Research

International Finance

Tails of Foreign Exchange-at-Risk (FEaR)

[New Version | Coming Soon] [Cambridge Working Paper #2343 | June 2023] [Cambridge CERF Paper | May 2021]

The U.S. dollar tends to appreciate more against high-yield currencies during periods of global financial stress than it depreciates against low-yield ones. Using a novel quantile-regression setup, I show that while left-tail depreciations of high-yield currencies are predicted to be ten times greater than interest differentials, spikes in Treasury liquidity premia meaningfully appreciate the dollar regardless of the U.S. relative interest rate. I rationalize these results using a model in which speculators unwind carry trades and hedgers unwind their dollar hedges during global financial disasters. The dynamics of speculators' and hedgers' currency futures positions around disasters match those of my model, which highlights that hedging agents imbue the U.S. dollar with its unique safe-haven status.

Topography of the FX Derivatives Market: A View from London

[CEPR Discussion Paper | December 2025] [NBER SI Draft | July 2025] [Bank of England SWP | December 2024]

(with Sinem Hacioglu-Hoke, Hélène Rey, Adrien Rousset Planat, Vania Stavrakeva, Jenny Tang)

Drawing on 100 million transactions, we show how speculators, hedgers, and market makers interact in the world’s largest FX derivatives market, and that these derivatives activities affect exchange rates. Firms in the largest client sectors---pension and investment funds, insurers, and non-financials---use FX derivatives primarily to hedge currency risk, with dealer banks providing the liquidity. Hedge funds, with comparatively smaller net exposures, trade speculatively, while dealer banks insulate themselves from changes in speculative demand by taking offsetting positions with hedgers, especially non-financials. Non-bank market makers, instead, hold residual exchange-rate risk ``on-the-margin". Hedge funds' speculative flows help transmit monetary policy shocks to exchange rates, while investment funds' unwinding of hedges contribute to dollar appreciations when credit risk rises. Our results highlight that exchange rate dynamics depend on the composition of trading activities in FX derivatives markets.

Investment Strategies and Changes in Selected Firms’ EUR-USD Derivatives Exposure

Granular Banking Flows and Exchange-Rate Dynamics

[Latest Version | February 2024] [Bank of England SWP | September 2023] [Cambridge Working Paper #2359 | September 2023]

(with Balduin Bippus and Simon Lloyd)

We identify exogenous granular financial shocks in currency markets using data on the external positions of global banks resident in world's largest cross-border banking centre, the UK. Using a granular international banking model to guide our empirics, we show that large banks' idiosyncratic demand-flows disproportionately influence exchange-rate dynamics. Empirically, we find that while the supply of US dollars from banks' counterparties is price-elastic, UK-resident global banks' dollar demand is price-inelastic, due to their more-limited risk-bearing capacities. Overall, banks' inelastic demand implies they price most of the exchange-rate response to capital flows, making them `marginal' investors in currency markets.

Inelastic UK Bank Demand and Elastic ROW `Fund' Supply of USD

U.S. Risk and Treasury Convenience

[CEPR Discussion Paper | September 2025] [NBER SI Draft | June 2023]

(with Giancarlo Corsetti, Simon Lloyd and Emile Marin)

We document a rise in investors’ assessment of U.S. risk relative to other G.7 economies since the late 1990s, driven by higher permanent risk but not reflected in currency returns. Using a two-country framework with trade in a rich maturity structure of bonds which earn convenience yields, alongside risky assets and currencies, we establish an equilibrium relationship between cross-border convenience yields, relative country risk and carry-trade returns. Empirically, we identify a cointegrating relationship between relative permanent risk and long-maturity convenience yields. Counterfactual experiments show rising relative permanent risk explains around one-third of declining long-maturity convenience yields over 2002-2006 and 2010-2014.

Trading Blows: The Exchange-Rate Response to Tariffs and Retaliations

(with Simon Lloyd and Giancarlo Corsetti)

This paper provides econometric evidence on how exchange rates respond to tariffs. We construct a new tariff-shock database, which captures tariff-related announcements, threats and implementations by the U.S., China, the Euro Area and Canada between 2018 and 2020, and in 2025. Our shock measure accounts for both the size of tariff rates and their economic relevance. Over the 2018-2020 period, we show that exchange rates reacted to U.S. tariff shocks in systematically different ways depending on retaliation: the U.S. dollar (USD) appreciated if the tariff was imposed unilaterally, but depreciated if other countries threatened to retaliate. In 2025, when nearly all U.S. tariff actions were met with retaliatory threats, the USD again depreciated. In contrast to 2018-2020, however, long-maturity U.S. Treasury yields rose in 2025, instead of fell—consistent with an interpretation of ‘Liberation Day’ as a reserve-currency shock. This may reflect that U.S. tariff actions in 2025 were significantly larger, more frequent and targeted a broader set of countries.

Monetary Economics

Firm Risk Premia and Monetary Policy Transmission

(with Thiago R.T. Ferreira)

We examine how the transmission of monetary policy to firm-level investment depends firms' financial conditions, as measured by their excess bond premia (EBP), the risk premium component of their credit spreads. We first show that firm-specific EBPs compensate investors for the cyclicality of firms’ default risk, with lower-EBP firms' default risk covarying less with aggregate risk. Next, we find that monetary policy easing shocks compress credit spreads more for higher-EBP firms, whereas lower-EBP firms increase their investment by more. Firms’ responses to credit supply shocks display the same pattern of heterogeneity. We rationalize these price and quantity responses with a model in which firms' EBPs arise endogenously from the combination of firm-specific default-risk cyclicalities and aggregate financial intermediary balance-sheet constraints. From micro to macro, we show that the cross-sectional distribution of firms' EBPs shapes the aggregate potency of monetary policy.

The Asymmetric Effects of Quantitative Tightening and Easing on Financial Markets

Economics Letters (2024)

[DOI] [Final Manuscript | May 2024]

(with Simon Lloyd)

We study the asymmetric impact of US quantitative tightening (QT) and easing (QE) on financial markets using high-frequency large-scale asset purchase surprises around FOMC announcements. We document that QT surprises since 2017 had larger and more persistent effects on US Treasury yields than QE surprises. Using numerous empirical decompositions of bond yields, we show that this asymmetry arises from the differential effect of QT vs. QE surprises on expectations of future short-term rates (linked to the so-called signalling channel) at shorter maturities.

Page updated

Google Sites

Report abuse