Working Papers

Return Heterogeneity, Information Frictions, and Economic Shocks (Job Market Paper)

This study investigates the effects of information disparities on returns to net worth and their role in amplifying wealth inequality in the wake of big economic shocks. Using a panel of US individuals, I present new evidence that returns among individuals holding similar asset classes are heterogeneous in part because of how those individuals respond to economic shocks. Specifically, I show that individuals whom survey data suggest are better-informed earn significantly higher returns after big uncertainty shocks compared to less well-informed individuals. I investigate a potential channel to explain this outperformance. I show that better-informed wealthy investors hedge themselves better against uncertainty shocks by conducting a market-timing strategy. To interpret these facts, I build a dynamic, stochastic, general equilibrium economy in which individuals with near-rational expectations are heterogeneous in their private signals' quality about future fundamentals. I show that those with more precise information earn higher average returns because they are better equipped to hedge against endogenous uncertainty shocks using a market-timing strategy to exploit their more accurate information about future fundamentals. The model implies that disparities in the quality of information lead to higher wealth inequality.

What Explains the COVID-19 Stock Market? (with Daniel L. Greenwald and Sydney Ludvigson)

What explains stock market behavior in the early weeks of the coronavirus pandemic? Estimates from a dynamic asset pricing model point to wild fluctuations in the pricing of stock market risk, driven by shifts in risk aversion or sentiment. We find further evidence that the Federal Reserve played a role in these fluctuations, via a series of announcements outlining unprecedented steps to provide several trillion dollars in loans to support the economy. As of July 31 of 2020, however, only a tiny fraction of the credit that the central bank announced it stood ready to provide in early April had been extended, reinforcing the conclusion that market movements during COVID-19 have been more reflective of sentiment than substance.


Drivers of the Great Housing Boom-Bust: Credit Conditions, Beliefs, or Both? (with Sydney Ludvigson). Real Estate Economics, 2019.

Two potential driving forces of house price fluctuations are commonly cited: credit conditions and beliefs. We posit some simple empirical calculations using direct measures of credit conditions and beliefs to consider their potentially distinct roles in house price fluctuations at the aggregate level. Changes in credit conditions are positively related to the fraction of riskier nonā€conforming debt in total mortgage lending, while measures of beliefs are unrelated to this ratio. Credit conditions explain quantitatively large magnitudes of the variation in quarterly house price growth and also predict future house price growth. Beliefs bear some relation to contemporaneous house price growth but have little predictive power. A structural VAR analysis implies that exogenous changes in credit conditions have quantitatively important dynamic causal effects on house price changes.

Work in Progress

The Construction of Crises: Time-To-Build and Financial Frictions in Real Estate (with Matias Covarrubias)

We evaluate the contribution of frictions in the supply of capital to the severity of financial crises. In contrast with the traditional focus on frictions on demand for durable goods, we propose a quantitative model for the developers of capital to argue that time-to-build, combined with limited liability in the supply of structures, can explain a sizable part of boom-and-bust dynamics. These frictions amplify downturns through the following mechanism: time-to-build introduces a timing mismatch between supply and demand of durable assets, which implies that developers need to 'time' the cycle in advance. This timing mismatch induces precautionary behavior in developers, but leverage and limited liability in the case of a project's failure reduce such prudential conduct. If a sufficiently adverse shock hits the economy, supply does not adjust in the same fashion, the price of capital falls sharply, and there is a default crisis. We find that if time-to-build is two years instead of one year, the bust in the price of capital in downturns is 60% larger and the drop in output is 40% larger and more persistent.