Assistant Professor of Finance
567 West Yangsi Road
Revise & Resubmit, American Economic Review
Abstract: We document the historically bad performance of shorting strategies in late 2020 and early 2021. Short sellers started retreating several weeks before the dramatic growth in the online discussion of January 2021 and across numerous stocks, the majority of which were not heavily discussed online and did not experience an unusual increase in retail buying volume. We provide a model to explain how fears among short sellers can become self-fulfilling and lead to "run-type" behavior. The model also provides a novel explanation why rational short sellers may choose to leave the market even as mispricing widens.
Abstract: We study the relation between funding liquidity and the valuation of mortgage-backed securities. Most MBS positions are financed through a trade known as a dollar roll, the simultaneous sale and purchase of MBS forward contracts. We develop a four-factor no-arbitrage MBS valuation model that allows us to value dollar roll trades based on exposure to (i) interest rates; (ii) prepayments; (iii) credit risk; and (iv) funding liquidity. Unlike previous studies of MBS funding costs, we allow for the possibility of both a prepayment risk premium and maturity-dependent prepayment behavior. The model-implied measure of MBS funding liquidity is independent of prepayment risk and agency credit spreads. The model tightly fits the cross-section and term structure of MBS forward contracts, with a median RMSE across the coupon stack and expiration dates of only 15.9 cents per $100 notional, a 40% reduction over the prior literature. Our model-implied funding liquidity spread is strongly related to proxies for intermediary balance sheet costs and primary dealer MBS positions. Apart from crisis periods, Agency MBS is a specialized market whose financing costs are distinct from those in other large fixed income markets.
New Draft coming soon!
Cubist Systematic Strategies PhD Candidate Award For Outstanding Research, 2020 Western Finance Association
Abstract: I decompose the growth of top wealth shares into two terms: (i) an intensive term driven by wealth accumulation by incumbent wealthy households and (ii) an extensive term driven by the entry of new households. I present a model featuring overlapping generations of agents to relate these two terms to asset prices. When incumbent accumulation causes increases in wealth inequality, rates of return rise to reflect superior investment opportunities. In contrast, when new households are the source of rising wealth inequality, returns decline. I then estimate the relative contribution of incumbents versus new entrants to rising wealth inequality using a novel panel data set of wealth for top wealth households from 1982 to 2018. The extensive margin accounts for roughly half of the rise in wealth inequality at short horizons and over eighty percent over longer horizons. The larger role of entry at long horizons is the result of heterogeneous growth rates among wealthy households. Consistent with my model, this heterogeneity is well captured by a life-cycle effect, wherein younger households’ wealth growth outpaces that of older households.
Measuring The Cost of Red Tape: A Survey Data Approach with Bruno Pellegrino (2016)
Accepted, Journal of Financial Economics
Formerly titled "Institutions and Resource Misallocation"
Abstract: Measures of institutional quality are strong predictors of cross-country differences in income and productivity. The institutional economics literature has long maintained that one way institutions influence economic growth is by impacting the efficient allocation of production factors across firms. In this study, we measure the effect of bureaucracy, labor regulations, family management and financial frictions on input misallocation across firms using a unique dataset that combines firm-level financial data with a large survey administered to company managers. We use a general equilibrium model and a new econometric methodology that is robust to production function mis-specification to infer the size of the distortions induced by these frictions in six large European Union economies. For each of the countries included in our sample, we find that the amount of output that is lost as a result of these frictions is less than 1% of aggregate manufacturing production. This is relatively small compared to previous estimates, partly because we implement a number of methodological innovations to reduce upward bias in our measurements.
Growth Options, Incentives, and Pay-for-Performance: Theory and Evidence (DOI) with Sebastian Gryglewicz and Barney Hartman-Glaser (2016)
Jacob Gold & Associates Best Paper Prize, 2017 ASU Sonoran Winter Finance Conference
Abstract: Pay-performance sensitivity is a common proxy for the strength of incentives. We show that growth options create a wedge between pay-effort sensitivity, which determines actual incentives, and pay-performance sensitivity, which is the ratio of pay-effort to performance-effort sensitivity. An increase in growth option intensity can increase performance-effort sensitivity more than pay-effort sensitivity, so that incentives increase while pay-performance sensitivity decreases. We document empirical evidence consistent with this finding. Within firm, a standard deviation increase in Market-to-Book, a growth option proxy, coincides with a 5.7% decrease in pay-performance sensitivity, measured by dollar changes in manager wealth over dollar changes in firm value.
Research in Progress:
Heterogeneity and Inequality: Historical Growth Rates of Wealth (2018)
Getting the Best from our Brightest: Financial Sector Employment and the Productive Economy (2016)
When Drug Lords Move Markets: Exogenous Trading Volume and Bitcoin Market Microstructure (2015)