I am a Principal Economist in the Systemic Financial Institutions and Markets section of the Federal Reserve Board, and this is my personal research page. Follow this link to access my official FRB page and contact information. The views expressed on this site are mine and do not necessarily reflect the views of the Board of Governors of the Federal Reserve System or its staff. I am a member of the Macro Finance Society. [CV] [Google scholar] [SSRN] [RePEc]
[current research]
14. Information Networks over the Business Cycle (with Nathan Foley-Fisher and Gary Gorton) [draft on request] [this version: April 2025]
We calculate a sectoral-level information flow matrix, quarterly, using a structural model of firm managers learning from stock prices. We then calculate network informativeness, measuring how easily information flows across sectors. We study relationships over the business cycle between network informativeness and other macroeconomic variables. We find that network informativeness is a leading indicator of real business cycles. Before a boom, information flows more easily driving stronger industrial production and real GDP. These dynamics reverse after information flow becomes more restricted. We link network informativeness to information production by stock analysts. Our measure is correlated with the analyst recommendation cycle lagged by several quarters.
13. The Informational Centrality of Banks (with Nathan Foley-Fisher and Gary Gorton) [NBER WP#32007] [this version: January 2024]
The equity and debt prices of large nonbank firms contain information about the future state of the banking system. In this sense, banks are informationally central. The amount of this information varies over time and over equity and debt. During a financial crisis banks are, by definition of a crisis, at risk of failure. Debt prices became about 50 percent more informative than equity prices about the future state of the banking system during the financial crisis of 2007-2009. This was due to firms' fears that banks might not be able to rollover their debt.
European Winter Finance Conference 2025; ACPR Chair Academic Conference on New Financial Actors, New Technologies and Risks 2024; NBER SI Capital Markets and the Economy 2023; Midwest Macro 2024
12. Measuring Interest Rate Risk Management by Financial Institutions (with Celso Brunetti and Nathan Foley-Fisher) [PDF] [this version: September 2024] [Revision requested by the Review of Asset Pricing Studies]
Financial institutions manage myriad sources of interest rate risk. We propose a new method to measure financial institutions' residual interest rate risk using high-frequency financial market data. We provide theoretical justification for the method using a model of life insurance companies with endogenous interest rate risk management. Applying the method to U.S. insurers, we find their interest rate risk management strategies are generally effective. Analyzing a panel of insurers confirms a key theoretical prediction: The effectiveness of interest rate risk management depends, in part, on an institution's ability to create net worth.
NBER Times Series Conference 2024 (poster session); NYU Stern/Salomon Market Microstructure Conference 2024; FMA Applied Finance Conference 2024; EEA-ESEM 2023; International Risk Management Conference 2023 (Best Conference Paper Award)
Our estimate of large US life insurers' sensitivity to interest rate risk features in the 2022 Financial Stability Oversight Council Annual Report (Page 39)
11. Optimal Retirement Policies with Private Annuities (with Pei Cheng Yu) [draft on request] [this version: April 2025]
This paper examines the optimal design of retirement policies that rely on private insurance markets while accounting for financial frictions within these markets. We analyze the impact of uninsurable aggregate interest rate shocks in a life-cycle model where the government screens productivity, longevity, and altruism. We show that observing retirees' annuitization choices helps separate individual types. However, private annuity markets face supply-side inefficiencies due to interest rate risk. To improve market efficiency, the government can issue long-term bonds, supported by interest rate-contingent taxes. Therefore, full privatization can only be optimal without interest rate shocks; otherwise, Social Security remains necessary.
SED2024; SED 2023 (unable to present)
10. Who Limits Arbitrage? (with Nathan Foley-Fisher and Borghan Narajabad) [PDF] [this version: April, 2021]
Limits of arbitrage prevent prices from fully revealing securities' fundamental value. We show that risk taking in the securities lending market, which operates in tandem with the spot market, plays an important role in shaping the limits of arbitrage. Securities lenders taking greater risk with their cash collateral reinvestment decrease short-selling costs and increase price informativeness in the securities spot market. We identify this causal relationship in a data set matching corporate bond loans and trades to securities lenders' cash collateral reinvestment. The effect of risk taking by securities lenders is large, narrowing the bid-ask spread by around ten basis points.
SFS Cavalcade 2021; EFA 2020; World Congress of the Econometric Society 2020; IMF Macro-Financial Research Conference 2020; Fed System Committee on Financial Institutions, Regulation, and Markets 2019
9. Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry (with Nathan Foley-Fisher and Borghan Narajabad) [PDF] [this version: December, 2019] [NBER WP#22774 ]
The securities lending market for corporate bonds relies on the willingness of institutional investors to lend their bond holdings. Life insurers are major suppliers of bonds in the securities lending market. By lending their bonds against cash collateral, insurers create short-term liabilities that are prone to runs. We show that, controlling for bond borrowers' demand, the maturity of an insurer's cash collateral reinvestment portfolio determines its decision to lend individual bonds. Insurers' cash collateral reinvestment strategy, as part of their interest rate risk management, drives supply in the securities lending market. Our results suggest a new source of financial fragility.
Philly Fed's Conference on The Impact of Post-Crisis Regulation on Financial Markets 2020; World Congress of the Econometric Society 2020; FMA 2020; SFS Cavalcade 2018; Fixed Income and Financial Institutions Conference 2018; UNC/Duke Corporate Finance Conference 2017; AFA 2017; Cass Business School Workshop on Corporate Debt Markets 2017; UConn Risk Management Conference 2017;LBS Summer Finance Symposium 2016; NBER New Developments in Long-Term Asset Management Conference; EFA 2016; SEM 2016; EEA 2016
Coverage:
8. Financing Constraints, Firm Dynamics, and International Trade (with Till Gross) [PDF] [online appendix] [this version: November, 2013]
This paper studies the impact of financial constraints on exporter dynamics, and the role of financial intermediation in international trade. We propose a two-country general equilibrium model economy in which entrepreneurs and lenders engage in long-term credit relationships. Financial markets are endogenously incomplete because of private information, and .financial constraints arise as a consequence of optimal financial contracts. Young and small firms operate below their efficient level, and their financial constraint is relaxed as the entrepreneur's claim to future cash-flows increases. Consistent with empirical regularities, there is a substantial year-to-year transition in and out of export markets for smaller firms, and new exporters account only for a small share of total exports. Established exporters are less likely to exit export markets and tend to experience slower, albeit more stable growth.
SED 2012; RES 2012, CEF 2012
[published / forthcoming / accepted articles]
7. What's Wrong with Annuity Markets? (with Pei Cheng Yu) [PDF] [Journal of the European Economic Association, 2024, 22 (4): 1981-2024]
We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight percentage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.
AFA 2024; European Winter Finance Conference 2022; 114th Annual Conference on Taxation
Coverage:
6. Adverse Selection Dynamics in Privately-Produced Safe Debt Markets (with Nathan Foley-Fisher and Gary Gorton) [American Economic Journal: Macroeconomics, 2024, 16 (1): 441-68]
Privately produced safe debt is designed so that there is no adverse selection in trade. But in some macro states, here the onset of the pandemic, it becomes profitable for some agents to produce private information, and then agents face adverse selection when they trade the debt (i.e., it becomes information-sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations (CLOs), which finance loans to below investment-grade firms. We decompose the bid-ask spreads on the AAA bonds of CLOs into a component reflecting dealer bank balance sheet costs and the adverse selection component.
FIRS 2022; FDIC-JFSR Bank Research Conference 2021; Fed and OFR's 2021 Conference on Financial Stability; Cleveland Fed and OFR's 2021 Conference on Financial Stability; Barcelona GSE Summer Forum 2021; Econometrics Society European Meeting 2021; 2021 ANU-FIRN Banking and Financial Stability Meeting
5. Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry (with Nathan Foley-Fisher and Borghan Narajabad) [model slides] [Journal of Political Economy, 2020, 128:3520-3569]
The interaction of worsening fundamentals and strategic complementarities among investors renders identification of self-fulfilling runs challenging. We propose a dynamic model to show how exogenous variation in firms' liability structures can be exploited to obtain variation in the strength of strategic complementarities. Applying this identification strategy to puttable securities offered by U.S. life insurers, we find that at least 40 percent of the $18 billion run on life insurers by institutional investors during the 2007-08 crisis was amplified by self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.
Macro Finance Society Workshop 2019; NBER SI Corporate Finance 2016; CEPR ESSFM Corporate Finance 2016; European Winter Finance Conference 2016; AEA 2016; SED 2016; Wharton Conference on Liquidity and Financial Crisis 2015; Becker-Friedman Institute Conference on Financial Regulation; WFA 2015; FIRS 2015; Vienna Macroeconomic Workshop 2016, African Search and Matching Workshop 2015; RES 2015; LAEF Conference on Macroeconomics & Business Cycle 2015; SEM 2015
The Funding Agreement-Backed Securities (FABS) data from this project are included in the Enhanced Financial Accounts of the United States and in the Federal Reserve's Financial Stability Report
This FEDS Notes based on the paper discusses potential methods for assessing the size of the run risk associated with life insurers' nontraditional liabilities.
Becker Friedman Institute Conference on Financial Regulation
Presentation on FABS and financial system vulnerability at the Fall 2015 NAIC Financial Stability (EX) Task Force meeting [presentation slides]
Money, Banking, and Financial Markets Blog: Taking the **Sock** out of FSOC
4. Over-the-Counter Market Liquidity and Securities Lending (with Nathan Foley-Fisher and Stefan Gissler) [Review of Economic Dynamics, 2019, 33:272-294]
This paper studies how over-the-counter market liquidity is affected by securities lending. We combine micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. Applying a difference-in-differences empirical strategy, we show that the shutdown of AIG's securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. We also show that an important mechanism behind the decrease in corporate bond liquidity was a shift towards relatively small trades among a greater number of dealers in the interdealer market.
SED 2018; RED Fragmented Financial Markets Conference; Federal Reserve “Day-Ahead” Conference on Financial Markets and Institutions 2018; American Risk and Insurance Association Annual Meeting 2017
Coverage:
3. Aggregate Consequences of Dynamic Credit Relationships [online appendix] [Review of Economic Dynamics, 2018, 29:44–67]
I investigate the aggregate consequences of canonical financial frictions in the supply of credit to firms: private information and limited enforcement. I propose a general equilibrium model in which entrepreneurs finance their firm through a long-term contract with a financial intermediary. The contract is inefficient because firm cash flow is costly to monitor, and borrowers that repudiate cannot be excluded from capital markets. By investing in enforcement capacity, an intermediary can delay debt repayment and maintain incentive compatibility. Reforms that seek to decrease either the cost of monitoring or enforcing contracts, or both, affect firm dynamics and can generate complementarities. Estimating the model with data on Colombian manufacturing firms in the 1980s and 1990s, I find that financial frictions are responsible for a significant aggregate output loss. Most of this distortion can be attributed to private information. Reforms that only reduce private information create significant economic growth and welfare gains, while those that only improve enforcement do not. There are significant complementaritities between different types of reforms, as moral hazard is less significant when contracts are more enforceable.
SED 2016; LAEF Conference on Macroeconomics & Business Cycle 2014; MidWest Macro; Workshop on Macroeconomic Dynamics, Sydney; CEF 2012; LAEF Conference on Firm Financing, Dynamics and Growth
2. From Wall Street to Main Street: The Impact of the Financial Crisis on Consumer Credit Supply (with Rodney Ramcharan and Skander Van Den Heuvel) [Journal of Finance, 2016, 71:1323–1356]
How did the collapse of the asset-backed securities (ABS) market during the 2007 to 2009 financial crisis affect the supply of credit to the broader economy? Using new data on the U.S. credit union industry, we find that ABS-related losses are associated with a large contraction in the supply of credit to consumers, especially among those credit unions that began the crisis with weaker capitalization. We also find that this credit supply shock restricted the availability of mortgage and automobile credit. These results show how movements in the prices of financial assets can affect the real economy.
AEA 2014; NBER SI Risks of Financial Institutions 2013; NBER Monetary Economics 2013; FIRS 2012
[book chapter]
U.S. Life Insurers and Systemic Risk (with Nathan Foley-Fisher and Nathan Heinrich) in the Handbook of Macroprudential Policy edited by David Aikman and Prasanna Gai, forthcoming.
This hanbook chapter is a shorter version of the full-length working paper:
1. Are US Life Insurers the New Shadow Banks? (with Nathan Foley-Fisher and Nathan Heinrich) [PDF] [this version: April, 2023]. (this is an updated version of the paper Capturing the Illiquidity Premium that was circulated from February 2020.)
We show that the largest U.S. life insurers entered corporate loan markets as banks refocused on commercial banking from 2009, against a backdrop of unconventional monetary policies and tighter bank regulations. Through complex on- and off-balance sheet arrangements, these insurers, many of whom are controlled by private equity firms, are acquiring and deploying vast amounts of insurance liabilities to fill the void left by banks. Using the COVID-19 pandemic, we show that life insurers have become more vulnerable to an aggregate shock to the corporate sector and disproportionately benefited from the Fed's response to the pandemic.
Coverage:
Bloomberg: Annuities Should Be Boring, Not a Systemic Threat
New York Times: A ‘Shadow’ Lending Market in the U.S., Funded by Insurance Premiums
Risky Business. by Mary Williams Walsh in John Ellis News Items
NBC News: As insurance companies take over pension plans, are your payments at risk?
Retirement Income Journal: Why Life Insurers Fly into the ‘Bermuda Triangle’ and Life Insurers’ Bermuda Triangle, Part II
California Insurance Lawyer Blog: Pension De-Risking – Don’t be Duped by the Name
Insurance Asset Risk: US life insurers' massive private debt growth a concern
ThinkAdvisor: 5 Things to Know About the New Triangular Annuity Issuer Paper, for Agents
[federal reserve board publications]
This note quantifies life insurers' role in the intermediation of public and private credit to risky firms. Since the 2007-09 financial crisis, the share of life insurers' general account assets exposed to below-investment-grade ('risky') corporate debt has roughly doubled. Life insurers invest directly in risky firms through high-yield corporate bonds and leveraged loans, while also gaining exposure indirectly via broadly syndicated loan (BSL) collateralized loan obligations (CLOs), middle market (MM) CLOs, business development companies (BDCs), and joint venture loan funds (JVLFs). These arrangements seek to shift portfolio allocations towards risky corporate debt while exploiting loopholes stemming from rating agency methodologies and accounting standards.
Coverage:
CentralBanking.com: US life insurers more exposed to ‘risky’ debt than in 2007 – study
ThinkAdvisor: Fed Researchers See Life Insurers Filling Up on Junk Assets
Retirement Income Journal: Cross-Fire: NAIC and Fed Economists Release Same-Day Zingers
Pitchbook: Fed research highlights life insurers’ shift toward private credit
This note describes U.S. life insurers' liquidity management when the COVID-19 pandemic broke. We show that life insurance companies immediately created cash buffers to manage potential liquidity shocks. They did not create these buffers by selling their liquid assets. Rather, life insurers' cash buffers came largely from Federal Home Loan Banks (FHLBs) and interest rate derivatives.
Foley-Fisher, Nathan, Borghan Narajabad, and Stephane Verani (2019). "Assessing the Size of the Risks Posed by Life Insurers' Nontraditional Liabilities," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, May 21, 2019
This note discusses potential methods for assessing the size of the run risk associated with life insurers' nontraditional liabilities. A run on a life insurer poses a potential financial stability risk if the life insurer plays an important role in the financial system. For example, during the financial crisis of 2007-09, runs occurred on several types of nontraditional liabilities issued by life insurers. Some of the largest and most interconnected life insurers that experienced runs required substantial government assistance to prevent spillovers to households and to the rest of the financial system.
Coverage:
Foley-Fisher, Nathan, Ralf Meisenzahl, Borghan Narajabad, Maria Perozek, and Stephane Verani (2016). "Funding Agreement-Backed Securities in the Enhanced Financial Accounts," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, August 5, 2016
This note describes new data on funding agreement-backed securities (FABS) that is being provided as part of the Enhanced Financial Accounts (EFA) initiative. This EFA project expands upon the Financial Accounts data by providing daily data for different types of FABS that vary by maturity at issue and embedded optionality. The more granular data presented in this EFA project provides a clearer picture of developments in this important funding market, including the run on a segment of the FABS market starting in the summer of 2007.
[discussions]
Army of Mortgagors: Long-Run Evidence on Credit Externalities and the Housing Markes by Herbst, Kuhn and Saidi at the EWFC 2024 [Download the R Markdown for the slides]
The Effect of Government Debt on Corporate Debt Borrowing in Developing Economies: Evidence from Africa by Colak, Habimana and Korkeamaki at the EWFC 2023
Social Inflation by Oh at the OFR PhD Conference 2022
Ex-Post Loss Sharing in Consumer Financial Markets by Barbu at the FMA 2022
The Externalities of Fire Sales: Evidence from Collateralized Loan Obligations by Kundu at the SFS Cavalcade 2021
The impact of rating standards on risk-taking of financial institutions by Basten, Kartasheva, and Park at the European Winter Finance Conference 2021
Do Municipal Bond Dealers Give their Customers `Fair and Reasonable' Pricing? by Griffin, Hirschey, and Kruger at the European Winter Finance Conference 2020
Financial Intermediation through Financial Disintermediation: Evidence from the ECB Corporate Sector Purchase Programme by Ertan, Kleymenova, Tuijn at FIRS 2019
How Risky is the US Corporate Sector? by Davydiuk, Richard, Shaliastovich and Yaron at the European Winter Finance Conference 2019
Capital Constraints and Risk Shifting: An Instrumental Approach by Drexler and King at the Federal Reserve System Banking Conference 2018
Do Insurers Deviate From the Industry Portfolio Asset Allocation Norm Under Investment Limitations? by Boyer and Reddic at American Risk and Insurance Association 2017
Covenant Violations, Collateral and Access to Funding: Public and Private Firms by Barakova, Hasan and Parthasarathy at AEA 2017
Lender of Last Resort versus Buyer of Last Resort--The Impact of the European Central Bank Actions on the Bank-Sovereign Nexus by Acharya, Pierret and Stephen at the U of Connecticut's Risk Management Conference 2016
Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Business Conditions by Berger and Roman at AEA 2015
Bank Ratings: What Determines Their Quality? by Hau, Langfield and Marquez-Ibanez at the Basel Committee's Bank Regulation and Liquidity Risk in a Global Financial System Workshop 2013