
Working Papers
(with Johnathan Loudis and Lawrence D.W. Schmidt, the latest version is available from SSRN)
In addition to a priced, dominant market factor (DMF), the value-weighted stock market return contains an "idiosyncratic financial factor" (IFF) related to overweighting of large-cap stocks. The IFF carries no risk premium, is unrelated to macroeconomic factors and returns in other markets, and significantly impacts systematic risk estimates. Size factors separate exposures to the DMF from the IFF. Consistent with a model with nontraded assets, using the DMF as an alternative market factor resolves the size anomaly and obviates the need for size factors in multifactor models. Finally, the DMF generates a stronger intertemporal risk-return tradeoff.
Community Banks and the Mitigation of the China Shock
(with Sanghoon Lee and Seung Hoon Lee, formerly circulated as "China Shock, local credit supply, and the amplified impact on the U.S. labor market ")
This paper investigates the impact of the ‘China Shock’ on banking institutions and their feedback effects on local economies. We find community banks in the regions hit hard by the China Shock experienced slower growths in deposits and loans while offering and charging higher interest rates on deposits and loans. The higher interest rates suggest that loan supply may have been negatively affected by the reduced deposits caused by the China Shock. However, community banks still provided relatively more loans to the distressed local economies, compared with non-community banks. On the extensive margin, non-community banks, typically operating in multiple regions, slowed down their branch expansions in the distressed regions. On the intensive margin, the average branch of a non-community bank supplied relatively fewer loans to the distressed regions, compared with the average branch of a community bank. Therefore, regions with higher community-bank market shares suffered relatively less employment loss compared with other regions with similar exposure to the China Shock.
Work in Progress
Disclaimer
The views in this site are my own and should not be interpreted as those of the Federal Reserve Bank of Dallas or the Federal Reserve System.