Volatility, Intermediaries, and Exchange Rates

with Xiang Fang

Journal of Financial Economics, forthcoming

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

R&R, Review of Financial Studies

Best Paper Award, Annual Conference in International Finance

We show the significance of output volatility (vol) shocks for both currency and international quantity dynamics: (1) consumption and output vols are imperfectly correlated within countries; (2) across countries, consumption vol is more correlated than output vol; (3) the pass-through of relative output vol shocks onto relative consumption vol is significant, especially for small countries; and (4) the consumption differentials vol and exchange rate vol are disconnected. We rationalize these findings in a frictionless model with multiple goods and recursive preferences featuring a novel and rich risk sharing of vol shocks.

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

Higher debt-to-GDP ratios (i) predict higher excess stock returns with 30% five-year out-of-sample R-squared, (ii) correlate with higher corporate bond excess returns and credit spreads, (iii) are associated with lower real risk-free rates and government debt expected returns. I rationalize these findings in a general equilibrium model featuring time-varying fiscal uncertainty. 

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.


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, SHUFE Conference, UBC Winter Conference.


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

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*, ASU Conference*, Triangle Macro Finance Seminar*, HKU*, Wharton*