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NBER Household Finance Grant Award (Sloan Foundation) for the project

On the Causes of Ineffectiveness of Monetary Policy: Inability to Refinance vs. Voluntary Deleveraging (with Amir Kermani)

INQUIRE Europe Research Grant for the project

The Unintended Consequences of the Zero-Bound Monetary Policy: Evidence from Money Funds (with Marcin Kacperczyk)

Credit-Induced Boom and Bust (with Amir Kermani) COMING SOON

To be presented at the NBER SI Monetary Economics and Real Estate

Can a credit expansion induce a boom and bust in house prices and real economic activity? This paper exploits the federal preemption of national banks from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. Specifically, we exploit the heterogeneity in the market share of national banks across counties in 2003 and that in state anti-predatory laws to instrument for an outward shift in the supply of credit. First, a comparison between counties in the top and bottom deciles of presence of national banks in states with anti-predatory laws suggests that the preemption regulation produced an 11% increase in annual lending. Our estimates show that to this lending increase is associated with a 12% rise in house prices and a 2% expansion of employment in the non-tradable sectors, followed by drops of similar magnitude in subsequent years. Finally, we show that the increase in the supply of credit reduced mortgage delinquency rates during the boom years but increased them in bust years. These effects are even stronger for subprime and inelastic regions.

Presented at: 16th Annual Texas Finance Festival, Federal Reserve Bank of San Francisco / UCLA Conference on Housing and Monetary Policy*, Summer Real Estate Symposium in Monterrey*.

This paper presents a model in which the investment funds' desire to enhance their reputation is decisive in determining the severity of aggregate shocks. Fund managers can generate active returns at a disutility or try to time the market, while investors learn about the managers' skill by observing past returns. During booms, star funds exploit their status by extracting higher rents from investors, while poor performers may end up in a reputation trap, limiting their ability to attract investment. In a crisis, the funds exploit their reputation more frequently and tend to exacerbate fluctuations insofar as in the search for higher short-term returns they expose investors' capital to tail risk. The model's predictions on the effect of volatility, skewness of returns and inflows of funds, are all supported by recent empirical evidence on fund managers' behavior.

Presented at: 3rd ITAM Finance Conference, Financial Intermediation Research Society 2014, 2014 Annual Meeting of the Financial Management Association*, 9th Csef-Igier Symposium on Economics and Institutions.


Market Turmoil and Destabilizing Speculation NEW VERSION November '13

Supplementary Appendix

This paper explores how speculators can destabilize financial markets by amplifying negative shocks in periods of market turmoil, and confirms the main predictions of the theoretical analysis using data on money market funds (MMFs). I propose a dynamic trading model with two types of investors -- long-term and speculative -- who interact in a market with search frictions. During periods of turmoil created by an uncertainty shock, speculators react to declining asset prices by liquidating their holdings in hopes of buying them back later at a gain, despite the asset's cash flows remaining the same throughout. Interestingly, I show that a reduction in search frictions leads to more severe fluctuations in asset prices. At the root of this result are the strategic complementarities between speculators expected to follow similar strategies in the future. Using a novel dataset on MMFs' portfolio holdings during the European debt crisis, I gauge the strength of funds' strategic interactions as the number of funding relationships each issuer has with MMFs. I show that funds are more likely to liquidate the securities of issuers that have fewer funding relationships with other funds, obliging them to borrow at shorter maturity and higher interest rates.

Working Papers

"Financial Disclosure and Market Transparency with Costly Information Processing" (with Marco Pagano), NEW VERSION October 2013

We study a model where some investors (“hedgers”) are bad at information processing, while others (“speculators”) have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators’ trades more visible to hedgers. As a consequence, issuers will oppose both the disclosure of fundamentals and trading transparency. This is socially ine¢ cient if a large fraction of market
participants are speculators and hedgers have low processing costs.
But in these circumstances, forbidding hedgers’access to the market
may dominate mandatory disclosure.

What drives workers to seek information from their peers? And how does communication affect employee performance? We address these questions using an original panel data set that includes all accesses to an information-sharing platform, together with performance measures of all loan officers at a major commercial bank. This paper makes three contributions. First, we show that skill level differences, job rotation, and differences among branches each affect the demand for information. Moreover, low skill agents benefit the most from consuming others' information. Second, restricting attention to officers who switched branches, we show that they perform on average significantly worse than before the switch, suggesting that job rotation destroys specialized human capital, such as soft information about local borrowers. Third, by instrumenting the demand for information with the exogenous variation arising from differences in social norms among branches, we are able to assess the causal effect of information sharing on performance: a standard deviation increase in information access increases performance by roughly ten percent.

Work in Progress

The Unintended Consequences of the Zero-Bound Policy (with Marcin Kacperczyk)