...

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]

7. Who Limits Arbitrage? (with Nathan Foley-Fisher and Borghan Narajabad) [PDF] [preliminary and incomplete[this version: March, 2019] 

This paper proposes and tests a theory of endogenous limits of arbitrage. We incorporate short-sale restrictions and an imperfectly competitive securities lending market into a model of securities traders with private information. The cost of short selling a security is an equilibrium outcome of the demand for short positions and the willingness of buy-and-hold institutional investors to supply their securities to short sellers. Securities lenders with greater risk tolerance are more willing to lend their securities, lowering the cost of taking short positions, which increases price informativeness in the spot trading market. We provide compelling evidence that the corporate bonds held by more risk tolerant insurance companies with securities lending programs tend to have greater spot market trade volume and more price informativeness. Controlling for each individual bond's demand, we identify the mechanism proposed by the model. Insurance companies with more risky cash collateral reinvestment portfolios are more willing to lend corporate bonds that are otherwise costly for short sellers to borrow. Our results suggest a new connection between liability-driven investment and asset pricing. 
    6. Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry (with Nathan Foley-Fisher and Borghan Narajabad) [PDF] [this version: March, 2019] [NBER WP#22774 ]

    This paper studies the supply side of the securities lending market. We match every U.S. life insurers' corporate bond holdings, lending, and cash collateral reinvestment to the universe of corporate bond lending transactions from 2011 to 2015. Focusing on the cross-section of U.S. life insurers holding the same bonds, we find that insurers with the most aggressive cash collateral reinvestment strategy are more likely to lend their bonds. This finding is in sharp contrast with the literature that views securities lenders as primarily responding to borrowers' demand. We account for this findings in a simple model of life insurer managing interest risk and discuss the financial system vulnerabilities associated with using securities lending as wholesale funding.5. Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry (with Nathan Foley-Fisher and Borghan Narajabad) [PDF] [this version: October, 2018] [revise & resubmit to the Journal of Political Economy, 3rd round]

    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.
    4. 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 and forthcoming articles]

    3. Over-the-Counter Market Liquidity and Securities Lending (with Nathan Foley-Fisher and Stefan Gissler) [PDF] [this version: December, 2018[forthcoming in the Review of Economic Dynamics]

    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.
    2. Aggregate Consequences of Dynamic Credit Relationships [PDF[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
    1. From Wall Street to Main Street: The Impact of the Financial Crisis on Consumer Credit Supply (with Rodney Ramcharan and Skander Van Den Heuvel) [PDF] [online appendix] [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
    Subpages (1): files