I am a PhD candidate in Economics at London Business School.
My research fields are macroeconomics, finance, and financial intermediation. I am also interested in cybersecurity and spatial economics.
(This version: August 2020. First Version: March 2020)
I document that concentration in the U.S. markets for consumer, corporate, and mortgage bank loans has increased fourfold since 1980. First, I argue that such consolidation of credit market power can explain many of the major trends in empirical macro-finance. To that end, I develop and calibrate a tractable quantitative model with endogenously variable credit markups, incomplete markets, and bank default. Transition to an equilibrium with high banking concentration can explain 50% of the empirically observed declines in investment, risk premia, and real interest rates. The mechanism behind this result is the credit supply externality: financial intermediaries do not internalize the impact of private margins on aggregate returns and investment demand. Welfare costs of credit market power are large, amounting to 9.1% of lifetime consumption. Size-dependent bank regulation can decentralize constrained-efficient allocations but at a cost of greater default risk due to the endogenous financial competition-stability trade-off. Second, I demonstrate that local credit market power was instrumental for the transmission of housing net worth shocks during the Great Recession. By exploiting within-bank cross-regional variation in weekly changes in branch loan rates over 2007-2009, I provide novel estimates of the credit demand elasticity. The average nationwide elasticity is 1.2, a low value that is consistent with localized monopolistic banking. Spatial heterogeneity in elasticities is correlated with the timing of state-level bank deregulation laws over 1960-1990, suggesting that the quasi-exogenous timing of regulatory shocks lead to the creation of persistent local credit markets. I show that over 2007-2009 regions with high local credit market power experienced significantly weaker small business lending, employment, output and wage growth, and establishment dynamism. Overall, my quantitative and empirical results show that competition and market power in the financial sector are key for our understanding of both trend and transitory macro-financial fluctuations.
Presentations: Junior VMACS Conference, EEA 2020, EFA 2020, AEA 2021, LBS
Granular Credit Risk, with S. Galaasen, R. Juelsrud, and H. Rey
(First Version: September 2019)
We show that idiosyncratic shocks to banks' granular borrowers have a large impact on loan outcomes at all levels of aggregation. The effect is strongly concave, consistent with the payoff structure of the debt contract. Using detailed data on banks' non-interest income, we find that such risks largely go unhedged. Affected banks pass on portfolio-level granular credit shocks to their non-granular corporate clients via reduced loan supply. This leads to a decline in firm investment and an increased probability of bankruptcy. Our empirical strategy employs a novel administrative matched bank-firm dataset from Norway and exploits the heavy tail of the loan size distribution by constructing a Gabaix and Koijen (2020) granular instrumental variable. Our results are useful for calibrating the granularity adjustment in the regulation of credit concentration risk.
Presentations: CEPR Conference on Granularity and Applications, EEA 2020, LBS, Norges Bank, Statistics Norway, Zurich
The Cross-Section of Risk-Taking and Asset Prices, with N. Coimbra and H. Rey
The distribution of institutional investor risk-taking carries significant explanatory power for the cross-section of asset returns. We compute an investor-level Value-at-Risk (VaR) measure - our proxy for ex-ante riskiness - from a structural model with stochastic volatility that we estimate with a particle filter. Our pricing factor - CrossRisk - is then constructed from shocks to the procyclical dispersion of the time-varying VaR distribution. CrossRisk is able to price equity, bond, CDS, options, currency, and commodity market portfolios comparably to numerous single and multi-factor benchmarks. We show that the mechanism behind our results is the extensive margin - dynamic entry and exit of investors into the risky market. A synthetic high minus-low CrossRisk beta pre-sorted equity portfolio built on the full universe of CRSP firms has an annualized returns spread of 5.8%.
Presentations: EFA 2019
WORK IN PROGRESS
Systemic Cyber Risk, with H. Rey and A. Tahoun [Draft Coming Soon]
Presentations: AFA 2021, Video with Wheeler Institute for Business and Development