Research

Publications

Bonds vs. Equities: Information for Investment, with Adrien d’Avenas and Andrea L. Eisfeldt [PDF], Journal of Finance (2024)

Abstract: Why do credit spreads explain firm investment better than equity volatility does? In a standard corporate finance setting, this can be explained as a consequence of credit spreads and asset volatility having unambiguous relationships with investment, while equity volatility sends a mixed signal: Elevated volatility raises the option value of equity and increases investment for financially sound firms, but it exacerbates debt overhang and decreases investment for firms close to default. Overall, our study clarifies the structural and empirical relationships between investment, leverage, credit spreads, volatility, and Tobin’s q.

Working Papers

A Macroeconomic Model with Bond Market Liquidity [Draft]

Abstract: This paper studies how corporate bond market liquidity affects the macroeconomy. I develop a dynamic general equilibrium model in which firms roll over long-term bonds traded in over-the-counter secondary markets featuring search and bargaining frictions. A deterioration in secondary-market liquidity lowers bond prices in both secondary and primary markets, reducing firms’ rollover proceeds and pushing them closer to default.  This raises effective labor costs through endogenous working-capital financing and reduces employment. A liquidity shock calibrated to the rise in U.S. corporate bond bid--ask spreads during the Great Recession reduces employment by 1.95 percent, roughly 28 percent of the observed decline.

Beyond the Targeted Segment: Spillovers from Corporate Bond Purchase Programs [Draft][Appendix], with Shihan Shen

Abstract: We study whether and how demand shocks induced by corporate bond purchase programs (CBPP) transmit beyond where they originate. Using institutional features of passive funds, we construct plausibly exogenous firm-level, maturity-specific demand shocks that mirror those generated by CBPP. We show that these shocks reduce yield spreads, primarily through the liquidity-related component, and generate substantial cross-maturity spillovers. We develop a tractable model of segmented OTC trading and show that transmission is stronger when markets are less segmented and when non-targeted bonds are more liquidity-sensitive, with these mechanisms supported by the data.

CBDC and Banks’ Disintermediation in a Portfolio Choice Model, with Lucyna Górnicka, Federico Grinberg, Marcello Miccoli, and Brandon Tan,[PDF] IMF Working Paper

Abstract: Would the introduction of a Central Bank Digital Currency (CBDC) lead to lower bank deposits (disintermediation) and lending by the banking sector? To answer this question, this paper presents a model in which heterogeneous households allocate their wealth among an illiquid asset and payments-capable assets: cash, CBDC, and bank deposits, the last of which is offered by an imperfectly competitive banking sector. Upon the introduction of CBDC, banks raise deposit interest rates to deter substitution from deposits to CBDC. Differently from the previous literature, our findings highlight two divergent effects on the aggregate level of deposits: (1) an intensive margin effect, where wealthier households increase their deposit holdings due to higher interest rates on deposits, and (2) an extensive margin effect where less affluent households transition from bank deposits to CBDC. This second effect is more likely to be stronger and lead to a fall in aggregate deposits when the mass of poorer households is large and when accessing bank accounts is relatively costly. Although the decline in aggregate deposits is small as a share of total wealth, it can have a large impact on banks’ balance sheets and profits. Still, the impact on lending remains modest, provided that banks can resort to alternative funding sources, such as wholesale or central bank financing.