Publications

In Sickness and in Debt: The COVID-19 Impact on Sovereign Credit Risk

(with Patrick Augustin, Marti G. Subrahmanyam and Davide Tomio) Journal of Financial Economics (2022)

Media

Short Selling Equity Exchange Traded Funds and its Effect on Stock Market Liquidity

(with Egle Karmaziene) Journal of Financial and Quantitative Analysis (2022)

Media and industry coverage

How Sovereign is Sovereign Credit Risk? Global Prices, Local Quantities

(with Patrick Augustin, Marti G. Subrahmanyam and Davide Tomio) Journal of Monetary Economics (2022)

 

 

working papers

Hedge Funds and Prime Broker Risk

(with Magnus Dahlquist Simon Rottke, and Erik Sverdrup)
We show that large adverse shocks to an individual prime broker only impact the performance of hedge funds using the affected broker exclusively, highlighting the diversifiability of idiosyncratic shocks. Conversely, we find systematic financial intermediary risk a significant determinant in the cross-section of hedge fund returns. Moreover, the average hedge fund's exposure to this risk exceeds the aggregate risk of its holdings. This incremental exposure is asymmetric, driven solely by negative intermediary shocks. In contrast, mutual funds and other risk factors show no similar effect. Our findings underscore the unique risks of hedge funds due to their prime brokerage dependencies.

Internet Appendix for Hedge Funds and Prime Broker Risk

PRESENTED AT: Annual Hedge Fund and Private Equity Research Conference, Australasian Finance and Banking Conference, EFA, HEC Montreal, London School of Economics, Luxembourg Asset Management Summit, Laval University, London School of Economics, MFA, SAFE Asset Pricing Workshop, Syracuse University, TBEAR Network Asset Pricing Workshop, University of Alberta, University of Connecticut, University of Geneva, Young Scholars Finance Consortium (scheduled).

Media

Commodity Prices and Currencies

(with Alexandre Jeanneret))
We introduce an empirical approach to identify commodity currencies as those with significant commodity price exposure. This categorization aligns with the importance of a country's commodity sector across multiple dimensions. Studying these currencies, we find that monthly changes in a country's commodity export prices predict its exchange rate, especially when uncertainty is high. This predictability extends to the carry trade and is driven exclusively by investments in commodity-exposed currencies. These results hold out-of-sample, surpassing the random walk benchmark, particularly for emerging currencies. We explain our findings using a model incorporating heterogeneous beliefs among agents regarding the informativeness of news.

PRESENTED AT: 2021 Vienna Symposium on Foreign Exchange Markets, 2023 Frontiers in Finance Conference, 10th FIRN Annual Conference, 34th Australasian Finance and Banking Conference, HEC Montreal, MFA 2024.

Benchmark Currency Stochastic Discount Factors

(with Piotr Orlowski and Erik Sverdrup)
We examine the pricing performance of out-of-sample pricing factors in the broad cross-section of currency returns. To this end, we develop a methodology for estimating empirical minimum-entropy stochastic discount factors (SDFs) under economically-motivated constraints on position leverage. Our empirical SDFs deliver superior out-of-sample fit and smaller pricing errors than existing factor models in the cross-section of currency portfolio returns, and are priced in individual currency and hedge fund cross-sections. After transaction costs, an investable SDF portfolio delivers a Sharpe ratio of around 0.8 and positively skewed returns. These empirical SDFs offer tractable benchmarks for candidate currency pricing models.

PRESENTED AT: HEC Montreal, Vienna Symposium on Foreign Exchange Markets, EFA 2022, MFA 2022, China International Conference in Finance 2022, 2022 North American Summer Meeting of the Econometric Society.

Social Premiums

((with Hoa Briscoe-Tran, Reem Elabd, and Iwan Meier)
While there is extensive research on governance (G) and a growing focus on environmental (E) issues, the social dimension (S) of ESG investing is still underscrutinized. Using the MSCI social scores, we find that the two main components of a firm's social score, human capital and product safety, command statistically significant (yet opposing) return premiums in the cross-section of US stocks. Specifically, stocks with a high human capital score earn higher returns, and stocks with a high product safety score earn lower returns. Consequently, the aggregate social score commands no premium as the opposing effects of its components neutralize each other. Our findings challenge the common ESG investing approach of amalgamating factors without considering their distinct, potentially contradictory, risk and return implications.

Crowds, Crashes, and the Carry Trade

Currency carry trades exhibit sudden and extreme losses. A popular explanation is that these losses are to some extent driven by leveraged carry trade speculators amplifying negative shocks through forced unwinding of their positions. A testable implication is that the likelihood and intensity of large carry trade losses (crashes) increases with the level of carry trade activity (crowdedness). To test it, I develop a measure of crowdedness based on daily abnormal currency return correlation among the target currencies. This measure is related to other indicators of FX market activity. I show that between 40% and 50% of the largest carry trade losses occur in periods of high crowdedness. I further demonstrate that high levels of crowdedness double the probability of realizing an extreme carry trade loss after controlling for FX volatility, FX liquidity, equity volatility and funding liquidity. The level of crowdedness amplifies negative carry trade returns and has no effect on the positive ones. The results hold at multiple time horizons.  

PRESENTED AT: Aalto University, Amsterdam Business School, BI Norwegian Business School, EFA 2018, FMA 2018, HEC Montréal,  Lund University, NFA 2017, Norwegian School of Economics, Nova School of Business and Economics, Stockholm Business School, Stockholm School of Economics, Universidad Carlos III de Madrid, University of Georgia, University of Gothenburg, University of Münster University of Texas at Dallas, Vienna Symposium on Foreign Exchange Markets, Vrije Universiteit Amsterdam, Warwick Business School.

Work in Progress