Senior Fellow in Finance
London School of Economics
Ph.D., Economics, 2006.
A.M., Economics, 2003.
London School of Economics
M.Sc., Econometrics and Mathematical Economics, Distinction, 2001.
B.Sc., Econometrics and Mathematical Economics, First Class Honours, 1999.
Bond Market Clienteles, the Yield Curve and the Optimal Maturity Structure of Government Debt, with Stephane Guibaud and Dimitri Vayanos, Review of Financial Studies 26: 1913-1961, August 2013.
We propose a clientele-based model of the yield curve and optimal maturity structure of government debt. Clienteles are generations of agents at different lifecycle stages in an overlapping-generations economy. An optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing. If agents are more risk-averse than log, then an increase in the long-horizon clientele raises the price and optimal supply of long-term bonds---effects that we also confirm empirically in a panel of OECD countries. Moreover, under the optimal maturity structure catering to clienteles is limited and long-term bonds earn negative expected excess returns.[pdf]
Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt, with Jens Hilscher, Review of Finance 14: 235-262, April 2010. Deutsche Bank Prize in Financial Economics Review of Finance Best Paper Award 2010 (Second Prize).
This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We find that the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. This is robust to instrumenting terms of trade with a country-specific commodity price index. Our measures of country fundamentals have substantial explanatory power, even controlling for global factors and credit ratings. We also estimate default probabilities in a hazard model and find that model implied spreads capture a significant part of the variation in observed spreads out-of-sample. The fit is better for lower credit quality borrowers. [pdf]
Interest Costs and the Optimal Maturity Structure of Government Debt, Economic Journal 118: 477-498, March 2008.
The government faces a trade-off between the benefits of tax smoothing and an associated increase in expected interest costs when choosing its optimal debt portfolio. The article solves for optimal policies in an incomplete markets model where the government uses two debt instruments, long-term and short-term noncontingent nominal bonds. In this setup the basic prescription is to borrow long and invest short even though equilibrium expected interest costs are higher on long-term debt. The resulting welfare gains are close to what the government could achieve with complete markets. Significant welfare gains are possible even in the presence of leverage constraints.
Intergenerational Risksharing and Equilibrium Asset Prices, with John Y. Campbell, Journal of Monetary Economics 54: 2251-2268, November 2007.
In the presence of overlapping generations, a social security system, with contingent taxes and benefits, can affect both asset prices and intergenerational risksharing. In a simple model with two risky factors of production - human capital, owned by the young, and physical capital, owned by all older generations - a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital. Such a system reduces precautionary saving and increases the riskbearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, and lowers the price and risk premium of physical capital.
Appendix for Intergenerational Risksharing and Equilibrium Asset Prices, with John Y. Campbell. [pdf]
Leveraged Financial Intermediation, Default, and the Design of Public Debt.
Few papers in the existing literature model financial intermediaries explicitly in a general equilibrium framework. Those that do either assume an exogenous riskless rate or they imply no defaults of financial intermediaries in equilibrium, or both. In contrast, this paper captures the idea that in a financial crisis, riskless rates fall endogenously due to "flight-to-quality" and that financial intermediaries default with positive probability in the absence of government intervention. The result that the equilibrium riskless rate is procyclical stands in stark contrast to tax smoothing models. It has novel implications for the design of public debt, in particular the optimal maturity structure and the desirability of adding call features to government bonds.