Welcome to my personal homepage!
In 2013, I graduated with a Ph.D. in Economics from the London School of Economics and Political Science, where I was a Deutsche Bank Fellow at the Financial Markets Group. In Spring 2012, I visited the Department of Economics at New York University.
In September 2013, I joined the Bank of Canada as a research economist in the Financial Studies Division, subsequently promoted to Principal Researcher in September 2016.
I am a member of the Finance Theory Group.
- Financial Intermediation (main), Theory, International Finance
- Information choice and amplification of financial crises (with Ali Kakhbod, MIT)
We propose an amplification mechanism of financial crises based on the information choice of investors. Information acquisition always makes investors more likely to act against what is suggested by the prior. Deteriorating public news under an initially strong (weak) prior increases (reduces) the value of private information and induces more (less) information acquisition. Deteriorating public news always increases the probability of a crisis, since the initially strong (weak) prior suggests do-not-attack (attack). This effect is amplified when information choices are endogenous. To enhance financial stability, a policymaker can use taxes and subsidies to affect information acquisition. We also derive implications about the magnitude of amplification and discuss how these can be tested.Review of Financial Studies, 30 (6), June 2017, Pages 2130-78(Previous version published as Bank of Canada WP 2014-30)
- Rollover Risk, Liquidity and Macroprudential Regulation
I study rollover risk in wholesale funding markets when intermediaries hold liquidity ex ante and fire sales may occur ex post. Multiple equilibria exist in a global rollover game: intermediate liquidity holdings support equilibria with both positive and zero expected liquidation. A simple uniqueness refinement pins down the private liquidity choice, which balances the forgone expected return on investment with reduced fragility and costly liquidation. Due to fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the holdings of other intermediaries, causing excessive liquidation. To internalize the systemic nature of liquidity, a macroprudential authority imposes liquidity buffers.Journal of Money, Credit and Banking 48 (8), December 2016, Pages 1753-85.(Previous versions published as European Central Bank WP 1667 and Bank of Canada WP 2014-23)
- Information Contagion and Systemic Risk (with Co-Pierre Georg, University of Cape Town + Bundesbank)
We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint default of banks. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank and trigger information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases systemic risk overall. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.Journal of Financial Stability, doi:10.1016/j.jfs.2017.05.009(Also published as Bank of Canada WP 2017-29)
- Asset Encumbrance, Bank Funding and Fragility (with Kartik Anand, Bundesbank; Prasanna Gai, University of Auckland; and James Chapman, Bank of Canada)
R&R, Review of Financial StudiesPresented at AFA 2017, EFA 2017
We propose a model of asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's choice of encumbrance trades off the benefit of expanding profitable investment, funded by cheap long-term secured debt, against the cost of greater fragility due to runs on unsecured debt. We derive several testable implications about privately optimal encumbrance ratios. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and exacerbate fragility. We show how regulation, such as explicit limits on encumbrance ratios and revenue- neutral Pigouvian taxes, can mitigate the risk-shifting incentive of banks.
- A wake-up call theory of contagion (with Christoph Bertsch, Sveriges Riksbank)
R&R, Journal of Financial IntermediationPresented at FIRS 2017, EFA 2014, NBER Summer Institute 2014
We offer a theory of contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions with an unobserved common macro shock as the only link between regions. A crisis in the first region is a wake-up call to investors in the second region. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can even occur after investors learn that regions are unrelated (zero macro shock). Our results rationalize empirical evidence about contagious bank runs and currency crises after wake-up calls. We also derive new implications and discuss how these can be tested.
- Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? (with Kristin Forbes, MIT Sloan; Christian Friedrich, Bank of Canada; Dennis Reinhardt, Bank of England)
Presented at AEA 2018
Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulation, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) may not significantly reduce the sensitivity of corporates or the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rates movements and the global financial cycle, but may have the side effect of shifting the snowbanks of a portion of this vulnerability to other sectors.
- Seeking Safety (with Enrico Perotti, University of Amsterdam)
We propose a theory of intermediation and demandable debt based on safety preferences. We posit that investors seek to consume a reference level. Investors can self-insure at a safe heterogeneous return and make risky investment that can be liquidated upon interim information. Pooling improves upon autarky: low-return investors do not self-insure, which boosts investment and expected output, but receive a sufficient share of investment. Competitive intermediaries attain this efficient allocation by carving safe claims (debt) out of risky investment backed by enough loss-absorbing claims (equity). This delegation of the liquidation choice, however, creates a conflict between debt and equity holders when the future investment return is risky. Demandability resolves this conflict as the option to withdraw implements a safe payoff. We characterize how the volume and price of safe debt and investment respond to changes in self-insurance and investment characteristics, imperfect competition, and scarce loss-absorption capacity. The private provision of safety via bank debt is substituted by public debt issuance but complemented by deposit insurance.
- How risk-sensitive should bank capital regulation be? (with James Chapman and Carolyn Wilkins, BoC)
We present a simple model to study the optimal risk-sensitivity of bank capital regulation. A banker’s investment is funded with uninsured deposits and costly equity capital. Capital resolves a moral hazard problem in the banker’s choice of risk. Competitive investors are uninformed about the quality of investment (the banker type). A regulator receives a signal about the type and imposes minimum capital regulation. With a revealing signal, risk-sensitive capital ratios achieve the efficient levels of risk and intermediation: better projects attract cheaper funding and require less capital. With an uninformative signal, a risk-insensitive leverage ratio still induces the efficient risk choice but leads to either excessive or insufficient intermediation. With an informative but noisy signal, risk-sensitive capital regulation implements a separating equilibrium in which low banker types do not participate. The degree of risk-sensitivity is non-monotone in the signal precision, the cost of capital, and the investment return.
Work in progress (selected)
- Loan Insurance, Adverse Selection and Screening (with Martin Kuncl, Bank of Canada)
- Transparency in Global Games of Regime Change (with Christoph Bertsch, Sveriges Riksbank; Daniel Quigley, Oxford; Frederik Toscani, IMF)
- Safe Assets, Demand-Deposit Contracts and Bank Runs (with Mahmoud Elamin)