Volatility, Intermediaries, and Exchange Rates

with Xiang Fang

Journal of Financial Economics

Cubist Systematic Strategies PhD Candidate Award for Outstanding Research, Western Finance Association 

We propose and estimate a quantitative model of exchange rates in which the participants in the FX market are intermediaries subject to value-at-risk (VaR) constraints. The model resolves the exchange rate puzzles (Backus-Smith, forward premium, volatility, CIP deviation) and generates new implications consistent with the data.

AEA, EFA, ES North American, WFA, Penn, PKU, SJTU, Wharton, Cavalcade Asia, ES China, ES European (Winter),  FIRS, Midwest Macro.


Government Policy Approval and Exchange Rates

with Ivan Shaliastovich

Journal of Financial Economics, forthcoming

Measures of U.S. government policy approval are strongly related to persistent fluctuations in the dollar exchange rates. Contemporaneous correlations reach 50%. High approval ratings further forecast a decline in the dollar risk premium, a persistent increase in economic growth, and a reduction in future economic volatility. We provide an illustrative economic model to interpret our empirical evidence.  

AFA, EFA, Cavalcade, WFA, ASU, BI, HKU, Luxemburg School of Finance, NUS, SMU, UW-Madison, Front Range Seminar, ITAM Conference, MFA, Midwest Macro, Vienna Symposium on Foreign Exchange


Volatility Risk Pass-Through 

with Riccardo Colacito, Mariano Croce, and Ivan Shaliastovich

Review of Financial Studies

Best Paper Award, Annual Conference in International Finance

We develop a novel measure of volatility pass-through to assess international propagation of output volatility shocks to macroeconomic aggregates, equity prices, and currencies. An increase in country’s output volatility is associated with a decrease in its output, consumption, and net exports. The average consumption pass-through is 50% (a 1% increase in output volatility increases consumption volatility by 0.5%) and it increases to 70% for shocks originating in smaller countries. The equity volatility pass-through is larger and in the order of 90%. A novel channel of risk sharing of volatility risks can explain our empirical findings.

AEA, ES North America, WFA, Columbia, Chicago Fed, Erasmus, Indiana, Maastricht, Norwegian School of Economics, SF Fed, Tilburg, Universita' della Svizzera Italiana, Virginia, Wharton, BoC Workshop, Brazilian Meeting of Finance, Chicago International Macro Finance, CEBRA (New York, Warsaw and Madrid), CEPR ESSFM Gerzensee, ES North America (Summer), Hanqing Workshop, SAFE Workshop, Stanford SITE, SEA, SED, SoFiE, UBC Winter Conference, Workshop on Uncertainty (UCL).


Government Debt and Risk Premia

Journal of Monetary Economics, conditionally accept

Risk premia increase with government debt. Debt-to-GDP ratios positively predict risk premia at short and long horizons, in the U.S. and other advanced economies. Higher debt is also associated with higher credit risk premia and lower risk-free rates. New evidence suggests that the increased risk premia provide compensation for higher fiscal risk: during periods of elevated debt, fiscal policy becomes less certain, less countercyclical, and less effective, and can even lead to debt crises. I quantify these mechanisms in an equilibrium model.

EFA, BlackRock, CUHK, Philly Fed, Goldman Sachs, NTU, Penn, SSE, Tsinghua PBC, HKU, UW-Madison, Wharton, 3rd Conference on Uncertainty, EconCon, HK Joint Workshop, Mitsui Symposium, Midwest Macro, SoFiE, World Symposium on Investment Research.


The Risks of Safe Assets

with Lukas Schmid and Amir Yaron

We empirically document and theoretically evaluate a dual role for government debt. An increase in government debt improves liquidity and lowers liquidity premia, while it creates policy uncertainty and raises default risk premia. We interpret and quantitatively evaluate these two channels through the lens of a general equilibrium asset pricing model with risk-sensitive agents subject to liquidity shocks. The calibrated model generates quantitatively realistic liquidity spreads and default risk premia, and suggests that increasing safe asset supply can be risky.

NBER AP, NBER SI Capital Markets, AFA, EFA, Cavalcade, Zurich, Backus Memorial Conference, Cavalcade Asia, CEPR ESSFM Gerzensee, Greater Bay Conference, LBS Summer Symposium, SED, Federal Reserve Short-Term Funding Markets Conference, SHUFE Conference, UBC Winter Conference.


Getting to the Core: Inflation Risks Within and Across Asset Classes

with Xiang Fang and Nikolai Roussanov

Decomposing inflation into core and non-core components (e.g., energy) sheds new light on the nature of inflation risk and risk premia. While stocks have insignificant exposure to headline inflation in the U.S., their core inflation betas are negative and energy betas are positive. Conventional inflation hedges such as currencies and commodities only hedge against energy inflation risk but not the core. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium. We develop a two-sector New Keynesian model to account for these facts.

EFA, HKU, Kellogg, Wharton, ASU Conference, CICF, FIRS, JHU Conference, MFA, SED, Tsinghua Conference, Triangle Macro-Finance Seminar, VSFX.