Publications (Ordered Chronologically)

Working Papers

Abstract: We present a life cycle view of how systemic risks build during a boom, are realized during the following crisis, and are addressed in the aftermath. We also offer potential explanations of the seemingly irrational behavior by private-sector agents and policy makers. We show how the model applies to three global crises over the last 100 years. We also review research on how systemic risks build and the policy tools to combat these risks, including resolving financially distressed financial institutions and instituting “first lines of defense” to prevent such distress in advance. We conclude with research and policy suggestions.

Abstract: We examine the spillover and direct effects of cross-border bank M&As on the systemic risk of banks in the target’s country. We document that higher cross-border bank M&A activity is associated with higher systemic risk for peer banks, while target banks exhibit a decrease in systemic risk post-merger. The effect is stronger for deals involving large acquirers from developed countries and from countries with weaker regulatory quality than the target’s country. Our data suggest that the channels for these effects are reductions in peer banks’ market value of equity and income diversity and an increase in market value of equity for target banks post-merger relative to the control group. Our findings show destabilizing effects of cross-border bank M&As that stem from improvements in the quality of the target banks that exert pressure on peer banks.

Abstract: Unlike common stocks, ETF failures-to-deliver (FTDs) remain high even after the implementation of SEC rules banning naked shorting and removing market maker exemptions for short sales. We find that ETF-related FTDs are growing at a disproportionately high rate in dollar volume. While the prior literature and SEC rule-making would point to a rise in naked short-selling as a possible explanation for this growth in FTDs, we identify an alternative cause related to the market making activities associated with the ETF creation/redemption process, which we label “operational shorting”. We propose a simple methodology to estimate operational shorting and show that our measure is consistent with the economics behind the mechanism. Examining the market implications of operational shorting, we find that it is associated with improved ETF liquidity but that it is also predictive of market wide indicators of systemic and counterparty risk. In exploring possible mechanisms for that predictive relationship, we find that there is commonality in operational shorting across ETFs with the same lead market maker/authorized participant, suggestive of an increase in counterparty risk.

Abstract: We examine the impact of cross-border bank flows on recipient countries’ systemic risk. Using data on bank flows from 26 source countries to 119 recipient countries, we find that bank flows are associated with improved financial stability (i.e. lower systemic risk) in the recipient country. The impact of bank flows is stronger in recipient countries with weak regulatory quality and fragile banking sectors; weak evidence suggests that the impact is more pronounced when bank flows come from source countries with relatively stronger regulatory quality and more stable banking sectors. In addition, we document that bank flows reduce systemic risk of larger banks, with poor asset quality and more volatile sources of funds. The evidence suggests that bank flows reduce systemic risk by improving banks’ asset quality, efficiency, and reliance on non-traditional revenue sources. Overall, our evidence supports the benign view of regulatory arbitrage in international bank flows.

Abstract: While operational risk is often perceived as largely idiosyncratic and with limited systemic implications, this study documents a significant positive relation between operational risk and systemic risk contribution at large U.S. bank holding companies (BHCs). The relation is driven by high-severity operational risk events. It is more pronounced for systemically important BHCs, closer-to-distress BHCs, and during adverse macroeconomic conditions. We additionally document the specific business lines and types of operational risk that contribute to systemic risk. Overall, our findings provide evidence that operational risk can have consequences spreading beyond specific institutions and pose a threat to overall finnancial system stability.

Abstract: Is bitcoin money? We study the characteristics of bitcoin in the context of its use as money, following the theory of money demand first posited by Keynes (1935). Specifically, we answer three questions. First, is bitcoin used as a transactional currency? Yes. Second, is bitcoin used as a speculative currency? Yes. Third, is bitcoin used in a precautionary sense? No, although there are some weak results in support of this motive. We find this evidence using data on bitcoin returns and volume from 2010-2016, using a principal components analysis framework, supplemented with tests that incorporate specific elements of each component.

  • The Real Effects of Elections on Firms' Growth Opportunities (With Matthew M. Wynter)

Abstract: Across a sample of 49 countries, we show that during the run-up to elections of top-level government officials across the world firms display strikingly negative cumulative abnormal stock returns. We treat these abnormal returns as a proxy for the market-implied impact of the election on firms’ growth opportunities. Using firms’ run-up CARs, we find that firms with growth opportunities that are susceptible to electoral uncertainty perform worse, hold less cash, and invest and hire less than their peers after the election. The findings strongly support theories that identify the political processes as an important factor in firms’ real behaviors.