Working Papers

When do Treasuries Earn the Convenience Yield? – A Hedging Perspective, with Viral Acharya. January 2024. SSRN.

We document that the convenience yield of U.S. Treasuries exhibits properties that are consistent with a hedging perspective of safe assets, i.e., Treasuries are valued highly if they appreciate with poor aggregate shocks. In particular, the convenience yield tends to be low when the covariance of Treasury returns with the aggregate stock market returns is high. A decomposition of the aggregate stock-bond covariance into terms corresponding to the convenience yield, the frictionless risk-free rate, and default risk reveals that the covariance between stock returns and the convenience yield itself drives the effect in a substantive capacity. We show the convenience yield is reduced with heightened inflation expectations that erode the hedging properties of U.S. Treasuries and other fixed-income money-like assets, inducing a switch to alternatives such as gold; it is also reduced immediately prior to debt-ceiling standoffs and with increases in Treasury supply.

Discounting Market Timing Strategies, August 2023.  SSRN.

Prior literature has documented a number of timing strategies that obtain superior Sharpe ratios and alphas relative to underlying buy-and-hold portfolios by employing calendar- or indicator-based weighting schemes. I establish a novel fact: the risk-return tradeoff of such strategies deteriorates substantially as the investment horizon increases. The strategies are therefore less appealing to long-term investors than might at first appear. I show that such strategies arise in a model with seasonalities in the volatility of expected cash-flow and price of risk shocks and provide a connection with the literature on pricing at different maturities.

The Retail Habitat, with Marco Sammon. July 2023. SSRN.

Retail investors trade hard-to-value stocks. Stocks with a high share of retail-initiated trades are composed of more intangible capital, have longer duration cash-flows and a higher likelihood of being mispriced. Consistent with retail-heavy stocks being harder to value, we document that such stocks are less sensitive to earnings news, more sensitive to retail order flow and are especially expensive to trade around earnings announcements. Additionally, the well-known earnings announcer risk premium is limited to low retail stocks only. Overall, our findings document a new dimension of investor heterogeneity and suggest a comparative advantage of retail in holding hard-to-value stocks.

Precautionary Savings and the Stock-Bond Covariance. R&R. November 2022. SSRN. Short slides.

I show that the precautionary savings motive can account for the high-frequency variation in the stock-bond covariance. An increase in the price of risk lowers risky asset prices on account of an increase in risk premia; it lowers bond yields on account of the precautionary savings component. Consequently, times when the price of risk is volatile see a more negative stock-bond covariance. I demonstrate that a model of time-varying price of risk, calibrated to fit equity moments, matches well the evidence regarding both the nominal and real stock-bond covariance, even in the absence of inflation news. Empirically, I show that the stock-bond covariance co-moves with credit spreads and can predict excess returns on corporate bonds and on bond-like stocks. The calibrated model underlines the systematic nature of high-frequency changes in the stock-bond covariance and the first-order effect of risk compensation on safe rates.

Pre-Announcement Risk.  September 2022. SSRN. AFA 2021 presentation. Slides.

I propose and test a new explanation for the pre-FOMC announcement drift puzzle. I show that such a drift arises in a model where investors interpret a given FOMC action based on recent news. If recent news has been good, FOMC announcements are seen as signals about economic conditions; if recent news has been poor, they are seen as signals about the Fed's own policy stance. According to the model, high returns in the run-up to FOMC announcements represent a risk premium associated with the resolution of uncertainty regarding announcement interpretation. Consistent with the model, I demonstrate that the market return pre-announcement predicts the interpretation of Fed action. The model does not require informational leaks or biased beliefs and can account for the timing of returns in anticipation of Fed announcements.

Announcement Risk Premium Reconsidered, August 2019.

Ai and Bansal (2018) claim that a non-zero risk premium earned in a tight window around macroeconomic announcements is inconsistent with expected utility preferences if aggregate consumption cannot respond to news at a high frequency. I show that the claim results from a misapplication of the Envelope Theorem. I calculate asset prices in their model and show that an announcement risk premium is consistent with expected utility preferences, even if aggregate consumption takes arbitrarily long to adjust to the news. I provide examples from well-studied settings.

Published Work

1930: First Modern Crisis, with Gary Gorton and Tyler Muir. Financial History Review. December 2023. SSRN.

Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks' decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.

Stock Market Stimulus, with Robin Greenwood and Jeff Wurgler. Review of Financial Studies. April 2023. SSRN. Slides. The Economist. WSJ.

We study the stock market effects of the arrival of the three rounds of “stimulus checks” to U.S. taxpayers and the single round of direct payments to Hong Kong citizens. The first two rounds of U.S. checks appear to have increased retail buying and share prices of retail-dominated portfolios. The Hong Kong payments increased overall turnover and share prices on the Hong Kong Stock Exchange. We cannot rule out that these price effects were permanent. The findings raise novel questions about the role of fiscal stimulus in the stock market.

Mobile Collateral versus Immobile Collateral, with Gary Gorton and Tyler Muir. Journal of Money, Credit and Banking. February 2022. SSRN.

The financial architecture prior to the recent financial crisis was a system of mobile collateral. Safe debt, whether government bonds or privately-produced bonds, i.e., asset-backed securities, could be traded, posted as collateral, and rehypothecated, moving to their highest value use. Since the financial crisis, regulatory changes to the financial architecture have aimed to make collateral immobile, most notably with the BIS liquidity coverage ratio (LCR) for banks which requires that (net) short-term (uninsured) bank debt (e.g. repo) be backed one-for-one with high-quality bonds. We evaluate this immobile capital system with reference to a previous structurally identical regime which also required that short-term bank debt be backed by Treasury debt one-for-one: the U.S. National Banking Era. The experience of the  U.S. National Banking Era suggests that the LCR is unlikely to reduce financial fragility and may increase it.

The Run on Repo and the Fed's Response, with Gary Gorton and Andrew Metrick. Journal of Financial Stability, June 2020. SSRN.

The Financial Crisis began and accelerated in short-term money markets. One such market is the multi-trillion dollar sale-and-repurchase ("repo") market, where prices show strong reactions during the crisis. The academic literature and policy community remain unsettled about the role of repo runs, because detailed data on repo quantities is not available. We provide quantity evidence of the run on repo through an examination of the collateral brought to emergency liquidity facilities of the Federal Reserve.  We show that the magnitude of repo discounts ("haircuts") on specific collateral is related to the likelihood of that collateral being brought to Fed facilities.

Collateral Damage, with Gary Gorton. Banque de France Financial Stability Review, April 2018. SSRN. En Français.

A financial crisis is an event in which the holders of short-term debt come to question the collateral backing that debt. So, the resiliency of the financial system depends on the quality of that collateral. We show that there is a shortage of high-quality collateral by examining the convenience yield on short-term debt, which summarizes the supply and demand for short-term safe debt, taking into account the availability of high-quality collateral. We then show how the private sector has responded by issuing more (unsecured) commercial paper at shorter maturities. The results suggest that there is a shortage of safe debt now compared to the pre-crisis period, implying that the seeds for a new shadow banking system to grow exist.

Genes under weaker stabilizing selection increase network evolvability and rapid regulatory adaptation to an environmental shift, with Pedro Bordalo and Bernardo Lemos. Journal of Evolutionary Biology, August 2016.

Regulatory networks play a central role in the modulation of gene expression, the control of cellular differentiation, and the emergence of complex phenotypes. Regulatory networks could constrain or facilitate evolutionary adaptation in gene expression levels. Here, we model the adaptation of regulatory networks and gene expression levels to a shift in the environment that alters the optimal expression level of a single gene. Our analyses show signatures of natural selection on regulatory networks that both constrain and facilitate rapid evolution of gene expression level towards new optima. The analyses are interpreted from the standpoint of neutral expectations and illustrate the challenge to making inferences about network adaptation. Furthermore, we examine the consequence of variable stabilizing selection across genes on the strength and direction of interactions in regulatory networks and in their subsequent adaptation. We observe that directional selection on a highly constrained gene previously under strong stabilizing selection was more efficient when the gene was embedded within a network of partners under relaxed stabilizing selection pressure. The observation leads to the expectation that evolutionarily resilient regulatory networks will contain optimal ratios of genes whose expression is under weak and strong stabilizing selection. Altogether, our results suggest that the variable strengths of stabilizing selection across genes within regulatory networks might itself contribute to the long-term adaptation of complex phenotypes.