Research

research projects

EUR/USD Covered Interest Parity Deviation

FX Hedging, Currency Choice, and Dollar Dominance (2022), with M. Fraschini
Job Market Paper
PRESENTATIONS: 2022 European Winter Meeting of the Econometric Society, Harvard-MIT Jr Researcher Series 2022; Internal Finance Seminar at Berkeley Haas 2022; SFI Job Market workshop 2022; AEA/ASSA 2022 - poster session; Econ GSW seminar series (Unil UZH); SFI Research Days 2022 and 2021; RIEF 20th Doctoral Meetings in International Trade and International Finance (Paris School of Economics); Finance PhD Final Countdown (Nova Business School)
ABSTRACT:

When exporters price their goods in a foreign currency, they are exposed to exchange-rate risk. However, they can hedge this risk by underwriting a foreign exchange (FX) forward contract, which means selling forward the currency in which they price their goods. In this paper, we study how the cost of FX hedging influences the currency choice of French exporters. Our identification strategy exploits an exogenous increase in the trading costs of FX forward contracts, which was triggered by a spike in the Greek default risk. First, we find that higher FX trading costs lower the probability of pricing in dollars and in local (i.e., buyer’s) currency for hedging firms. Second, we show that hedging firms price more their goods in dollars than in local currency. Third, we document that FX hedging affects the transmission of exchange-rate shocks to prices and find that FX hedging is associated with lower levels of exchange-rate pass-through. We conclude that FX hedging contributes to dollar dominance and to the exchange-rate disconnect puzzle.

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Central Bank Digital Currency and Quantitative Easing (2022), with M. Fraschini and L. Somoza

Swiss Finance Institute Research Paper No. 21-25. (poster)
AWARD: Finalist at ECB Best Young Economists Award 2022
MEDIA COVERAGE: LSE Business Review, Financial Times
PRESENTATIONS: ECB Annual Meeting, AEA/ASSA 2022 poster session, University of Luxembourg, the Day-Ahead Workshop on Financial Regulation at the University of Zurich, the Finance BB seminar at the University of Geneva, the 14th Financial Risks International Forum, and the SFI Research Days 2021

ABSTRACT:
This paper studies how the introduction of a central bank digital currency (CBDC) interacts with ongoing monetary policies. We distinguish two kinds of policies: standard policy, where the central bank invests in treasuries, and quantitative easing, where the central bank invests in risky securities. In each scenario, we introduce an interest-bearing CBDC, and study the equilibrium allocations. Our analysis reaches three main conclusions. The first is that the equilibrium impact of a CBDC depends on the ongoing monetary policy. Second, when the central bank conducts quantitative easing, the introduction of a CBDC is neutral under two conditions: the cost of issuing a CBDC is equal to the interest on reserves, and the demand for CBDC deposits is smaller than the amount of excess reserves in the system. Third, the introduction of a CBDC might render quantitative easing a quasi-permanent policy, as commercial banks optimally use their excess reserves to accommodate retailers’ demand for switching from bank deposits to CBDC deposits.
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The Crypto Cycle and US Monetary Policy (2022), with N. Che, A. Copestake, and D. Furcieri

IMF FIP Research Project
PRESENTATIONS: International Monetary Fund
ABSTRACT:This paper studies variations in crypto markets globally, their interaction with equity markets, and their response to US monetary policy. We first identify a single "crypto" factor that explains 80% of variation in crypto prices. Second, we show that the increasing correlation between crypto and global equity markets can be explained by the entry of institutional investors into crypto markets. Third, we find that a monetary contraction reduces the crypto factor, and by substantially more than for global equities, possibly due to the increased cost of leverage reducing the risk appetite of the marginal investor. We formalize our findings in a model with heterogeneous agents and time-varying aggregate effective risk aversion.
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OTC Markets and Corporate FX Hedging (2022), with H. Hau and E. Dautovic


ABSTRACT:
New evidence shows substantial price discrimination in FX derivative markets between sophisticated and less-sophisticated non-financial firms (Hau et al., 2020). This paper provides new evidence on corporate currency hedging decisions based on firm-level measurement of currency exposure and hedging costs. We aggregate all foreign currency payable and receivable invoices of French manufacturing firms to measure their FX exposure by currency. New comprehensive European OTC transaction data allows us to observe the corporate hedging decision and estimate the associated hedging costs. First, we show that substantial heterogeneity of hedging costs across firms explains why larger firms are much more likely to hedge FX exposure in any currency. Second, specific currency exposures within a firm are more likely to be hedged if the currency features lower hedging costs. Understanding this issue has relevant policy implications for designing a better functioning derivative market that better serves the real economy.
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Are Green Mutual Funds Listening? Climate Transition in Earning Calls (2022), with C. Jaunin

Swiss Finance Institute Research Paper No. 22-19.
PRESENTATIONS: Wharton PhD seminar, SFI Research Days 2022, UNIL & EPFL brown bag seminar
ABSTRACT:We empirically study the preferences of mutual funds regarding firm-level communications about the climate transition. Using an unsupervised machine learning algorithm, we measure the magnitude of climate transition talks during earnings conference calls and find that it relates positively to ownership by green mutual funds. Furthermore, we establish the existence of selection effects and show that, a year after starting to discuss the climate transition, firms see their green fund ownership increase by twice as much as matched firms with similar characteristics, but that did not discuss the topic. We do not find any differences in non-green ownership. Next, we show that climate transition talk proves an effective screening mechanism to design decarbonization portfolios whose carbon emissions increase 32% less in a given year than those of a benchmark portfolio. Overall, these results do not indicate that green mutual funds and firms systematically engage in greenwashing. In fact, we document the existence of a channel for firms to efficiently communicate their climate stance to green investors.
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Policy Papers

Stabilizing Stablecoins: Proposal for a Pragmatic Regulatory Approach (2021) , with L. Somoza

The Journal of FinTech


MEDIA COVERAGE: VoxEU.org , Financial Times - Alphaville, Cointelegraph, Il Sole 24 Ore .
ABSTRACT:We propose a framework for regulating stablecoins as a new asset class. We define stablecoins as those digital currencies which are centrally managed and backed by other assets. We compare stablecoins and ETFs under the principle that similar risks should be treated in a similar fashion. Hence, we argue that locking stablecoins into an ETF-like structure, along with restrictions on the basket composition, would significantly reduce regulatory concerns. Stablecoin providers would be functionally similar to ETF sponsors, and stablecoins would be a new vehicle for traditional fiat currencies. Finally, we address common macroeconomic concerns in light of our proposed framework.
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Written evidence for the House of Lords Economic Affairs Committee inquiry on Central Bank Digital Currencies (2021), with M. Fraschini and L. Somoza [by invitation]


as part of 3rd Report of Session 2021-22 by the House of Lords Economic Affairs Committee, Central bank digital currencies: a solution in search of a problem?

ABSTRACT:
  • Consumers might have some benefits from lower transaction costs, faster payments, and increased competition.
  • A CBDC would change the relationship between the BoE and the banking sector, with the latter becoming even more dependent on the BoE.
  • The BoE would have a direct channel with consumers, thus being able to implement more effective and targeted monetary policies.
  • A CBDC might blur the line between monetary and fiscal policy, gradually shifting responsibilities from HM Treasury to the BoE.
  • Whether to introduce a CBDC is mainly a political decision over the role and powers of the BoE.
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