Job Market Paper

The Real Consequences of Macroprudential FX Regulations
Dissertation Committee: Robert Engle (Co-chair), Philipp Schnabl (Co-chair), Ralph Koijen, Alexi Savov, and Joel Hasbrouck

I examine the real effects of macroprudential foreign exchange (FX) regulations designed to reduce risk-taking by financial intermediaries. I exploit a natural experiment in South Korea at the bank-level that can be traced through firms. The regulation limits the banks’ ratio of FX derivatives positions to capital. By using cross-bank variation in the tightness of the regulation, I show that the regulation causes a reduction in the supply of FX derivatives. Controlling for hedging demand, I find that exporting firms reduce hedging with constrained banks by 47% relative to unconstrained banks. Further, I show that the reduction in the banks’ supply of hedging instruments results in a substantial decline in firm exports. For a one-standard-deviation increase in a firm’s exposure to the regulation shock transmitted by banks, exports fall by 17.1% for high-hedge firms and rise by 5.7% for low-hedge firms, resulting in a differential effect of 22.8%. Collectively, my results provide causal evidence that regulations aiming to curtail risk-taking behaviors of financial intermediaries can affect the real side of the economy.

Presented at: Federal Reserve Board (Pre-Job Market Conference), SoFiE Seminar ( Video), NYU Stern

Working Papers

Understanding the Onshore versus Offshore Forward Rate Basis: The Role of FX Position Limits and Margin Constraints
Poster (presented at AFA)

During the global financial crisis of 2007–2009, the difference between the exchange rate for locally traded (onshore) forward contracts and contracts with the same maturity traded outside the jurisdiction of countries (offshore) increased significantly, though the magnitudes varied across currencies. This deviation from the law of one price can be explained by two constraints imposed on financial intermediaries: margin constraint and position limit constraint (a leverage-based cap on net open foreign exchange position). In an intermediary-based asset pricing model where intermediaries face both margin constraint and position limit constraint, I show how and when the position limit leads to a gap between onshore and offshore forward rates. The model predicts that (1) the basis increases with the shadow costs of the two constraints across time and increases with the country-specific 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 position limit constraint imposed on the intermediaries. I 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

Work In Progress

Climate Stress Testing (with Robert Engle)
Slides | Draft coming soon
Climate change could lead to a systemic risk to the financial sector in the process of an economy transitioning to less carbon-intensive environment. We develop a stress testing procedure to test the resilience of financial institutions to climate-related risks. The procedure involves three steps. The first step is to measure the climate risk factor by using stranded asset portfolio returns. The second step is to estimate time-varying climate beta of financial institutions using Dynamic Conditional Beta (DCB) model. The third step is to compute the systemic climate risk (CRISK), the capital shortfall of financial institutions in a climate stress scenario. This step is based on the same methodology as SRISK, but the climate factor is added as the second factor. We use this procedure to study large banks in the U.S. and the U.K. in the recent collapse in fossil-fuel prices.

Estimating SRISK for Emerging Markets (with Robert Engle)
The expected capital shortfall of a financial entity conditional on a prolonged market decline, SRISK measure of Brownlees and Engle (2016), is a useful monitor of financial fragility. The key challenge in applying SRISK is that it requires data on the market value of firm equity. However, many of the major financial institutions in Latin America and China are not publicly listed and therefore do not have market data on firm equity. To get a full picture of financial fragility, it is crucial to estimate SRISK for unlisted firms as well. To this end, we estimate SRISK for unlisted Latin American and Chinese financial institutions by examining the relation between accounting data and market data for listed banks and then applying the same relation to unlisted firms.

Presented (by coauthor) at: 53rd Colombian Banking Summit, Volatility Institute at NYU Shanghai Conference

The Cross-section of Stock Price Sensitivity to Macroeconomic News Announcements over the Business Cycle
This paper studies the link between firm characteristics and sensitivities of stock prices to macroeconomic news announcement (MNA) surprises over the business cycle. I find that the stocks with high market beta are more sensitive to MNA surprises, while the relationships between the sensitivity and other characteristics (size, book-to-market ratio, profitability, investment, and momentum) are muted. Furthermore, the relationship between market betas and the sensitivities varies over the business cycle. The sensitivities tend to align with market betas in bad times but not in good times.

Presented at: NYU Stern