Published and Accepted Papers

Historical Antisemitism, Ethnic Specialization, and Financial Development

with Francesco D'Acunto and Marcel Prokopczuk

Media Coverage:The Economist, The American Interest, Haaretz, The Marker, Tablet Magazine, La Stampa, Die Welt, Oekonomenstimme, ZU Daily, Journalist's Resource
Review of Economic Studies, accepted for publication
Abstract: For centuries, Jews in Europe have specialization in financial services. At the same time they have been the victims of historical antisemitism on the part of the Christian majority. We find that present-day financial development is lower in German counties where historical antisemitism was higher, compared to otherwise similar counties. Households in counties with high historical antisemitism have similar savings rates but invest less in stocks, hold lower bank deposits, and are less likely to get a mortgage (but not to own a house) after controlling for wealth and a rich set of current and historical covariates. Present-day antisemitism and supply-side forces do not appear to fully explain the results. Present-day households in counties where historical antisemitism was higher express lower trust in finance, but have levels of generalized trust similar to other households.


2016 Barcelona Summer Forum: Towards Sustained Economic Growth, NBER Behavioral Finance Meeting 2014, NBER SI Political Economy 2015, EFA 2015, Miami Behavioral Finance Conference, UBC Summer Finance Conference, SunTrust Finance Conference 2014, European Winter Finance Conference 2015, The European Winter Finance Summit 2015, SED 2015, Midwest Finance Conference 2015.
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Unconventional Fiscal Policy

with Francesco D'Acunto and Daniel Hoang

American Economic Review Papers & Proceedings (2018), 108(5): 519-523.
Abstract: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We provide preliminary evidence for the effectiveness of such policies using changes in value-added tax (VAT) and household survey data for Poland. We find households increased their inflation expectations and willingness to purchase durables before the increase in VAT. Future research has to ensure income, wealth effects, or intratemporal substitution channels cannot explain these results and ideally exploit exogenous variation in VAT in a fixed nominal interest rate environment.
2018 AEA
Other versions: NBER, KIT, SSRN, AER

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Flexible Prices and Leverage

Media Coverage: Chicago Booth Review
Journal of Financial Economics (2018), 129(1): 46-68.
Abstract: The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most flexible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. Sticky-price firms increased leverage more than flexible-price firms following the staggered implementation of bank deregulation across states and over time, which we use in a difference-in-differences strategy. Firms' frequency of price adjustment did not change around the deregulation.


NBER CF 2016, NBER SI Capital Markets and the Economy 2016, 2016 Edinburgh Corporate Finance Conference, 2016 ASU Sonoran Winter Finance Conference, 2016 WFA, Stockholm Corporate Finance Symposium 2016, FIRS 2016 Conference, 2016 Risk Management Conference Mont Tremblant, 2016 Calgary, HEC, McGill Winter Conference, EFA 2015
Other versions: SSRN, CES-ifo, BFI, NBER, JFE

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Cash Flow Duration and the Term Structure of Equity Returns

Colloquium on Financial Markets Best Paper Award
Media Coverage: alpha architect
Journal of Financial Economics (2018), 128(3): 486-503.
Abstract: The term structure of equity returns is downward-sloping: stocks with high cash flow duration earn 1.10% per month lower returns than short-duration stocks in the cross section. I create a measure of cash flow duration at the firm level using balance sheet data to show this novel fact. Factor models can explain only 50% of the return differential, and the difference in returns is three times larger after periods of high investor sentiment. Analysts extrapolate from past earnings growth into the future and predict high returns for high-duration stocks following high-sentiment periods, contrary to ex-post realizations. I use institutional ownership as a proxy for short-sale constraints, and find the negative cross-sectional relationship between cash flow duration and returns is only contained within short-sale constrained stocks.


AFA 2016, 2016 Colloquium on Financial Markets, 2016 Econometric Society European meeting, NBER AP 2015, Colorado Finance Summit 2015, 2015 China International Conference in Finance, 2015 HEC-McGill Winter Finance Workshop, SGF 2013
Other versions: NBER, SSRN, CES-ifo, BFI, JFE
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Are Sticky Prices Costly? Evidence from the Stock Market

Media Coverage: AEA Research Highlight, Econbrowser, The Economist, Economist's View, WCEG, DeLong
American Economic Review (2016), 106(1): 165-199.
Abstract:We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of price adjustment, informational frictions, etc.—are an important factor for nominal price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous price stickiness.


NBER EFG 2013, NBER SI EFG-PD 2013, ESNASM 2013, Barcelona Summer Forum 2013, BU/ Boston Fed Conference 2013, German Economists Abroad Conference 2013.

Other versions: NBER, SSRN, AER

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Conditional Risk Premia in Currency Markets and Other Asset Classes

Winner of the 2013 AQR Insight Award
Media Coverage: AQR Announcement, WSJ, Reuters
Journal of Financial Economics (2014), 114(2): 197-225.
Abstract:The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns, thus offering a unified risk view of these asset classes. In contrast, popular models that have been developed for a specific asset class fail to jointly price other asset classes.


AEA 2012, EFA 2012, EEA 2012, ESNAWM 2013, AQR 2013, NBER AP 2013, Finance Cavalcade 2013, Imperical College FX Conference 2013, 2016 Quantitative Trading Symposium.

Other versions: NBER, CEPR, SSRN, JFE

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American Option Valuation: Implied Calibration of GARCH Pricing--Models

Journal of Futures Markets (2011), 31(10): 971-994.
Abstract:This article analyzes the issue of American option valuation when the underlying exhibits a GARCH-type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation-based methods being considered in previous sudies. The EBT-based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach.


FMA EM 2010

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non-refereed publications

The Effect of Unconventional Fiscal Policy on Consumption Expenditure

Media Coverage: Chicago Booth Review, WSJ
ifo DICE Report (2017), 15(1): 9-11.
Abstract:The Euro area faces zero inflation paired with low economic growth, at a time when the effective lower bound on nominal interest rates and large budget deficits are constraining conventional monetary and fiscal policy. In this article, we discuss the theoretical and empirical evidence on unconventional measures of fiscal policy that increase inflation, spur economic growth, and keep the tax burden on households constant without inducing budget deficits


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Working Papers

Nominal Rigidities and Asset Pricing

UBS Best Conference Paper Prize at the EFA Annual Meeting 2014
2014 EFA Best Doctoral Student Conference Paper Prize
Best Finance PhD Award in Honor of Prof. Greenbaum (Finalist)
Cubist Systematic Strategies PhD Candidate Award for Outstanding Research
Best PhD Student Paper Award, FMA European Conference 2014
revise and resubmit, Journal of Political Economy
Abstract:This paper examines the asset pricing implications of nominal rigidities. Firms that adjust their product prices infrequently earn a return premium of more than 4% per year. Merging unique product-price data at the firm level with stock returns, I document that the premium for sticky-price firms is a robust feature of the data and varies substantially over the business cycle. The premium is not driven by other firm and industry characteristics. Differential exposure to systematic risk fully explains the premium for sticky-price firms.


WFA 2014, NBER SI Impulse and Propagation Mechanisms 2014, NBER SI EFG-PD 2014, SED 2014, EFA 2014, EEA 2014, Duke Conference on Macroeconomics and Finance 2014, CEPR European Summer Symposium in Financial Markets, 5th Ifo Conference on Macroeconomics and Survey Data, Mannheim Macro Conference 2014, Jerusalem Finance Conference 2014, 6th Joint French Macro Workshop, Warwick Frontiers of Finance 2014, FMA Europe 2014, Safe Asset Pricing Workshop 2014, German Economists Abroad Conference 2014, Paris December 2014 Finance Meeting, Annual Meeting of the German Finance Association.
Other versions: SSRN
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Monetary Policy Through Production Networks: Evidence from the Stock Market

revise and resubmit, Econometrica
Abstract: We study the importance of production networks for the transmission of macroeconomic shocks using the stock market reaction to monetary policy shocks as a laboratory. We decompose the overall effect of monetary policy shocks into a direct effect and a network effect and attribute 50 to 85 percent of the overall effect to the network effect. Large network effects are a robust feature of the data, and we document similar patterns in realized cash-flow fundamentals. A simple model with intermediate inputs predicts that the reaction of stock returns to shocks follows a spatial autoregression, which we exploit for our empirical strategy. Our results suggest that production networks are an important mechanism for transmitting aggregate shocks to the real economy.


AEA 2017, NBER ME 2016, NBER SI Impulse and Propagation Mechanisms, 2016 LSE Economic Networks and Finance Conference, Firms in Macroeconomics Conference 2016, SED 2016, 2016 Barcelona Summer Forum: Asset Prices, Finance and Macroeconomics, CEPR Asset Prices and the Macroeconomy Conference, 2016 European Finance Association Annual Meeting, 2016 Texas Finance Festival, 2016 Duke-UNC Asset Pricing Conference, 2016 Adam Smith Asset Pricing Workshop, 2016 Istanbul Conference on Advances in Empirical Macro & Finance, International Conference on Sovereign Bond Markets, Ghent Workshop on Empirical Macroeconomics, 2016 Econometric Society North American Summer Meeting, 2016 European Economic Association Annual Meeting, 2016 University of Washington Summer Finance Conference
Other versions: SSRN, NBER, CES-ifo, BFI
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Dissecting Characteristics Nonparametrically

revise and resubmit, Review of Financial Studies
Abstract: We propose a nonparametric method to study which characteristics provide incremental information for the cross-section of expected returns. We use the adaptive group LASSO to select characteristics and to estimate how they affect expected returns nonparametrically. Our method can handle a large number of characteristics, allows for a flexible functional form, and our implementation is insensitive to outliers. Many of the previously identified return predictors don’t provide incremental information for expected returns, and nonlinearities are important. We study the properties of our method in simulations and find large improvements both in model selection and prediction compared to alternative selection methods.


Booth--EDHEC--RFS Conference on New Methods for the Cross Section, 2017 NBER SI Forecasting and Empirical Methods, 2017 Texas Finance Festival, 2017 Revelstoke Finance Conference, 2016 Santiago Finance Workshop, SFS Finance Cavalcade 2017, FRA Conference 2016, TAU Finance Conference 2016, 2017 Luxembourg Asset Management Summit, 2017 Finance UC Conference, AFA 2018
Other versions: NBER, BFI, CES-ifo, SSRN

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The Effect of Unconventional Fiscal Policy on Consumption Expenditure

Media Coverage: Bloomberg Surveillance, Die Welt, VoxEU, Econbrowser
Abstract: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We exploit a unique natural experiment for an empirical test of the effectiveness of unconventional fiscal policy. To comply with European Union law, the German government announced in November 2005 an unexpected 3-percentage-point increase in value-added tax (VAT), effective in 2007. The shock increased households' inflation expectations during 2006 and actual inflation in 2007. Germans' willingness to purchase durables increased by 34% after the shock, compared to before and to matched households in other European countries not exposed to the VAT shock. Income, wealth effects, or intratemporal substitution cannot explain these results which are, instead, consistent with an intertemporal-substitution channel.


2017 CES-ifo Venice Summer Institute, AEA 2016, New York Fed Workshop on Subjective Expectations, 9th Conference of the International Research Forum on Monetary Policy, NBER ME 2015, 5th Macro Finance Workshop, 2015 Reserve Bank of Australia’s Quantitative Macroeconomics Workshop, Conference on The Price-Stability-Target in the Eurozone and the European Debt Crisis, 2015 Household Economics and Decision-Making Conference Cleveland Fed, 6th Ifo Conference on Macroeconomics and Survey Data, Midwest Macro Meeting 2015, SED 2015, EEA 2015, Bundesbank PHF Workshop, Econometric Society 2015 World Congress, Chicago Junior Macro and Finance meetings, 8th Joint French Macro Workshop, AEA 2018
Other versions: SSRN, CES-ifo, BFI, NBER
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Price Rigidities and the Origins of Aggregate Fluctuations

Abstract: We document a novel role of heterogeneity in price rigidity: It strongly amplifies the capacity of idiosyncratic shocks to drive aggregate fluctuations. Heterogeneity in price rigidity also completely changes the identity of sectors from which fluctuations originate. We show these results both theoretically and empirically through the lens of a multi-sector model featuring heterogeneous GDP shares, input-output linkages, and idiosyncratic productivity shocks. Quantitatively, we calibrate our model to 341 sectors and find sectoral productivity shocks can give rise to aggregate fluctuations that are half as large as those arising from an aggregate productivity shock. Heterogeneous price rigidity amplifies the aggregate fluctuations by a factor of more than 2 relative to a flexible-price or homogeneous sticky price economy. Hence, idiosyncratic shocks and heterogeneous price rigidity can account for large parts of aggregate fluctuations and there is hope we will not "forever remain ignorant of the fundamental causes of economic fluctuations" (Cochrane (1994)).


NBER ME 2017, SED 2016, LSE Workshop on Networks in Macro and Finance 2017, AEA 2018

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The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

Abstract: We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Empirically, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects, whereas heterogeneity in input-output linkages contributes only marginally, with differences in consumption shares in between. Heterogeneity in price rigidity further is key in determining which sectors are the most important contributors to the transmission of monetary shocks, and is necessary but not sufficient to generate realistic output correlations. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks.


AEA 2017, Inflation: Drivers and Dynamics Conference 2016, Annual Inflation Targeting Seminar of the Banco Central do Brasil 2016, 2016 Konstanz Conference on Monetary Theory and Policy, Banque de France Conference on Price Setting and Inflation, EEA 2015, SED 2015


Human Frictions to the Transmission of Economic Policy

with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita

Media Coverage: Fazit - das Wirtschaftsblog

Abstract: Intertemporal substitution is at the heart of modern macroeconomics and finance as well as economic policymaking, but a large fraction of a representative population -- those below the top of the distribution by cognitive abilities (IQ) -- do not change their consumption propensities with their inflation expectations. Low-IQ men are also less than half as sensitive to interest-rate changes when making borrowing decisions. Low-IQ men account for more than 50% of the individuals and 50% of the labor income in our sample, which includes unique merged administrative data on cognitive abilities, economic expectations, and consumption and borrowing plans from Finland. Heterogeneity in education, income, other expectations, and financial constraints do not explain these results. Limited cognitive abilities are human frictions in the transmission and effectiveness of economic policy and inform research on heterogeneous agents in macroeconomics and finance.

CES-ifo Summer Institute: Expectation Formation, CES-ifo Workshop on Subjective Expectations and Probabilities in Economics, CEBRA Annual Meeting, CEPR Household Finance Conference, Cowles Macro Conference, Symposium on Economics and Institutions, the European Central Bank, the EABCN Asset Pricing and Macro Conference, European Midwest Micro/Macro Conference. 
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Monetary Policy Slope and the Stock Market

Media Coverage: Systemic Risk and Systemic Value
Abstract: We construct a slope factor from changes in federal funds futures of different horizons. A positive slope signals faster monetary policy tightening and predicts negative excess returns at the weekly frequency. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters, but macro news does not drive the predictability of slope for future excess returns. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.


AEA 2017, FIRS 2017 Conference, SFS Finance Cavalcade 2017, 2016 European Finance Association Annual Meeting, 2016 Ifo Conference on Macroeconomics and Survey Data, 2017 HEC-McGill Winter Finance Workshop, 2016 European Economic Association Annual Meeting, 2016 Wabash River Conference, 2017 The European Winter Finance Summit, AFA 2018
Other versions: SSRN, CES-ifo, NBER, BFI

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Monetary Momentum

Media Coverage: alpha architect, The NBER Digest, Forbes, Manager Magazin
Abstract: We document a large return drift around monetary policy announcements by the Federal Open Market Committee. Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. Standard return factors and time-series momentum do not span the return drift around FOMC policy decisions. The return drift is a market-wide phenomenon and holds for all industries and many international equity markets. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4.


2017 Colorado Finance Summit, 2017 German Economists Abroad Conference, 2018 MFA
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The Information Content of Dividends: Safer Profits, Not Higher Profits

with Roni Michaely and Stefano Rossi

Media Coverage: WSJ
Abstract: Contrary to the central prediction of signaling models, changes in profits do not empirically follow changes in dividends. We show both theoretically and empirically that dividends signal safer, rather than higher, future profits. Using the Campbell (1991) decomposition, we are able to estimate expected cash flows from data on stock returns. Consistent with our model's predictions, cash flow volatility changes in the opposite direction from that of dividend changes and larger changes in volatility come with larger announcement returns. We find similar results for share repurchases. Crucially, the data support the prediction—unique to our model—that the cost of the signal is foregone investment opportunities. We conclude that payout policy conveys information about future cash flow volatility. Our methodology can be applied more generally to overcoming empirical problems in testing theories of corporate financing.


2017 NBER Corporate Finance, Adam Smith Corporate Finance Conference, the Corporate Finance Conference at Washington University, the Review of Corporate Finance Studies Conference, the 2017 TAU Finance Conference, 2018 Western Finance Association Annual Meeting
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IQ, Expectations, and Choice

with Francesco D'Acunto, Daniel Hoang and Maritta Paloviita

Abstract: We use unique administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), expectations, and consumption-saving choices for a representative population. High-IQ men display 50% lower inflation-forecast errors than other men. High-IQ men, but not others, have consistent inflation expectations over time and their perceptions align with past expectations. High-IQ men are also less likely to round and to report implausible values for numerical inflation expectations, especially when inflation uncertainty is low. In terms of choice, only high-IQ men decrease their saving propensity when expecting higher inflation in line with the consumer Euler equation. High-IQ men are also forward looking and more likely to plan borrowing to invest in human capital. Education levels, income, socio-economic status, or other demographic observables, although important, do not explain fully the variation in expectations and choice by cognitive abilities. Our results have implications for the theory and empirical assessment of heterogeneous-beliefs models.

CES-ifo Summer Institute: Expectation Formation, CES-ifo Workshop on Subjective Expectations and Probabilities in Economics, CEBRA Annual Meeting, CEPR Household Finance Conference, Cowles Macro Conference, Symposium on Economics and Institutions, the European Central Bank, the EABCN Asset Pricing and Macro Conference, European Midwest Micro/Macro Conference. 
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Low Inflation: High Default Risk AND High Equity Valuations

Abstract: We develop an asset-pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model includes two empirically grounded nominal frictions: fixed nominal coupons and sticky profitability. Taken together, these two frictions result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts the negative impact of inflation on real equity values is stronger for low leverage firms. We find empirical support for the model predictions.


2017 Adam Smith Asset Pricing, 2017 HEC-McGill Winter Finance Workshop, 2017 BoC-FRBSF-SFU Conference, 2017 SAFE Asset Pricing Workshop, 2017 Conference on Corporate Policies and Asset Prices, 2017 Society for Economic Dynamics, 2018 Cavalcade, 2018 WFA, 2018 EFA, 2018 NFA
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