Working Papers

Corporate Debt and Monetary Policy - with Andrea Fabiani and Luigi Falasconi 

We show that a policy rate cut lengthens corporate debt maturity. A 1 standard deviation (10 basis points, b.p.) expansionary interest rate shock raises the share of long-term debt by 87 b.p., explaining about 20% of its variation. Moreover,we show that only large, bond-issuing firms adjust. A simple model combining moral-hazard frictions and yield-seeking investors explains the findings: a policy rate cut boosts demand for long-term debt-securities by yield-seeking investors; large, unconstrained firms accommodate the demand shift by issuing bonds. Further empirical evidence on how corporate bond issuances, stock prices and debt-security holdings by mutual funds react to monetary policy shocks validates our mechanism.

Does Dispersed Sentiment drive Returns, Turnover, and Volatility for Bitcoin? - with Ilja Kantorovitch

We test the theoretical predictions of the differences-of-opinion literature by analyzing the extensive online discussion on Bitcoin to build a time-varying sentiment distribution, defining disagreement as dispersion in sentiment. High disagreement is associated with negative returns, high turnover growth, and high volatility, confirming the theory's predictions. However, we do not find that an increase in disagreement increases the price, which is seemingly at odds with the theoretical prediction of disagreement leading to overpricing. As the theory predicts, the disagreement effect weakens significantly after shorting instruments were introduced at the end of 2017. Our results are economically significant: at the monthly frequency, a one standard deviation increase in disagreement leads to a 9.2 percentage points lower cumulative return over the following eight months, and the adjusted R2 of regressing contemporaneous returns on average sentiment and disagreement is 0.33. 

Heterogeneous Expectations and Stock Market Cycles - with Pau Belda and Adrian Ifrim

We present a model of heterogeneous expectations. In the short run, agents learn about prices with different intensities due to their distinct levels of confidence regarding the signal-to-noise content of price news. Beliefs fluctuate around idiosyncratic means, which set agents’ different views about the asset’s long-run value. The model micro-founds the heterogeneous extrapolation and the persistent and procyclical disagreement present in survey data. The subjective belief system is embedded in an otherwise standard asset pricing framework, which can then quantitatively account for the dynamics of prices and trading. In the model, learning from prices leads to disagreement and trading, which reshuffles the distribution of wealth between lower- and higher-propensity-to-invest agents, affecting aggregate demand and prices. This feedback loop complements the expectations-price spiral typical of models with extrapolation, placing heterogeneity and trading as key drivers of price cycles.

Equity Market Participation, Corporate Leverage Choice, and Constrained Intermediaries - [Draft coming soon, Slides]

With home bias, households’ equity market participation is a key determinant of how much equity firms are able to issue. I explore theoretically and empirically the consequences of constraints to households' equity investment for regulated intermediaries and the corporate capital structure. In cross-country comparison, I document a negative relationship between households' equity participation and corporate leverage, as well as financial sector leverage. I develop a general equilibrium model consistent with these observations: firms optimally choose leverage, trading off interest tax deduction and costly default, while only a subset of households can participate in equity markets directly with the remainder saving via regulated intermediaries. I explore the effects of capital requirement regulation (including Basel-style risk-weighting of corporate equity) on corporate leverage, output, return inequality and financial stability. In the first-best equilibrium the planner invests on the households' behalf into equity, in the second-best equilibrium financial intermediaries hold more equity than in the market solution. Capital regulation that imposes a high risk-weight on equity, pushes the economy even further into equity scarcity, relative to the laissez-faire solution. Therefore, this paper implies that regulators optimally might want to be more lenient towards financial intermediaries that hold corporate equity as assets.