Job Market Paper

Real Consequences of Foreign Exchange Derivatives Hedging
Dissertation Committee: Robert Engle (Co-chair), Philipp Schnabl (Co-chair), Ralph Koijen, Alexi Savov, and Joel Hasbrouck

I exploit a quasi-natural experiment in South Korea to examine the real effects of foreign exchange derivatives (FXD) hedging. By using cross-bank variation in the tightness of an FX regulation designed to discourage risk-taking by financial intermediaries, I show that the regulation caused a decline in the supply of FXD, resulting in a substantial reduction in exports, especially for small firms that relied heavily on FXD hedging. I provide a mechanism involving firms’ costly external financing, as well as their costly switching of banking relationships and banks’ costly equity financing, that explains the empirical findings.

Presentations: NBER IFM Meeting, IMF Macro-Financial Research Conference, WEAI-IBEFA Conference, HEC Paris-CEPR Conference, EFA, Bank of Korea, Australasian Finance and Banking Conference, International Risk Management Conference, Korea University, HKUST, Vanderbilt Owen, Yale SOM, Federal Reserve Bank of New York, Federal Reserve Board, Stockholm School of Economics, Federal Reserve Bank of Chicago, Warwick Business School, U of SC Darla Moore, Oxford Said, Imperial College London, HKU, Federal Reserve Board (Pre-Job Market Conference), SoFiE Seminar ( Video), NYU Stern

Working Papers

Climate Stress Testing (with Robert Engle and Richard Berner)
Climate change could impose systemic risks upon the financial sector, either via disruptions of economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure to test the resilience of financial institutions to climate-related risks. Specifically, we introduce a measure called CRISK, systemic climate risk, which is the expected capital shortfall of a financial institution in a climate stress scenario. We use the measure to study the climate-related risk exposure of large global banks in the collapse in fossil-fuel prices in 2020.

Presentations: ASSA, Paris December Finance Meeting, UN PRI Academic Network Week, OFR Climate Implications for Financial Stability Conference, CEBRA, EFA, International Journal of Central Banking Conference, Cornell University ESG Investing Research Conference, Banco de Portugal Conference on Financial Intermediation, OCC Symposium, ESRB Workshop, NY Fed-Columbia University Conference, University of Oklahoma Energy and Climate Finance Research Conference, Federal Reserve Board, Banque de France Workshop, ESSEC-Amundi Chair Webinar, Federal Reserve Bank of Richmond, Australasian Finance and Banking Conference*, (EC)^2 Conference, European Central Bank, MIT GCFP Conference, Central Bank of Chile Workshop, Federal Reserve Stress Testing Research Conference, Federal Reserve Bank of New York, IFABS Oxford Conference, Green Swan Conference*, EBA EAIA Seminar*, 2nd Annual Volatility and Risk Institute Conference ( Video)
(* presented by co-author)

Deviations from the Law of One Price across Economies (with Jaehoon (Kyle) Jung)
Poster (presented at AFA)

In a model with agents facing constraints heterogeneous across economies, we provide a novel explanation for an understudied yet economically significant deviation from the Law of One Price across FX forward markets. Specifically, we document a substantial divergence between the exchange rate for locally traded forward contracts and contracts with the same maturity traded outside the jurisdiction of countries during the global financial crisis, and that the magnitudes varied across currencies. The model predicts that (1) the basis increases with the shadow costs of constraints across time and increases with the country-specific FX position limit across countries; (2) the shadow cost of each constraint non-linearly increases as the intermediary sector’s relative performance declines below a threshold; and (3) higher shadow cost of the position limit predicts lower future excess return on local-currency denominated assets, as buying local assets relaxes the FX position limit constraint imposed on the intermediaries. We test the model predictions and find consistent evidence in the countries with tight position limits.

Presented at: Columbia GSB Finance Ph.D. Seminar, NYU Stern