London Business School
London NW1 4SA
Institutional Affiliation: University of Pennsylvania
NBER Working Papers and Publications
|August 2019||Risk-Free Interest Rates|
with Jules H. van Binsbergen, William F. Diamond: w26138
We estimate risk-free interest rates unaffected by convenience yields on safe assets. We infer them from risky asset prices without relying on any specific model of risk. We obtain a term structure of convenience yields with maturities up to 2.5 years at a minutely frequency. The convenience yield on treasuries equals about 40 basis points, is larger below 3 months maturity, and quadruples during the financial crisis. In high-frequency event studies, conventional and unconventional monetary stimulus reduce convenience yields, particularly during the crisis. We further study convenience-yield-free CIP deviations, and we show significant bond return predictability related to convenience yields.
|November 2018||Foreseen Risks|
with João F. Gomes, Jessica Wachter: w25277
Large crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.
|August 2017||Cyclical Dispersion in Expected Defaults|
with João F. Gomes, Jessica A. Wachter: w23704
A growing literature shows that credit indicators forecast aggregate real outcomes. While researchers have proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes.
Published: João F Gomes & Marco Grotteria & Jessica A Wachter, 2019. "Cyclical Dispersion in Expected Defaults," The Review of Financial Studies, vol 32(4), pages 1275-1308.