Two intermediary factors explain nearly 50% of the puzzling common variation of credit spread changes beyond canonical structural variables. Besides explanatory power, our core focus is on the cross-sectional patterns of bond and non-bond loadings our two factors, which help identify various mechanisms at play.
Very common financial frictions induce a two-way feedback loop between asset prices and the real economy. This loop alone can justify self-fulfilling fluctuations ("sentiment"). Sentiment can help with some puzzles, permitting: high volatility, sudden financial crises, and booms that predict busts.
"Fear and Volatility at the Zero Lower Bound" with Fernando Mendo [Draft]
Self-fulfilling asset price volatility is endemic at the ZLB. This volatility has nothing to do with inflation, and optimal discretionary monetary policy will not eliminate it.
"Arbitrage and Beliefs" with Alex Zentefis [Draft]
A segmented-markets model in which the presence of arbitrage profits leaves asset markets susceptible to self-fulfilling price volatility.
"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]
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.
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.