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Publications

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Doubts and Variability: A robust perspective on exotic consumption series

(with Matt Smith)

Asset-pricing models have experienced success by augmenting the consumption process with Long-Run Risk and Rare Disasters. Acknowledging that both phenomena are naturally subject to ambiguity, we show that an ambiguity-averse agent may behave as if Long-Run Risk and disasters exist even if they do not or exaggerate them if they do.

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Long-Run Risk Is the Worst-Case Scenario

(with Ian Dew-Becker)

How do you value assets when you don't know how the world works? We study an investor who is unsure of the dynamics of the economy. Not only are parameters unknown, but the investor does not even know what order model to estimate -allowing potentially infinite-order dynamics. She prices assets using a pessimistic model that minimizes lifetime utility subject to a constraint on statistical plausibility. We show this helps explainimportant asset pricing phenomena.

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De-leveraging or de-risking? How banks cope with loss

(with Adam Shapiro and John Krainer)

What happens when a bank is damaged? Do they stop lending and shrink? This is the standard intuition and much of the academic literature has focused on testing this by looking at a given type of lending - deciding that this indeed is what happens.  We show that the reality is more subtle.  We find that banks do retrench when damaged, but by tuning their lending terms to adjust an array of assets in different directions, not to de-lever, but to de-risk.

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Robust Animal Spirits

(with Matt Smith)

Keynes coined the phrase "animal spirits" and, ever since, people have been interested in defining this nebulous concept. We provide an elegant interpretation by retaining small r "rationality" while relaxing big "R" Rationality, in the sense of Rational Expectations. If reasonable people "doubt" their model of the world, the interaction of these doubts with fluctuations in volatility induces them to behave as if they are subject to waves of sentiment.

Projects

Working paper

(with Tim Jackson and Matthias Rottner)

We examine the impact of central bank digital currency (CBDC) on banks and the broader economy - drawing on novel survey evidence and using a structural macroeconomic model with endogenous bank runs. A substantial share of German respondents seem willing to include CBDCs in their portfolio in normal times - replacing, in part, commercial bank deposits. This is hypothetical evidence for ‘slow’ disintermediation of the banking system. During periods of banking distress, households’ willingness to shift to CBDC is even larger, implying a risk of ‘fast’ disintermediation. Our structural model captures both phenomena and allows for policy prescriptions. Specifically the model suggests that CBDC can improve financial stability - but only if introduced carefully - such as with holding limits that reduce the scope for bank runs.

Working paper

(with Jamie Coen, Caterina Lepore and Laura Silvestri)

We study the price impact of sales in bond markets. Using novel data on the transactions of financial firms in corporate and government bonds in the UK, we develop a new measure of non-fundamental selling pressure that is remarkably general. The measure is based on the intuition that if someone is selling an asset, there's a good chance the asset is "bad". But if they are selling it at the same time they are selling lots of unrelated assets, it's more likely they are selling due to some investor-driven factor. Specifically, we instrument for firms' sales of a bond with their sales of bonds other than the bond in question and exploit within issuer-time variation to identify selling pressure that is unrelated to the bond's fundamentals. The price impact of a sale depends critically on who is selling the asset: sales by dealers and hedge funds generate significantly larger impacts than sales of the same size by other investor types. Our results suggest that more attention should be devoted to risks tofinancial stability stemming from these impactful sellers.

(with Nicolas Crouzet, Maggie Jacobsen and Michael Siemer)

We document new facts on the modification of bank loans using secret regulatory data from the largest US banks. Modifications are quite frequent: key contractual terms, such as interest and maturity, are adjusted at least once for 41% of loans. Cross sectional differences in modifications are substantial and amplified by borrower distress. Interestingly - and somewhat in tension with common intuition - syndicated loans are substantially more likely to be modified than single lender loans, and interest rate changes are twice as likely. Our findings call into question whether 1) creditor dispersion makes loan modifications more challenging and 2) relationship lending between banks and small borrowers creates more scope for flexibility when borrower-level conditions change.

Working paper

How much risk comes from high frequencies, business cycles frequencies or low frequency swings? If these properties are under the influence of a person or institution, whose incentives depend upon the distribution of risk across frequencies, then she will

manipulate this distribution. If her 'principal' is myopic with regard to certain frequencies, she will choose to hide risk by shifting power from frequencies to which the regulator is attuned to those to which he is not.

Working paper

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