Research

Working Papers

Rational Bubbles with Competitive Fund Managers
Job Market Paper

Abstract: Financial bubbles are often described as the result of behavioral biases and financial constraints. The model presented in this paper shows how a rational expectation equilibrium (REE), in which asset prices can deviate from their fundamental value, can still exist in a world with agents rationally and unbiasedly evaluating an asset’s future return. Price deviation is the result of risk-averse fund managers endowed with different information sets who compete to outperform a benchmark. More competition leads to larger price deviations, worse risk-adjusted returns, and deteriorates investors’ ability to separate different types of managers. However, competition hampers the effect of non-fundamental shocks on the price making them more informational efficient.

Presentations: AEA 2025 Poster Session*, 2024 FMA Annual Meeting, 2024 FMA European Doctoral Student Consortium, 15th Annual Hedge Fund Research Conference Poster Session, 2023 SFI research days, USI brown bag seminar.

Public Debt Promises
with Antonio Mele

Abstract: Governments may be unsure about the multiplier effects of public expenditures and, hence, disagree with investors regarding their own default probabilities. To what extent may well-functioning financial markets lead the cost of debt service towards the investorsíbeliefs? This paper analyzes how different interplays between governments' beliefs and market expectations affect market prices. In a world with Knightian uncertainty, conservative governments take worst-case scenario decisions and are less prone to default than more optimistic governments. However, optimistic governments collect more resources (and spend more) as they anticipate that asset prices are relatively insensitive to the size of the debt they rise. Finally, our model predicts, consistent with the empirical evidence, that more conservative governments overstimate the costs of debt service

Profiting from Bank Rescues

Abstract: Not every bank rescue is born equal. The model presented in this paper shows what are the economic conditions that drive the choice of a bank to intervene and rescue another bank in distress. We prove that depositors’ optimism and the size of a full rescue both deter healthier banks’ intervention. If instead incentives are sufficiently strong for a bank to attempt a rescue, even a partial rescue is able to provide a signal to depositors about the probability of contagion to the rescuing bank, thus reducing its cost of funding and generating a profit.

Presentation: 2024 SFI research days.

*Forthcoming