Journal of Applied Econometrics, 36(6):760-783. Online Appendix | Code Files (R Studio & Stata)
Journal of Empirical Finance, 61:34-56. Online Appendix | Code Files (Python)
Journal of Macroeconomics, 67, Article 103282.
Economics Letters, 171:58-62. Online Appendix | Data (xlsx)
Working Papers
FDIC Center for Financial Research Working Paper No. 2022-03 [updated August 2023] [Bank Underground Blogpost]
Bond markets can plummet or rally on the back of sentiment-driven reactions which are unrelated to fundamentals. Therefore, changes in bond prices can not only be interpreted as reflecting risk but also mispricing of long-term assets. These perceived risks can often feed back into the economy by affecting the supply of credit. We construct a DSGE model with heterogeneous banks, asset pricing rules that generate a time-varying term premium, and introduce bond risk mispricing shocks to study their effects on the real economy. A risk mispricing shock, in which agents overprice perceived risk, increases the term premium and lowers output by reducing the availability of credit, as banks increase interest rates and tighten lending standards. However, when investors underprice risk, a compressed term premium leads to a `bad' credit boom that results in a more severe recession once the snapback occurs.
FDIC Center for Financial Research Working Paper No. 2022-04 [Dallas Fed Economics Blogpost]
We develop a quantitative approach to evaluate the roles of upstream (supplier-to-user), downstream (user-to-supplier) and common factor shock transmission across firms. Inter-firm networks are estimated from U.S. equities over 1989-2017 using machine learning techniques. We then employ a multi-sector DSGE model as a lens through which to interpret them and calculate sectoral exposures from input-output tables. We find that: (i) common factors drive an increasing variance share of returns; (ii) equity return based networks reflect real interconnections across firms, with supplier disruptions being more prominent than downstream exposures; (iii) removing the impact of common factors is increasingly important for revealing inter-firm connections.
International Monetary Fund Working Paper No. WP/20/53 [Latest Version]
Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities. We study changes in risk taking behavior in a low interest rate environment by estimating a market stochastic discount factor that is non-linear and therefore consistent with the empirical properties of cashflow valuations identified in the literature. We provide evidence that non-linearities arise from hedging strategies of investors exposed to interest rate risk. Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.
Federal Reserve Bank of Dallas Economic Letter 13(2), February 2018.
Federal Reserve Bank of Dallas Economic Letter 12(8), July 2017.
Federal Reserve Bank of Dallas Economic Letter 11(4), May 2016.
Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute 2015 Annual Report, 22-27.