Working Papers

"Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress" with Zhiguo He and Zhaogang Song [Draft]

Two intermediary-based factors explain about 50% of the puzzling common variation of credit spread changes beyond canonical structural variables. Key result: higher-margin bonds are more sensitive to our two factors, consistent with a model where intermediaries face margin constraints and absorb customer asset sales.


"Arbitrage and Beliefs" with Alex Zentefis [Draft]

The presence of arbitrage profits leave asset markets susceptible to self-fulfilling price volatility. Conversely, self-fulfilling volatility implies arbitrage opportunities must exist. The tight theoretical connection between price volatility and the presence of arbitrage is detectable in currency markets.


"Financial Frictions, Amplification, and Sunspots" with Fernando Mendo [Draft]

Very common financial frictions induce a two-way feedback loop between asset prices and the wealth distribution ("amplification"). This loop alone can justify self-fulfilling fluctuations ("sunspots"). Sunspot equilibria can have arbitrarily high volatility and arbitrarily loose linkages between real shocks and crisis dynamics.


"The Risk of Risk-Sharing: Diversification and Boom-Bust Cycles" [Draft]

I model a shock whereby financial intermediaries can better diversify borrowers’ idiosyncratic risks. This improvement sets off a cycle: a fragile sectoral boom predictably ends in an economy-wide bust through excessive financier leverage, consistent with some past cycles like the 2000s US housing cycle.


"Entry and Slow-Moving Capital: Using asset markets to infer the costs of risk concentration" [Draft] (R&R at Journal of Financial Economics)

Asset prices encode costs of risk concentration, through the friction in capital mobility during crises. In models of slow-moving capital, such frictions must be enormous to match risk premia levels and variability. Among the possibilities considered, only extrapolative expectations can overturn this result.


"Comparative Valuation Dynamics in Models with Financing Restrictions" with Lars Hansen and Fabrice Tourre [Draft coming soon] [Slides] [Model Comparisons Toolbox] [Numerical Method Draft also coming soon]

This paper develops a theoretical framework to nest many recent macroeconomic models with financial frictions. We study the macroeconomic and asset pricing properties of this class of models, identify common features, highlight areas where these models depart from each other, and offer new insights.


"Financial Frictions and Aggregate Fluctuations" [Draft]

Aggregate fluctuations emerge out of idiosyncratic shocks if and only if there are financial frictions. By modeling a weak (network-like) dependence structure across economic agents, this failure of the law of large numbers holds generically and does not require any assumptions about fat-tailed size distributions.