Publications
Treasury Bill Shortages and the Pricing of Short-Term Assets, 2024, The Journal of Finance (co-author: Adrien d'Avernas) [internet appendix]
Abstract: We propose a model of post-GFC money markets and monetary policy implementation. In our framework, capital regulation may deter banks from intermediating liquidity derived from holding reserves to shadow banks. Consequently, money markets can be segmented, and the scarcity of Treasury bills available to shadow banks is the main driver of short-term spreads. In this regime, open market operations have an inverse effect on net liquidity provision when swapping ample reserves for scarce T-bills or repos. Our model quantitatively accounts for post-2010 time series for repo rates, T-bill yields, and the Fed's reverse repo facility usage.
Intraday Liquidity and Money Market Dislocations Accepted at Management Science (co-authors: Adrien d'Avernas and Baiyang Han)
Abstract: This paper proposes a new model of monetary policy implementation to account for two key developments: (i) the introduction of intraday liquidity requirements and (ii) the decreasing relevance of the federal funds market in favor of repurchase agreement (repo) markets with nonbank participants. Our paper studies how liquidity requirements prevent banks from arbitraging between the fed funds and repo markets and generate large repo spikes. We propose a simple measure of excess intraday reserves. Consistent with our theory, this metric is close to zero in 2019Q2, when US repo markets experienced a spike of 400 basis points.
Working Papers
Central Bank Balance Sheet and Treasury Market Disruptions [Updated February 2024, Revise & Resubmit at the Journal of Finance ] (co-authors: Adrien d'Avernas and Damon Petersen).
Abstract: This paper studies how Treasury market dynamics depend on adjustments to the cenral bank balance sheet. We introduce a dynamic model of Treasury bonds with traditional and shadow banks. In the model, both Treasury and repo market disruptions arise as a joint consequence of three frictions: (i) balance sheet costs, (ii) intraday reserves requirements, and (iii) imperfect substitutability between repo and bank deposits. Our model highlights the critical role of both sides of the central bank's balance sheet as well as agents' anticipation of shocks and policy interventions in matching observed market dynamics.
The Implications of CIP Deviations for International Capital Flows [Updated September 2024, Revise & Resubmit at the Journal of Finance] (co-authors: Christian Kubitza and Jean-David Sigaux)
Abstract: We study the implications of deviations from covered interest rate parity for international capital flows using novel data covering euro-area derivatives and securities holdings. Consistent with a dynamic model of currency risk hedging, we document that investors’ holdings of USD bonds decrease following a widening in the USD-EUR cross-currency basis (CCB). This effect is driven by investors with larger FX rollover risk and hedging mandates, and it is robust to instrumenting the CCB. These shifts in bond demand significantly affect bond prices. Our findings shed light on a new determinant of international capital flows with important consequences for financial stability.
Discount Factors and Monetary Policy: Evidence from Dual-listed Stock [Updated April 2025, Revise & Resubmit at the Journal of Financial Economics] (co-authors: Minghao Yang and Constantine Yannelis)
Abstract: This paper studies the transmission of monetary policy to the stock market through investors’ discount factors. To isolate this channel, we investigate the effect of monetary policy surprises on the ratio of prices of the same stock listed simultaneously in Hong Kong and Mainland China, thereby controlling for revisions in cash-flow expectations. We find this channel to be strong but asymmetric, with effects being driven by surprise cuts. A 100 basis point surprise cut results in a 30 basis point increase in the ratio of stock prices over five days while hikes do not significantly affect this ratio. Those results are suggestive of significant slow-moving reductions in risk premia following accommodating surprises.
Can Stablecoins be Stable? [Updated January 2024, Revise & Resubmit] (co-authors: Adrien d'Avernas and Vincent Maurin)
Abstract: This paper proposes a framework to analyze the stability of stablecoins -- cryptocurrencies designed to peg their price to a currency. We study the problem of a monopolist platform earning seignorage revenues from issuing stablecoins and characterize equilibrium stablecoin issuance-redemption and pegging dynamics, allowing for various degrees of commitment over the system’s key policy decisions. Because of two-way feedback between the value of the stablecoin and its ability to peg the currency, uncollateralized (pure algorithmic) platforms always admit zero price equilibrium. However, with full commitment, an equilibrium in which the platform maintains the peg also exists. This equilibrium is stable locally but vulnerable to large demand shocks. Without a commitment technology on supply adjustments, a stable solution may still exist if the platform commits to paying an interest rate on stablecoins contingent on its implicit leverage. Collateral and decentralizing stablecoin issuance help stabilize the peg.
How Large Is Too Large? A Risk-Benefit Framework for Quantitative Easing [October 2024] (co-authors: Adrien d'Avernas, Antoine Hubert de Fraisse, and Liming Ning)
Abstract: This work proposes a framework to study the risk-benefit trade-off of quantitative easing (QE) for the consolidated government, integrating the central bank and treasury department. In a simple model with distortionary taxes, nominal frictions, and a zero lower bound, we characterize the optimal size of a QE program as equalizing the marginal benefit from stimulating output to the marginal cost of induced rollover risk for taxpayers. A conservative quantification of this trade-off suggests that QE programs in the US made a positive net present contribution to welfare.
Equilibrium in DeFi Lending Markets [Updated March 2024] (co-authors: Thomas Rivera and Fahad Saleh)
Abstract: We study lending in decentralized finance facilitated by a programmable interest rate rule set by a Protocol for Loanable Funds (PLF). PLFs suffer a disadvantage when compared to traditional lending platforms, given their inability to incorporate off-chain information into the borrowing and lending rates that they set. For this reason, for a pre-determined PLF interest rate function, the DeFi equilibrium is sub-optimal when compared to a competitive lending market equilibrium. We nonetheless show that an optimally designed PLF interest rate function is able to generate equilibrium interest rates, and therefore welfare, that is arbitrarily close to a competitive lending market equilibrium.
Older Working Papers
A Solution Method for Continuous-Time General Equilibrium Models (co-author: Adrien d’Avernas and Damon Petersen) [PYTHON LIBRARY]
Abstract: We propose an algorithm capable of solving in a fast and standardized way a general class of continuous-time asset pricing models, including heterogeneous agent models. These models typically require to solve for a system composed of a Hamilton-Jacobi-Bellman equation for each agent, coupled with a system of algebraic equations. The resolution of such a system of PDEs is a tedious problem as approximation errors tend to amplify and create explosive dynamics. We rely on a Finite-Difference algorithm and show how using a Brocot-Tree decomposition as advocated by Bonnans, and al. (2004) allows for fast and stable convergence in settings with up to two endogenous and stochastic state variables.
Central Banking with Shadow Banks (co-authors: Adrien d'Avernas and Matthieu Darracq Pariès)
Abstract: This paper investigates how the presence of shadow banks affects the ability of central banks to offset a liquidity crisis. We propose an asset pricing model with heterogeneous banks subject to funding risk. While traditional banks have direct access to central bank operations, shadow banks rely on the intermediation of liquidity from traditional banks. In a crisis, this intermediation stops due to lack of collateral and shadow banks are left without lender-of-last-resort. Traditional instruments are not sufficient to fully mitigate the crisis. Opening liquidity facilities to shadow banks and purchasing illiquid assets is then necessary to further boost asset prices and tackle the crisis.