Working Papers

Adding Fuel to the Fire Sales: Banks, Capital Regulation, and Systemic Risk

Winner: Best Paper Award Junior Researcher Category at 2018 PANORisk Conference

In a model with heterogeneous banks and endogenous fire sales, the tightening of bank capital regulation can aggravate fire sales, leading to larger bank losses and higher systemic risk. When calibrated to the data, the least costly policies to mitigate systemic risk raise both ex ante capital requirements and ex post shortfall penalties. These policies also assign relatively higher capital requirements to banks that can better offset price declines during a fire sale, consistent with the recently implemented capital surcharge for global systemically important banks (G-SIBs). My findings provide further support for leading-edge macroprudential tools, including stress tests and countercyclical capital buffers.

Uncertainty-Induced Reallocations and Growth (with R. Bansal, M.M. Croce, and W. Liao)

Focusing on both micro and aggregate U.S. data, we show the existence of a significant link between aggregate uncertainty and reallocation of resources away from R&D-intensive capital. This link is important because a decrease in the aggregate share of R&D-oriented capital forecasts lower medium-term growth. In a multi-sector production economy in which (i) growth is endogenously supported by risky R&D investments, and (ii) the representative agent is volatility-risk averse and has access to other safer technologies that do not support growth, uncertainty shocks have a first-order negative impact on medium-term growth and welfare.

Firm-Specific Risk-Neutral Distributions with Options and CDS (with S. Aramonte, M. Jahan-Parvar, and J. Schindler)

We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Together but not in isolation, options and CDS span the intermediate part of the distribution, which is driven by exposure to the risk of large but not extreme returns. Through a series of asset-pricing tests, we show that our method delivers a more accurate measure for skewness, particularly at times of heightened market stress.

SONOMA: a Small Open ecoNOmy for MAcrofinance (with M.M. Croce and M. Jahan-Parvar)

We develop a small economy model in which external debt, corporate domestic debt and risky equities coexist. Our economy features shocks to short- and long-run productivity, as well as shocks to both domestic credit conditions (Jermann and Quadrini, 2012) and global credit markets. We show that credit shocks are an important determinant of economic fluctuations in a model consistent with asset pricing facts. According to data from EU countries, our setting features a powerful quantitative performance ideal for future monetary and fiscal policy analysis.

De-crypto-ing Signals in Initial Coin Offerings: Evidence of Rational Token Retention (with T. Davydiuk and D. Gupta)

Using the market for initial coin offerings (ICOs) as a laboratory, we provide evidence that entrepreneurs use retention to alleviate information asymmetry. The underlying technology and the absence of regulation make the ICO market well suited to study this question empirically. Using a hand-collected dataset, we show that ICO issuers that retain a larger fraction of their tokens are more successful in their funding efforts and are more likely to develop a working product. Moreover, we find that retention is a stronger signal when markets are crowded and investors do not have as much time to conduct due diligence.

Direct Lenders in the U.S. Middle Market (with T. Davydiuk and T. Marchuk)

Tightening of regulation in the banking sector following the Financial Crisis of 2007-2008 has contributed to a surge of direct lenders and, in particular, business development companies (BDCs). We hand-collect a novel investment-level dataset to provide the first systematic analysis of the BDC sector and estimate real effects stemming from the rise of the new lenders. Exploiting the 2009 collapse of major finance companies as a source of exogenous variation in credit supply, we establish that access to BDC financing has stimulated local economic growth. Specifically, a 10% increase in the BDC investment growth leads to a 0.5%-0.6% (0.6%-0.8%) increase in the employment (output) growth at the county level.

Sustainability of Direct Lending: Evidence from Index Exclusion (with T. Davydiuk and T. Marchuk)

The 2006 change in the disclosure requirements for "Acquired Fund Fees and Expenses" (AFFE) led to the exclusion of business development companies (BDCs) from major stock indexes in 2014, constituting a contractionary shock to the flow of equity capital into publicly traded BDCs. In a difference-in-differences setting, we demonstrate that AFFEcted BDCs --- those with high pre-shock mutual fund ownership --- experience a 10%-14% larger drop in their equity growth and 12%-16% larger decline in investment growth relative to non-AFFEcted BDCs. These findings highlight the importance of access to capital markets for BDCs to sustain their investment activities. Exploiting the geographic dispersion of BDC borrowers, we further document the negative impact of the AFFE regulation on local employment growth.

Public Firm Borrowers of the US Paycheck Protection Program (with A. Cororaton)

The May 5, 2020 version appeared in Issue 15 of Covid Economics

We document that nearly half of public firms were eligible for the Paycheck Protection Program (PPP), with 30.3% of those eligible choosing to borrow. Consistent with the program's objectives, borrowers tended to be smaller, have less cash, have higher leverage, and fewer investment opportunities. In addition, they faced negative profits in the second quarter of 2020 and their firm values declined upon PPP loan announcement. We further document that 17.7% of PPP borrowers, in particular the healthier firms, returned their loan after public backlash. Overall, concerns of reputational harm from public disclosure appeared to prevent eligible firms from availing emergency government funding.

Works in Progress

Predicting Fire Sales in the Banking Sector (with X. Zhong)

Published Papers

Assessing and Combining Financial Conditions Indexes (with S. Aramonte and J. Schindler)

International Journal of Central Banking, 2017

We evaluate the short-horizon predictive ability of financial conditions indexes for stock returns and macroeconomic variables. We find reliable predictability only when the sample includes the 2008 financial crisis, and we argue that this result is driven by tailoring the indexes to the crisis and by nonsynchronous trading. In addition, we suggest a simple procedure for aggregating the various indexes into a single proxy for financial conditions, which can help to reduce the uncertainty faced by policymakers when monitoring financial conditions.