Research
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
with Riccardo Colacito, Mariano Croce, and Ivan Shaliastovich
Review of Financial Studies, conditionally accepted
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
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.
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, Wharton, ASU Conference, CICF, FIRS, JHU Conference, MFA, SED, Tsinghua Conference, Triangle Macro-Finance Seminar.