Research
Working Papers
The Present Value of Future Market Power (with Thummim Cho, Marco Grotteria, and Howard Kung) -- (April 2024)
A novel log-linear identity linking a company's market value to expected future markups, output growth, discount rates, and investments within a present-value framework. By distinguishing between realized and expected markups, we establish that: (i) Expected markups account for one-third of the rise in aggregate firm values of U.S. public firms since 1980. (ii) The rise in aggregate expected markups is driven by a reallocation of market share towards high-expected-markup firms and a within-firm rise in expected markups. Mergers have accelerated this trend with expected markups rising post merger. (iii) Expected markups are closely tied to fixed costs and investments, particularly in intangibles. (iv) There is a negative time-series relationship between expected markups and discount rates, but (v) there is a positive cross-sectional link to risk premia after accounting for other risk factors. These five facts can guide the development of macro-finance models.
Upcoming presentations: Young Scholars Finance Consortium (Texas A&M), SFS Cavalcade (co-author presentation), WFA
Long-Horizon Exchange Rate Expectations (with Ian Martin and Liliana Varela) -- (August 2023)
Exchange rate expectations in surveys of financial professionals successfully forecast currency appreciation at the two-year horizon. Expectations are also interpretable, in the sense that three macro-finance variables---the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP---explain most of their variation. There is no ``secret sauce'' in expectations: after controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.
Upcoming presentations: Macrofinance Society Workshop
Income and Inequality under Asymptotically Full Automation (with Philip Bond) -- (February 2024)
We study a minimal model of automation in which labor is asymptotically replaced by capital in all tasks. Heterogeneity in broadly defined financial frictions naturally produces "workers'' and "capitalists.'' If tasks are gross complements and automation progresses sufficiently slowly, asymptotically full automation does not immiserate workers despite endogenously shrinking hours worked. Faster automation, however, lowers workers' consumption growth and output share. The threshold speed of automation separating these outcomes maps to observables, and a first-pass calibration suggests the current speed is below this threshold. For faster automation, redistribution funded by capital taxation serves workers better than deliberately slowing automation.
Positioning Risk -- (January 2024)
Risk profiles of individual assets vary with investor positioning. Hedge-fund positions in currency futures strongly predict exchange rate exposure to equity markets ("betas''). Hedge funds and their intermediary counterparties unwind futures positions with negative equity market shocks. Unwinding in futures translates into spot exchange rate betas only when hedge fund positioning is matched by intermediary counterparties, since hedging by intermediaries between futures and spot positions transmits demand shocks from futures to spot markets. The link is strongest when hedge funds have built short dollar positions, such that unwinding implies "scrambling for dollars''.
Sovereign Bond Restructuring: Commitment vs Flexibility (with Jason R. Donaldson and Giorgia Piacentino) -- (January 2024)
Sovereigns in distress often engage in bond restructuring. Does the commitment not to restructure one class of bonds benefit that class? Does it benefit other classes too? Evidence from a landmark UK High Court ruling and the Argentine restructuring saga suggests the answers are yes and yes.
Published and Accepted Papers
Scale or Yield? A Present-Value Identity (with Thummim Cho, Dongryeol Lee, and Christopher Polk), Review of Financial Studies (2024), 37:3:950-988
A new loglinear present-value identity decomposing market-to-book into investment ("scale"), profitability ("yield"), and discount rates. New insights: (i) investment (growth options) rather than profitability is an increasingly important driver of valuation differences between value and growth firms. (ii) Return predictability has a mirror-image in firm fundamentals which can help inform explanations of predictability. (iii) Using variation in investment to account for future cash-flow growth improves time-series predictability of the value premium and rationalizes recent HML underperformance.
Best Paper, 8th Melbourne Asset Pricing Meeting, 2021.
Currency Redenomination Risk, Journal of Financial and Quantitative Analysis (forthcoming)
Hypothetical eurozone exits or a eurozone breakup expose sovereign bondholders to non-euro currency risk in the form of new national numeraires. This risk can be positive (a specific type of credit risk) or negative (a specific type of 'convenience yield'). Countries with strong 'shadow currencies' earn breakup-insurance premia via convenience yields.
Best Job Market Paper, 1st LTI Asset Pricing Conference, Collegio Carlo Alberto (Turin), 2018.
The Quanto Theory of Exchange Rates (with Ian Martin), American Economic Review (2019), 109:3:810-843
Internet Appendix Slides Erratum
A new identity that relates expected exchange rate appreciation to a risk-neutral covariance term. Forward-looking, risk-neutral covariances with equity markets can be extracted from the prices of quanto index contracts. The quanto forecast variable predicts currency appreciation and excess returns in and out of sample.
Best Paper Award, Annual Conference in International Finance 2017,
SIX Best Paper Award, Annual Conference of the Swiss Society for Financial Market Research, 2018,
Runner-up, Best Conference Paper, Vienna Symposium on FX Markets 2018.
Photo credit: Cuemacro