Research in International Finance and Macroeconomics

Tails of Foreign Exchange-at-Risk (FEaR) 

I build a model in which speculators unwind carry trades and hedgers fly to relatively liquid U.S. Treasuries during global financial disasters. The net effect of these flows produces an amplified U.S. dollar appreciation against high-yield currencies in disasters and a dampened depreciation, or even an appreciation, against low-yield ones. I verify this prediction by examining deviations from uncovered interest parity (UIP) within a novel quantile-regression framework. In the tail quantiles, I show that interest differentials predict high-yield currencies to suffer depreciations ten times as large as predicted by UIP, while spikes in Treasury liquidity premia meaningfully appreciate the dollar regardless of the U.S. relative interest rate. A complementary analysis of speculators' and hedgers' currency futures positions substantiates my model's mechanism and highlights that hedging agents imbue the U.S. dollar with its unique safe-haven status. 

Marginal Effects along the Distribution of Exchange Rate Dynamics

Granular Banking Flows and Exchange-Rate Dynamics

(with Balduin Bippus and Simon Lloyd)

Using data on the external assets and liabilities of global banks based in the UK, the world's largest centre for international banking, we identify exogenous cross-border banking flows by constructing novel Granular Instrumental Variables. In line with the predictions of a new granular international banking model, we show empirically that cross-border flows have a significant causal impact on exchange rates. A 1% increase in UK-based global banks’ net external US dollar-debt position appreciates the dollar by 2% against sterling. While we estimate that the supply of dollars from abroad is price-elastic, our results suggest that UK-resident global banks' demand for dollars is price-inelastic. Furthermore, we show that the causal effect of banking flows on exchange rates is state dependent, with effects twice as large when banks’ capital ratios are one standard deviation below average. Our findings showcase the importance of banks' risk-bearing capacity for exchange-rate dynamics and, therefore, for insulating their domestic economies from global financial shocks. 

Inelastic UK-Bank Demand and Elastic World Supply of USD

U.S. Risk and Treasury Convenience

(with Giancarlo Corsetti, Simon Lloyd and Emile Marin)

We document that, over the past two decades, investors' assessment of U.S. risk has risen relative to other G.7 economies, driven by expectations of greater long-run (permanent) risk. Analytically, we develop a two-country no-arbitrage framework with a rich maturity structure of bonds and convenience yields, alongside equities, which links carry-trade returns, cross-border convenience yields and relative country risk across maturities. Informed by our model, we empirically construct novel measures of country risk from bond and equity premia that adjust for within-country convenience yields. Taking theory to the data, we find that a perceived increase in U.S. permanent risk is associated with a fall in the convenience yield that Foreign investors attach to long-maturity U.S. Treasuries. Overall, our results suggest that the rise of  U.S. risk and fall in long-maturity U.S. Treasuries convenience yields are two sides of the same coin.

Research in Monetary Economics

Firm Financial Conditions and the Transmission of Monetary Policy 

(with Thiago R.T. Ferreira and John Rogers)

We study how the transmission of monetary policy to firms' investment and credit spreads depends on their financial conditions, finding a major role for their excess bond premia (EBPs), the component of credit spreads in excess of default risk. While monetary policy easing shocks compress credit spreads more for firms with higher ex-ante EBPs, it is lower-EBP firms that invest more. We rationalize these findings using a model with financial frictions in which lower-EBP firms have flatter marginal product of capital curves. We also show empirically that the cross-sectional distribution of firm EBPs determines the aggregate effectiveness of monetary policy.