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 and liquidity in the crypto ecosystem. In an environment lacking frictionless access to traditional safe assets, we examine whether stablecoin lending pools provide liquidity services to investors. To do so, we develop a model in which a representative investor allocates liquidity between stablecoin lending pool deposits and traditional safe assets (e.g., MMF shares). The model delivers three predictions: (i) the stablecoin premium co-moves positively with the Treasury premium when investors value liquidity services of stablecoin pools, (ii) Treasury scarcity increases the stablecoin premium, and (iii) declines in the perceived liquidity of stablecoin pools — e.g., due to de-pegs or hacker attacks — reduce their premium. Our empirical results provide evidence consistent with these predictions. They suggest that investors treat stablecoin lending pools as money-like instruments and that shocks to traditional safe assets transmit to crypto markets. Our findings contribute to the literature on safe assets by showing how safety is intermediated in crypto markets. They also offer new insights into the segmentation and structure of decentralized finance (DeFi) as it evolves alongside traditional financial systems.
China's Savings Glut and Investors Hunt for Safe Assets, with V. Ioannidou (Bayes), 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.
Interest Rate Hikes, Collateral Deterioration, and Search for Yield: Evidence from Shadow Banks with B. Casu (Bayes)
Abstract: We study the transmission of monetary policy to shadow banks through changes in collateral quality. Using a novel dataset on collateral transactions in Asset-Backed Commercial Paper (ABCP) conduits, we show that increases in interest rates lead conduits to expand the issuance of short-term liabilities despite higher funding costs, conditional on investor demand. This expansion is sustained by increased collateral purchases that tilt toward lower rating (but within the investment grade range) and more opaque credit assets (e.g., structured assets). This response weakens funding resilience and increases fragility to runs. Our findings provide direct evidence of a collateral risk-taking channel through which monetary policy transmits risk to nonbank credit intermediation.
SoS! The Overnight Bilateral Liquidity Provision of Non-Bank Financial Institutions to Banks, with A. Clare (Bayes), E. Cucullo (Bayes and Bank of England) - First Draft
Abstract: We study the UK bilateral overnight repo market to examine the liquidity provision of non-bank financial institutions (NBFIs) to banks. Using proprietary transaction-level data from the Bank of England, we document that NBFIs supply substantially more liquidity to banks than traditional interbank lenders, with weekly volumes six to twelve times greater than in the interbank market. To measure the relative pricing of liquidity across NBFIs and bank lenders, we introduce the Spread-of-Spread (SoS), defined as the difference between bank–NBFI and interbank repo spreads. On average, we observe a stable and negative SoS (-7 bps) before 2022, indicating that banks borrowed from NBFIs at lower rates than from other banks. After 2022, the SoS is highly volatile and on average largely positive (+10 bps), suggesting that NBFI liquidity became more expensive for banks. Studying the opportunity cost associated with the onset of monetary tightening, we find that tighter monetary conditions raise SoS across NBFIs. The effect is primarily through volatility rather than mean shifts and is more persistent for money market funds and insurers, whereas investment funds and pension funds respond more sharply but stabilise more quickly.
Gallo, A. and Park, M.K. (2025). Financing Green Transition: Bank-Nonbank Partnerships. Journal of Financial Intermediation. Forthcoming.
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.
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.
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.
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.
