Abstract: We study mortgage design features aimed at stabilizing the macroeconomy. Using a calibrated life-cycle model with competitive risk-averse lenders, we consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this option has several advantages: it stabilizes consumption growth over the business cycle, shifts defaults to expansions, and lowers the equilibrium mortgage rate by stabilizing cash flows to lenders. These advantages are magnified in a low and stable real interest rate environment where the standard ARM delivers less budget relief in a recession.
Presented at: AFA (2019)*, NBER Real Estate (2018), NBER Capital Markets and the Economy (2018)*
Abstract: I study heterogeneity in demand elasticities as a source of risk in asset pricing. I use high-frequency product price and quantity data from Amazon to overcome the classical endogeneity challenge and estimate demand elasticities for a large cross-section of firms. I find that firms facing more elastic demands are riskier and this is reflected in higher equilibrium average stock returns (6.2% annual return premium). I show that price stickiness contributes to these differences in risk: firms are slow to react to competitors' price changes (compared to the predictions of a Calvo model). My empirical findings show the importance of having heterogeneous demand elasticities and degrees of price stickiness in macro-finance models.
Presented at: EFA (2019), SED (2018), ECB forum on Central Banking Young economists session and winner of best paper award (2018), Lubrafin (2019), HEC PhD Conference (2019), Trans-Atlantic Doctoral Conference (2019), FIRS (2022), WFA (2022), winner of the 2019 AQR Fellowship Award, finalist of the 2019 BlackRock Applied Research Award, AQR Top Finance Graduate Award (winner)
Abstract: The operation of residential buildings (our homes) is responsible for roughly 22% of the global energy consumption and 17% of the CO2 emissions. We use a large data set to study the investments that improve the energy efficiency and environmental performance of homes. Investments in elements that require larger capital expenditures and yield lower annual savings per pound of capex are undertaken less frequently. A regulation that requires privately rented properties to satisfy a minimum energy efficiency standard generates significant rental sector investments, similar in nature to those undertaken by owner-occupiers. However, the environmental gains of rental properties are limited by their use of more polluting energy sources. Regulatory interventions that target carbon emissions directly may be more effective in tackling the climate challenge.
Presented at: NBER Real Estate (2022), the OCC Symposium on Climate Risk in Finance and Banking, 11th European Meeting of the Urban Economics Association, AREUEA-ASSA Conference (2023, scheduled), FMA (2023, scheduled)
Abstract: Average product concentration within firms has been declining since the mid-2000s. We find that lower product concentration is associated with lower productivity, expected returns, and idiosyncratic volatility across firms. These empirical relations are explained in a general equilibrium model of multiproduct firms with endogenous firm boundaries. Parameters governing the flexible production technology are identified using the GIV approach of Gabaix and Koijen (2020) by exploiting fat tails in the distribution of product mix. Overall, this paper highlights the importance of firm boundaries for explaining asset prices and firm dynamics.
Abstract: In the U.S. student debt currently represents the second largest component of consumer debt, just after mortgage loans. Repayment of those loans reduces disposable income early in their life cycle when marginal utility is particularly high, and limits households' ability to build a buffer stock of wealth to insure against background risks. In this paper we study alternative student debt contracts, which include a 10-year deferral period. During this period individuals either only make interest payments ("Principal Payment Deferral", PPD) or make no payments at all ("Full Payment Deferral", FPD) with the missed interest payments added to the value of the debt outstanding. We first calibrate an equilibrium with the current contracts, and then solve for counterfactual equilibria with the PPD or FPD contracts. We find that both alternative contracts generate economically large welfare gains, which are robust to different assumptions about the behavior of the lenders. We also decompose the gains into the percentages resulting from loan repricing and from the deferral of debt repayments.
Abstract: We solve a quantitative dynamic model of borrower behavior, whose income is subject to individual specific and aggregate shocks. Lenders provide loans competitively. Recessions are characterized by lower expected earnings growth and a higher likelihood of a large drop in earnings. The model generates procyclical credit demand and countercyclical default. We analyze alternative debt restructuring policies aimed at reducing default during recessions: (i) interest rate reduction; (ii) maturity extension; and (iii) refinancing. Outcomes are best for the maturity extension policy that allows borrowers to temporarily make interest-only payments on the loan. Not all borrowers exercise the option. The maturity extension policy leads to lower default rates, higher consumer welfare, and a smaller drop in consumption during recessions, without significantly increasing cash-flow risk for lenders.
Presented at: SFS Cavalcade (2016), SED (2016), Trans-Atlantic Doctoral Conference
Abstract: Using information embedded in option prices, we uncover the existence of a non-trivial term-structure of systematic risk for individual stocks and portfolios. The slope of this term-structure is a priced factor on the cross-section of returns and spikes following relevant macroeconomic and firm-specific events. The slope of the term-structure of betas is mainly driven by the slope of the term-structure of variance swaps. A simple investment model with uncertainty shocks in the spirit of Bloom (2009) can quantitatively explain these dynamics.
Presented at: CEPR Second Annual Spring Symposium in Financial Economics (2017), Trans-Atlantic Doctoral Conference (2017), Conference for Young Economists in Belgrade (2017)
*Presentations by co-author