Working Papers
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7. The US Treasury's Biggest Short: Duration in the Shadows - with Stefano Pegoraro and Anthony Saunders
Presentations: BI Norwegian Business School Seminar (2024) and 2025 ESADE Spring Workshop
Abstract: The U.S. Treasury maintains a "regular and predictable" issuance strategy with correlations between planned and actual issuance exceeding 0.90 and deviations under 5% regardless of market conditions. This static approach to $28 trillion in marketable debt creates unhedged duration risk that imposes substantial costs through elevated term premia. We document that the Treasury does not adjust maturity composition in response to yield movements across normal periods and crises from 2002 to 2025. European sovereigns operating under ESA 2010’s market value reporting requirements actively manage duration and achieve term premia 9.2 basis points lower, with effects doubling during stress periods. The Treasury’s non-internalization of duration risk creates systematic positive skewness in swaption-implied interest rate distributions that predicts bond excess returns. While QE temporarily reduces term premia, effects are offset by continued static issuance. We estimate active duration management could save $45-65 billion annually in interest costs.
[Updated draft]
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6. The Cost of US Reserve Currency Status: Term Structure of Convenience Premia via Model-Free Triangulation
Abstract: We develop a model-free methodology to extract convenience premia, defined as differentials in expected term premiums across currencies, using triangular no-arbitrage relationships in cross-currency swap markets. Without parametric assumptions, we find USD systematically requires 16-42 basis points higher expected returns than EUR, JPY, and GBP at long maturities, indicating negative expected convenience despite reserve currency status. Extracted premia demonstrate strong predictive power of subsequent realized returns with R-squared values reaching 77% for ten-year horizons. These findings provide new empirical moments for international term structure models to match regarding expected term premiums. The model-free nature ensures these are robust stylized facts for understanding multi-currency portfolio allocation and risk management.
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5. Triangular Currency Pure Parity Deviations - with Benjamin Karner and Olav Syrstad
Abstract: Building on Du et al. (2018)’s seminal empirical findings on persistent cross-currency basis spreads, we develop a triangular arbitrage methodology that decomposes these bases into currency-specific term funding premium differentials and bilateral pure parity deviations. Applying our methodology to seven major currencies over 2002- 2024, we find that pure parity deviations, representing genuine bilateral arbitrage opportunities, remain economically small (typically under 5 basis points) even during crisis periods, suggesting that international cross-currency markets efficiently eliminate arbitrage opportunities. In contrast, term funding premium differentials, reflecting domestic funding market characteristics, account for 96-99% of observed basis variation. This decomposition suggests that apparent CIP violations may primarily reflect equilibrium pricing of structural differences in term funding conditions across currency areas rather than failures of international arbitrage. Only the 2022 SOFR transition temporarily disrupted this pattern, creating meaningful pure parity deviations that quickly reverted. We validate our decomposition using multi-currency bonds from the same high-grade issuers, finding consistent patterns across bond and swap markets: minimal pure parity deviations alongside substantial term funding differentials. Our results suggest that the persistence of cross-currency bases may reflect domestic funding constraints that manifest in international prices, while the efficiency of international arbitrage mechanisms remains intact.
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4. The "Hairy Premium": Incomplete Markets and Frictions - with Anthony Saunders
Presentations: 2024 Annual Meetings of the American Finance Association (AFA), 2024 European Finance Association (EFA), 2024 Northern Finance Association Annual Conference (NFA), Midwest Finance Association Conference (MFA), Young Scholars Nordic Finance Network Workshop (NFN), Alpine Finance Summit, Finance and Accounting Annual Research Symposium, Financial Engineering and Banking Society, BI Workshop on Uncertainty, NYU Stern School of Business, Miami Herbert Business School, Frankfurt School of Finance and Management, and BI Norwegian Business School
Abstract: We document systematic departures from risk-neutral pricing in interest rate swap markets through a "Hairy premium", the gap between swap rates and realized floating rates, averaging 2.7% annually for 10-year U.S. dollar swaps, with similar patterns across all G10 currencies. Market incompleteness (absent long-term risk-free FRNs and severe shorting constraints) prevents arbitrage, allowing risk premiums to contaminate the supposedly risk-neutral measures used to price the entire $684 trillion derivatives market. Our triangular methodology reveals markets expect these premiums ex-ante, not merely realize them ex-post. The evolving replication efficiency of swaps versus bond benchmarks explains the emergence of negative swap spreads as markets recognize improving relative market completeness.
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3. Time-varying Market Segmentation: The Twin D’s and a Tale of Two Tails - with Sven Klingler and Lukas Kremens
(This paper subsumes the previous paper "Currency Crashes and Sovereign Defaults: Two Markets and One Tail Risk")
Presentations: AFA Annual Meeting, EEA Annual Meeting, Bank of England: 8th International Conference on Sovereign Bond Markets, Anderson School of Management Brownbag Seminar, and SDU
Abstract: This paper documents striking market segmentation between sovereign credit default swaps (CDS) and far out-of-the-money (FOM) foreign exchange (FX) options markets. Despite pricing exposure to the same fundamental tail risks - sovereign default and currency crash, the "Twin Ds" - these markets exhibit persistent pricing discrepancies that cannot be explained by differences in contract specifications or risk exposures. We propose that this segmentation reflects institutional separation between market participants: credit specialists and FX traders operate in distinct spheres with limited information sharing during normal times. Using two cross-market trading strategies - one exploiting USD-denominated CDS versus FOM FX options spreads, and another using quanto CDS versus FOM FX options - we show that these pricing discrepancies yield substantial abnormal returns with Sharpe ratios exceeding 7.2. Crucially, both strategies generate consistent results despite differing in their treatment of depreciation size upon default, confirming that our findings reflect genuine market segmentation rather than risk compensation for variable depreciation magnitude. The abnormal returns collapse to zero during sovereign crises, when information sharing intensifies and pricing converges across previously segmented markets. Our analysis further reveals that information flows unidirectionally from CDS to FX options markets, supporting our institutional explanation. We exploit regulatory changes and cross-country variation in market structure to strengthen identification and rule out alternative explanations based on rational risk pricing. These findings have implications for understanding market structure effects on tail risk pricing and for detecting potentially destabilizing market fragmentation.
[Updated draft] [Internet Appendix]
2. Collateral-adjusted CIP Arbitrages
Presentations: EEA Annual Meeting, AFA Annual Meeting (Poster), Auckland Center’s Derivative Markets Conference, International Risk Management Conference, Virtual Derivatives Workshop, and Anderson School of Management Brownbag Seminar
Abstract: I show that a no-arbitrage consistent but costly collateral rental yield explains about two-thirds of the apparent standard Covered Interest Rate (CIP) violations. I proxy this yield with the difference between the risk-free and overnight index swap rates between the cross bilateral currencies and apply it to both short and long-term CIP violations. Further, the results suggest an important direct collateral channel through which costly collateralization explains CIP violations, independent of previously documented global risks and intermediary frictions.
[Updated draft] [Internet Appendix] [Virtual Derivatives Workshop 2020 Presentation]
1. Constraints of Collateralization and Regulation and the Law of One Price
Awards: Macro Financial Modeling Project Fellowship Award from the Becker Friedman Institute at the University of Chicago
Summary: I research collateralisation and bank regulatory changes in the post-2008 crisis period and their ability to explain large and persistent deviations from the law of one price observed in a number of arbitrage opportunities measured by cash-derivative bases across asset classes. The study attributes the inability to narrow these arbitrage opportunites to costs of participation which arise due to intermediaries facing a collateral, leverage and liquidity constraints, resulting in limits-to-arbitrage. These constraints inhibit regulated dealers/investors’ ability to arbitrage bases across various asset classes and over time. Moreover, I go a step further and measure the magnitude of the effects of each binding constraint on the deviations from law of one price across time and in the cross section across several asset classes. This allows me to classify asset classes by the magnitude of impact received from the binding constraints. The asset class bases I look at are: Bonds-CDS, Treasuries-Interest Rate Swaps, Covered interest rate parity, Inflation rate swaps-TIPS, and Stock Index - Stock index swaps bases.
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Publication of Master Thesis
Georgievska A., Georgievska, Lj, Stojanovic, A. and Todorovic, N. (2011), “Country Debt Default Probabilities in Emerging Markets: Were Credit Rating Agencies Wrong?” in Robert W.Kolb (ed.), Sovereign Debt: From Safety to Default (by invitation), Wiley, ISBN 978-0-470-92239-2
Georgievska A, Georgievska, Lj., Stojanovic, A. and N. Todorovic (2008), “Sovereign rescheduling probabilities in emerging markets: a comparison with credit rating agencies’ ratings”, Journal of Applied Statistics, 35(9), p.1031-1051
