Research

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 fly to relatively liquid U.S. Treasuries 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

[Latest Version | March 2025] [Bank of England Staff Working Paper #1103 | December 2024] 

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

We use 100 million transactions in the London FX derivatives market to provide the first high-frequency, granular topography of the world’s largest center for currency trading. We construct daily firm-level net FX derivatives exposures to study currency risk management by financial and non-financial firms, document significant within-sector heterogeneity and market concentration of exposures, and examine how the market equilibrates as the macroeconomic environment shifts. Pension and investment funds, insurers, and non-financial corporations use FX derivatives primarily for hedging purposes, with a handful of large dealer banks accommodating these hedging needs. In contrast, hedge funds predominantly utilize FX derivatives to speculate, with trading activity consistent with carry trade, momentum, and macro news investment strategies. Hedgers—especially non-financials—adjust their net exposures in the opposite direction. Dealer banks insulate themselves from these investment strategies by taking offsetting exposures with speculators and hedgers. These facts deepen our understanding of the market at the core of international finance.

Granular Banking Flows and Exchange-Rate Dynamics

[Latest Version | February 2024] [Bank of England Staff Working Paper #1043 | 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.

U.S. Risk and Treasury Convenience 

[New Version | Coming Soon] [NBER Summer Institute Draft | June 2023] 

(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 permanent risk. We develop a two-country, incomplete markets framework with trade in a rich maturity structure of bonds—which earn convenience yields—alongside equities. Our framework links carry-trade returns, cross-border convenience yields and relative country risk across maturities. Building on this, we construct novel empirical measures of country risk from bond and equity premia that adjust for within-country convenience yields. Our results suggest that the rise of U.S. permanent risk and fall in long-maturity U.S. Treasury convenience yields are two sides of the same coin. 

Firm Financial Conditions and the Transmission of Monetary Policy 

[Latest Version | September 2024 ] [Bank of England SWP | September 2024] [Finance and Economics Discussion Series (FEDs) #2023-037 | May 2023]  [Cambridge Working Paper #2316 | February 2023] [CEMLA Conference Draft | April 2022] 

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

We re-examine how financial frictions shape the transmission of monetary policy using firms' excess bond premia (EBPs), the risk premium component of credit spreads. While monetary policy easing shocks compress credit spreads more for higher-EBP (riskier) firms, lower-EBP firms' investment responds more. Further, credit supply shocks replicate monetary policy's heterogeneous effects, whereas credit demand shocks elicit homogeneous firm responses. A model with financial frictions in which lower-EBP firms have flatter marginal benefit curves for capital rationalizes firms' price and quantity reactions to these three shocks. In contrast, previously-examined channels, while complementary, are inconsistent with our more-comprehensive set of empirical moments.

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.