Treasury Bill Shortages and the Pricing of Short-Term Assets (co-author: Adrien d'Avernas), Forthcoming at The Journal of Finance

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.


Working Papers

Central Bank Balance Sheet and Treasury Market Disruptions (co-authors: Adrien d'Avernas and Damon Petersen). [Updated February 2024]

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. 

Intraday Liquidity and Money Market Dislocation [Updated July 2023, R&R] (co-authors: Adrien d'Avernas and Baiyang Han)

Abstract: This paper investigates the pricing of repurchase agreements (repos) within the new post-crisis regulatory framework. We find that new liquidity regulation prevents banks from using intraday credit provisions from the Fed. As a consequence, reserve-rich banks—rather than the Fedare the marginal provider of liquidity to money markets. In this new regime, intraday liquidity can suddenly become scarce and constrain the supply of repo, leading to sharp increases in repo rates. These spikes in repo rates are more likely when the supply of Treasury debt financed by shadow banks is large and settlement volumes are high. 

Can Stablecoins be Stable? [Updated January 2024] (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.

Discount Factors and Monetary Policy: Evidence from Dual-listed Stock  [Updated March 2024] (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.

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.

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.

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. 

Cross-Currency Basis Risk and International Capital Flows (co-authors: Christian Kubitza and Jean-David Sigaux). old draft available on request; new draft coming soon.

Abstract: We study the effect of frictions in FX derivatives markets on international capital flows. We propose a simple dynamic model in which investors face a maturity mismatch between currency hedging and asset holdings. This mismatch exposes investors to currency hedging rollover risk. Thereby, shocks to residual hedging demand result in both increased deviations from covered interest parity and fire sales of foreign-denominated assets. Using a novel and disaggregated dataset covering the entire euro area, we find strong evidence for these two channels in both the time series and cross-section. We further explore the consequences of FX derivatives frictions for monetary policy and financial stability.


Work in Progress

The Cost of Quantitative Easing: A Consolidated Government Perspective (co-authors: Adrien d'Avernas, Antoine Hubert de Fraisse and Liming Ning)

The Bright Side of Transparency: Evidence from Supervisory Capital Requirements (co-authors: Nordine Abidi, Livia Amato, and Ixart-Miquel Flores).