A Preferred-Habitat Model of the Term Structure of Interest Rates,
Econometrica, 2021, 89, 77-112.
(With Jean-Luc Vila)
Investors with preferences for specific maturities trade with risk-averse arbitrageurs.
Implications for the transmission of monetary policy to long rates, for the relationship between bond risk
premia and term-structure slope, and for the effects of bond demand on the term structure.
Financial Markets where Traders Neglect the Informational Content of Prices,
Journal of Finance,
2019, 74, 371-399.
(With
Erik Eyster and
Matthew Rabin)
Market equilibrium when traders are "cursed," failing to fully infer others' information from prices. Cursedness has
different implications, especially for trading volume, than traders inferring others' information but dismissing it as noisier than their own.
The Dynamics of Financially Constrained Arbitrage,
Journal of Finance,
2018, 73, 1713-1750.
(With
Denis Gromb)
The dynamics of expected returns and arbitrageur positions in a cross-section of relative-value trades. Expected
returns increase with volatility and convergence horizon. Positions decrease with horizon but increase with hedgeable volatility.
ESBies: Safety in the Tranches,
Economic Policy,
2017, 32, 175-220, lead article.
(With
Markus Brunnermeier,
Sam Langfield,
Marco Pagano,
Ricardo Reis, and
Stijn Van Nieuwerburgh)
Numerical simulations, theoretical modelling, and ideas for practical implementation of our
earlier policy proposal on European Safe Bonds (ESBies).
In the Press:
Bloomberg 08/11/2016.
Bond Supply and Excess Bond Returns,
Review of Financial Studies,
2014, 27, 663-713, lead article.
(With
Robin Greenwood)
Larger dollar duration of government debt predicts, theoretically and empirically,
higher excess returns of long- over short-term bonds, especially when arbitrageur
risk aversion is high.
Bond Market Clienteles, the Yield Curve and the Optimal Maturity Structure of Government Debt,
Review of Financial Studies,
2013, 26, 1914-1961.
(With
Stephane Guibaud and
Yves Nosbusch)
A welfare-maximizing government should cater the maturity structure of its debt to the mix of
investor clienteles. In doing so, it reduces but does not minimize expected interest costs.
In the Press:
Economist 20/04/2019.
An Institutional Theory of Momentum and Reversal,
Review of Financial Studies,
2013, 26, 1087-1145, lead article.
(With
Paul Woolley)
Non-Technical Summary
Fund flows generate momentum, reversal, amplification, comovement and lead-lag effects.
Larger effects for high idiosyncratic-risk assets. Sizeable Sharpe ratios of momentum and value in a calibration.
In the Press:
Economist 20/11/2008,
Financial Times 31/08/2009,
VoxEU 05/10/2009,
Economist 07/12/2013.
Liquidity and Asset Prices under Asymmetric Information and Imperfect Competition,
Review of Financial Studies,
2012, 25, 1339-1365, lead article.
(With
Jiang Wang)
Previously circulated under the title:
Liquidity and Asset Prices: A Unified Framework.
Asymmetric information raises expected asset returns, while imperfect competition
can lower them. Both frictions can move common measures of illiquidity in opposite directions.
The previous version studies also the effects of participation costs, transaction costs,
leverage constraints, and search frictions.
The Gambler's and Hot-Hand Fallacies: Theory and Applications,
Review of Economic Studies,
2010, 77, 730-778.
(With
Matthew Rabin)
People's belief that luck should balance out in small samples (gambler's
fallacy) causes them to also believe that long streaks of similar outcomes are overly likely
to continue (hot-hand fallacy).
Strong-Form Efficiency with Monopolistic Insiders,
Review of Financial Studies,
2008, 21, 2275-2306.
(With Minh Chau)
Previously circulated under the title: Positive Profits when Prices are Strongly Efficient.
A monopolistic insider who receives a smooth flow of private information
reveals it infinitely fast in continuous time, and yet earns positive profits.
A Search-Based Theory of the On-the-Run Phenomenon,
Journal of Finance,
2008, 63, 1361-1398.
(With
Pierre-Olivier Weill)
Appendix
Short-sellers concentrate into one asset because of its higher liquidity
relative to an identical-payoff counterpart. This causes the higher liquidity, as well
as repo specialness and a price premium.
Search and Endogenous Concentration of Liquidity in Asset Markets,
Journal of Economic Theory,
2007, 136, 66-104.
(With
Tan Wang)
High-turnover investors concentrate into one asset because of its higher
liquidity relative to an identical-payoff counterpart. This causes the higher liquidity
as well as a price premium.
Persuasion Bias, Social Influence, and Uni-Dimensional Opinions,
Quarterly Journal of Economics,
2003, 118, 909-968.
(With
Peter DeMarzo and
Jeff Zwiebel)
Belief dynamics in a social network when agents fail to adjust for
repetitions of information. Agents' influence depends on network position rather than
information accuracy, and their position ("left-right") on one issue predicts
perfectly that on all other issues.
The Decentralization of Information Processing in the Presence of Interactions,
Review of Economic Studies,
2003, 70, 667-695.
Appendix
Optimal decentralization of portfolio selection. This setting captures two
broader features of information processing in organizations: aggregation entails loss of
useful information, and agents' decision problems interact.
Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs,
Journal of Financial Economics,
2002, 66, 361-407.
(With
Denis Gromb)
Market liquidity increases in the capital of margin-constrained arbitrageurs.
Arbitrageurs can take too much risk, not internalizing that their fire sales tighten
margin constraints of other arbitrageurs.
Strategic Trading in a Dynamic Noisy Market,
Journal of Finance,
2001, 56, 131-171.
Appendix
Risk-sharing between a large investor and competitive market-makers occurs quickly
following a preference shock, but slows down as market makers learn about the shock. Noise traders
slow down learning.
Equilibrium Interest Rate and Liquidity Premium With Transaction
Costs,
Economic Theory,
1999, 13, 509-539, lead article.
(With Jean-Luc Vila)
Equilibrium prices of two riskless assets, one liquid and one carrying
transaction costs, in continuous-time OLG model. Price differential (liqudity premium)
decreases with relative supply of liquid asset.
Strategic Trading and Welfare in a Dynamic Market,
Review of Economic Studies,
1999, 66, 219-254, lead article.
Risk-sharing between N large investors who experience continuous and
privately-observed preference shocks occurs slowly even in the continuous-time limit. The
market converges to efficiency at the rate 1/N,
and not 1/N2 as in static models.
Transaction Costs and Asset Prices: A Dynamic Equilibrium Model,
Review of Financial Studies,
1998, 11, 1-58, lead article.
Equilibrium asset prices with transaction costs in continuous-time OLG model
with CARA agents and multiple risky assets. Transaction costs can raise prices and can
have weaker effects on more highly-traded assets.
Supply and Demand and the Term Structure of Interest Rates,
Annual Review of Financial Economics, forthcoming.
(With
Robin Greenwood and
Sam Hanson)
Survey of theoretical and empirical work on how supply and demand affect the term
structure of interest rates. The survey is organized around the
Vayanos-Vila model. Extensions within default-free bonds and
to other asset classes are presented.
Asset Management as Creator of Market Inefficiency,
Atlantic Economic Journal,
2023, 51, 1-11, Presidential Address to the International Atlantic Economic Society.
(With
Paul Woolley)
Frictions in asset management generate violations of efficient markets such as momentum,
value and risk-return inversion. Benchmarked investors with tight tracking errors are generating
the momentum and losing from it.
The Greek Economic Crisis and the Banks, requested by the
DNB-Riksbank-Bundesbank Macroprudential Conference.
(With
Gikas Hardouvelis)
Case study of the Greek economic crisis focusing on the banking system. Illustration of the
bank-sovereign loop's destructive effects and of the trade-offs in recapitalizing weak banks when fiscal
resources are severely limited.
A Restart Procedure to Deal with Covid-19,
in Simeon Djankov and Ugo Panizza, eds.: Covid-19 in Developing Economies, 2020, CEPR eBook.
(With
Cynthia Balloch,
Simeon Djankov, and
Juanita Gonzalez-Uribe)
Proposal to address debt overhang generated by Covid-19. Write-down of government claims
on distressed firms conditional on comparable write-down agreed by the firms' private creditors.
The Analytics of the Greek Crisis,
NBER Macroeconomics Annual,
2017, 31, 1-81.
(With
Pierre-Olivier Gourinchas and
Thomas Philippon)
The Greek crisis through the lens of a DGSE model. Fiscal consolidation accounted for
half of the output drop, and the sudden stop for much of the rest. Slow price adjustment
and NPL resolution account for the slow recovery.
Forward Guidance in the Yield Curve: Short Rates versus Bond Supply,
in Elias Albagli, Diego Saravia, and Michael Woodford, eds.: Monetary Policy Through Asset
Markets: Lessons from Unconventional Measures and Implications for an Integrated
World, 2016, Chapter 2, Central Bank of Chile.
(With
Robin Greenwood and
Sam Hanson)
Central-bank announcements about supply have a hump-shaped effect on the yield curve if they are
expected to be undone in the near future but a possibly increasing effect otherwise. Effect operates through risk premia.
The Sovereign-Bank Diabolic Loop and ESBies,
American Economic Review, P&P,
2016, 108, 508-512.
(With
Markus Brunnermeier,
Luis Garicano,
Philip Lane,
Marco Pagano,
Ricardo Reis,
Tano Santos,
David Thesmar, and
Stijn Van Nieuwerburgh)
A model that develops our earlier policy proposal on European Safe Bonds. ESBies break the sovereign-bank loop,
increase the amount of safe assets available to banks, and unlike Eurobonds preserve market discipline for sovereigns.
In the Press:
Wall Street Journal 27/09/2011.
Introduction to Financial Economics,
Journal of Economic Theory,
2014, 149, 1-14.
(With Franklin Allen and
Xavier Vives)
Introduction to a special issue of JET on financial economics, surveying recent developments in the field.
Market Liquidity: Theory and Empirical Evidence,
in George Constantinides, Milton Harris, and Rene Stulz, eds.:
Handbook of the Economics of Finance,
2013, Chapter 19.
(With
Jiang Wang)
Survey of theoretical and empirical work on market liquidity, based on a unified model. How to measure
illiquidity, how illiquidity relates to underlying market imperfections, and how it affects asset returns.
Theories of Liquidity,
Foundations and Trends in Finance,
2012, 6, 221-317.
(With
Jiang Wang)
Survey of theoretical work on market liquidity. Relative to the Handbook survey (above), there
is no discussion of empirical work but the unified model is analyzed in greater depth.
Quantitative Easing and Unconventional Monetary Policy -- An Introduction,
The Economic Journal,
2012, 122, F271-F288.
(With Michael Joyce,
David Myles and
Andrew Scott)
Introduction to a special issue of EJ on quantitative easing, surveying the relevant theory
and empirical evidence.
Limits of Arbitrage: The State of the Theory,
Annual Review of Financial Economics,
2010, 2, 251-275.
(With
Denis Gromb)
Survey of theoretical work on the limits of arbitrage. Research in this area is evolving
into a broader agenda emphasizing the role of financial institutions for asset prices.
In the Press:
VoxEU 10/04/2010, A version in French, in "La Jaune et La Rouge,"
the magazine of the alumni of Ecole Polytechnique,
Insead Knowledge 09/11/2010.
Price Pressure in the Government Bond Market,
American Economic Review, P&P,
2010, 585-590.
(With
Robin Greenwood)
Two case studies where shocks to institutional demand and supply for bonds affected the term
structure: UK pension reform of 2004 and US Treasury buybacks of 2000-2002.
A Model of Financial Market Liquidity Based on Intermediary Capital,
Journal of the European Economic Association, P&P,
2010, 456-466.
(With
Denis Gromb)
Two-period version of "Equilibrium and Welfare in Markets with Financially Constrained
Arbitrageurs" -- with new results on when arbitrage stabilizes or destabilizes prices.
The Impact of Green Investors on Stock Prices.
(With
Gong Cheng,
Eric Jondeau and
Benoit Mojon)
Equilibrium stock prices with green investors, tracking an index that gradually excludes brown
firms, passive investors and active investors. Large price impact of green investors, both upon the index's
formation and during the exclusion phase.
Long-Horizon Investing in a Non-CAPM World.
(With
Christopher Polk and
Paul Woolley)
Previously circulated under the title: A Theoretical Analysis of Value and Momentum Strategies.
Portfolio choice in a model where value and momentum anomalies arise because fund flows
chase past performance. Sharpe ratios, correlations and predictor variables of value and momentum returns
change significantly with investor horizon.
Risk Limits as Optimal Contracts.
Optimal contracts between investors and asset managers involve risk limits. Inducing
managers to acquire information generates incentives for risk-taking.
Fund Flows and Asset Prices: A Baseline Model.
(With
Paul Woolley)
Two-period version of Vayanos-Woolley (RFS 2013), with new results on
how index re-balancings affect price levels and comovement.
A Growth Strategy for the Greek Economy, 2023, CEPR eBook.
(With
Christopher Pissarides,
Costas Meghir and
Nikolaos Vettas)
The
Greek-language version of this report was prepared at the request of the Greek government in 2020.
In the Press:
VoxEU 04/12/2023, and many hundreds of articles and references to the report in the Greek and international press.
Beyond Austerity: Reforming the Greek Economy, 2017, MIT Press.
Table of Contents
(With
Costas Meghir,
Christopher Pissarides and
Nikolaos Vettas)
Greek edition by Crete University Press.