1, “Beliefs and the Net Worth Trap” - Journal of Economic Theory, Volume 227, June 2025
(with Seung Joo Lee and Goutham Gopalakrishna)

Abstract: We develop a tractable framework to explore how beliefs about long-term economic growth shape macroeconomic and financial stability. By modeling belief distortions among productive capital users, we provide an analytical characterization of a novel phenomenon termed the “net worth trap”, wherein overly optimistic or pessimistic beliefs among productive agents prevent them from rebuilding wealth, causing permanent inefficien- cies. A procyclical swing in beliefs reduces or exacerbates the instability, indicating that the type of belief when the economy is vulnerable has important consequences on financial stability and macroeconomic dynamics.

2.   "Divided Government and the Stock Market" - (Under Review) -  with Dean Ryu and Mungo Wilson

Abstract: We show that during United governments, where the same political party controls the White House, the Senate, and the House of Representatives, the U.S. stock market earns substantially higher average excess returns and the U.S. economy experiences higher economic growth than during Divided governments. Consistent with a political gridlock mechanism, the government cycle has a more pronounced impact on small firms, accounting for the recent vanishing of the firm size effect. We examine causal mechanisms through closely contested elections, and show that the government cycle is consistent with theoretical models that link under-performance during Divided-Republican governments to increasing political uncertainty.

3.  “A Macro-Finance Model of Credit Spreads” - (Under Review)
with C. Christopher Hyland, Dimitrios Tsomocos, and Nikolaos Romanidis
Abstract: We argue that fluctuations in corporate credit spreads arise from the time-varying risk-bearing ca- pacity of financial intermediaries. Empirically, we show that the primary broker dealers’ leverage ratios closely tracks the excess bond premium, highlighting that intermediary balance sheets, rather than firm-level default fundamentals, drive the dominant component of spreads. Guided by this evidence, we build a continuous-time heterogeneous-agent model in which productive experts finance capital with defaultable debt subject to an equity constraint and an endogenous, non-pecuniary default penalty. Three results obtain. (i) The model resolves the credit-spread puzzle: even after conditioning on expected default losses, equilibrium spreads include a sizable wedge that varies with intermediary net worth. (ii) Default is non-neutral: higher default rates raise the user cost of capital, depress investment, and amplify aggregate volatility. (iii) Default penalties have a non-monotonic welfare effect: lax penalties induce excessive leverage ex ante, whereas stringent penalties accelerate fire-sale deleveraging ex post. We characterise optimal policy by solving for the social planner’s solution to pin down an interior default penalty schedule.

4. “From Anomalies to Norms: A Unified Framework for Sentiment, Risk, and Mispricing” - (with Dean Ryu)
Abstract: This paper introduces a novel portfolio construction framework that goes long on safer stocks (less risky or mispriced) and short on unsafe ones. Rooted in limits-to-arbitrage theory, this normative approach pro- vides a strong rationale for cross-sectional anomalies driven by mispricing and helps address well-known asset pricing challenges, such as the low-volatility puzzle and the distress risk puzzle. In addition, our theoretical frame- work predicts: i) a negative contemporaneous link between aggregate stock market returns and cross-sectional signals, ii) a short-term sentiment-driven effect on expected returns versus a long-term fundamental risk effect, and iii) a decline in returns on both portfolio sides as sentiment rises, with the latter being an unexplored aspect in prior research. Testing 100 U.S. cross-sectional anomalies, we find robust empirical support, highlighting sentiment’s role in linking cross-sectional and time-series stock return dynamics.

5.  "The “Matthew Effect” in Asset Returns: Winners and Losers from Entry"

Presented at the Federal Reserve Board, European Winter Meetings of the Econometric Society (Barcelona, Dec 13 - 17, 2021), Said Business School FAME seminar, 2021. Accepted for presentation at the Midwest Finance Association 2023 (Chicago, IL) conference.

Abstract:  Firms differ in their vulnerability to new entrants to their industries. Re- cent research has shown the costs of entry to have varied over time, being low before the early 80s and having risen since. In a model with monopolistic com- petition, fixed costs, and heterogeneous markups, I show that increasing entry costs can give rise to the recently documented reallocation of economic activity towards large high market power firms, a phenomenon known as the “Matthew effect” (Merton (1968)). In particular, when entry costs increase, high market power firms can asymmetrically raise markups and, as a result, expand relative to firms with higher vulnerability to new entrants. A straightforward long-short strategy exploiting this effect would have generated 10.8% per annum since the 1980s. Furthermore, this effect can rationalize a number of different puzzles in equity markets, including the high equity premium, the time variation in size and profitability, the empirical relation between returns and markups and why the size effect resurrects when controlling for profitability. My results, thus, reconcile a series of asset pricing phenomena with several macroeconomic stylized facts documented in the literature.