Demand for Safety in the Crypto Ecosystem, with Murillo Campello (Cornell University and University of Florida) , Lira Mota (MIT) and Tammaro Terracciano (IESE)
Abstract: We study the demand for safety within the crypto ecosystem, where investors cannot frictionlessly resort to traditional asset classes. To enter and exit crypto, investors pay substantial fees associated with deposits and withdrawals, while facing increasing scrutiny from regulators and tax authorities. These frictions lead investors to leave resources ``trapped" in the crypto ecosystem. This paper shows that within crypto markets, stablecoin lending pools cater to safety demand, as measured by the spread between the T-bill yield and the overnight index swap rate (``money premium”). When the demand for safety rises, these pools experience lower interest rates and higher deposits than all other pools, as investors reallocate their funds toward them. Demand for safety-type dynamics, however, fade away during stress periods, such as Terra, FTX and SVB crashes or high VIX. Notably, investors treat all stablecoins as equal in terms of safety and prefer larger protocols and established blockchains (e.g., Ethereum). Our findings shed new light on how unregulated financial systems evolve to satisfy investors' demand for safety.
Interest Rate Hikes, Collateral Deterioration, and Search for Yield: Evidence from Shadow Banks with B. Casu (Bayes Business School)
Abstract: This paper studies the impact of interest rates hikes on the production of safe assets by shadow banks as they perform maturity transformation similar to banks, but without deposit franchise or access to central bank liquidity. Using a unique dataset of collateral transactions from Asset-Backed Commercial Paper (ABCP) conduits, we show how increases in interest rates in the years leading to the GFC led to conduits seeking higher yields to compensate their higher funding costs and support their production of safe assets. They substituted safe collateral with lower-rated and opaque assets like Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs). This shift rendered them susceptible to severe runswhen concerns regarding collateral quality surfaced.
Financing Green Transition: Bank-Nonbank Partnerships , with M. Park (University of Bristol)
Abstract: We examine the role of nonbanks in meeting the growing corporate demand for green financing through their investment in syndicated loans. Our findings indicate that nonbanks play a significant role in absorbing the increased demand for green loans, thereby facilitating the green transition in partnership with banks. Nonbank investment appears to be driven largely by investor demand rather than by banks seeking to offload exposure. Green lending that involves nonbanks is characterized by lower spreads, fewer covenants, more risk-sharing, and is directed towards private firms. Further analysis indicates that nonbank investment is as volatile as the regulatory and political climate agenda and exhibit window-dressing behavior.
China's Savings Glut and Investors Hunt for Safe Assets, with V. Ioannidou (Bayes Business School), Nicole Gao ( University of Bristol)
Abstract: The surge in China’s middle-class wealth, coupled with high savings rates, has exacerbated the demand-supply disparity for safe assets. Our analysis reveals that Chinese T-Bills carry significant safety premia, consistent with excess demand for public safe assets. Employing granular contract-level data on wealth management products (WMPs) issued by banks in China between 2012 and 2020, we find that investors treat WMPs with short maturities as substitutes for public safe assets (Chinese T-Bills and US T-Bills). Holding maturity constant, we find that retail investors are willing to pay safety premia on WMPs only if issued by government-owned banks. These results underscore that investors’ demand is driven by a need for safety rather than liquidity.
Bracci, A., Nadini, M., Aliapoulios, M., McCoy, D., Gray, I., Teytelboym, A. … Baronchelli, A. (2022). Vaccines and more: The response of Dark Web marketplaces to the ongoing COVID-19 pandemic. PLOS ONE, 17(11). doi:10.1371/journal.pone.0275288.
[publisher’s website]
Gallo, A. and Park, M.K. (2022). CLO (Collateralized Loan Obligation) Market and Corporate Lending. Journal of Money, Credit and Banking. doi:10.1111/jmcb.12941.
[publisher’s website]
Arnaboldi, F., Casu, B., Gallo, A., Kalotychou, E. and Sarkisyan, A. (2021). Gender diversity and bank misconduct. Journal of Corporate Finance, 71, pp. 101834–101834. doi:10.1016/j.jcorpfin.2020.101834.
[publisher’s website]
Bracci, A., Nadini, M., Aliapoulios, M., McCoy, D., Gray, I., Teytelboym, A. … Baronchelli, A. (2021). Dark Web Marketplaces and COVID-19: before the vaccine. EPJ Data Science, 10(1). doi:10.1140/epjds/s13688-021-00259-w.
Lucchini, L., Alessandretti, L., Lepri, B., Gallo, A. and Baronchelli, A. (2020). From code to market: Network of developers and correlated returns of cryptocurrencies. Science Advances, 6(51). doi:10.1126/sciadv.abd2204.
[publisher’s website]
