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), winner of the 2019 AQR Fellowship Award, finalist of the 2019 BlackRock Applied Research Award, AQR Top Finance Graduate Award (winner)
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: We document a decreasing trend in the concentration of products produced by the average firm over the past decade and a half. Firms are increasingly selecting a more diverse product range outside of their core, led by the largest firms in the industry. Rapidly expanding firm boundaries is closely intertwined with rising industry concentration. We explain the diverging patterns in product and industry concentration in a dynamic general equilibrium model of multiproduct firms with endogenously evolving firm and industry boundaries. The intra-firm extensive margin allows incumbent firms to seize additional market power through strategic product diversity. The estimated trend component in external financing costs can help quantitatively explain the emergence of firms with increasing size with greater product diversity. We show that the recent fall in idiosyncratic volatility and TFP can be explained by the shift in product creation to within the boundaries of the firm.
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