Working Papers
The Market for Sharing Interest Rate Risk: Quantities and Asset Prices (first version: April 2023) – with Umang Khetan (University of Iowa), Jane Li (Columbia Business School) and Ishita Sen (Harvard Business School)
We study interest rate risk sharing across the financial system using novel data on cross-sector interest rate swap positions. We show that pension funds and insurers (PF&I) are natural counterparties to banks and corporations: PF&I buy duration, whereas banks and corporations sell duration. However, demand is highly segmented across maturities, resulting in significant imbalances at various maturity points. We calibrate a preferred-habitat investors model with risk-averse arbitrageurs to study how demand imbalances interact with supply side constraints to impact swap spreads. Our framework helps quantify the spillover effects of demand shifts, which informs policy discussions on financial institutions’ hedging requirements.
Recipient of the Inquire Europe Research Grant, 2024; MFA Outstanding Paper in Asset Management, 2025
Selected presentations: 2025- NBER Financial Market Frictions and Systemic Risks*, NBER Long-Term Asset Management*, Swiss National Bank, AFA*; 2024 – EFA, EEA, IBEFA-WEAI Summer Meeting, SFS Cavalcade*, OFR Rising Scholars Conference*, European Summer Symposium in Financial Markets*, Columbia Workshop in New Empirical Finance*; 2023 – CFTC, Bank of Canada, HEC Montréal
Media coverage: Bank Underground
[Updated December 2024!]LASH Risk and interest rates (first version: April 2024) – with Laura Alfaro (Harvard Business School), Saleem Bahaj (UCL & BoE), Robert Czech (BoE) and Jonathon Hazell (LSE) – Submitted
This paper studies a form of liquidity risk that we call ‘Liquidity After Solvency Hedging’ or “LASH” risk. Financial institutions take LASH risk when they hedge against solvency risk, using strategies that require liquidity when the solvency of the institution improves. We focus on LASH risk relating to interest rate movements. Our framework implies that institutions with longer-duration liabilities than assets—e.g. pension funds and insurers—take more LASH risk as interest rates fall. Using UK regulatory data from 2019-22 on the universe of sterling repo and swap transactions, we measure, in real time and at the institution level, LASH risk for the non-bank sector. We find that at the peak level of LASH risk, a 100bps increase in interest rates would have led to liquidity needs close to the cash holdings of the pension fund and insurance sector. Using a cross-sectional identification strategy, we find that low interest rates caused increases in LASH risk. We then find that the pre-crisis LASH risk of non-banks predicts their bond sales during the 2022 UK bond market crisis, contributing to the yield spike in the market.
Selected presentations: NBER International Finance and Macroeconomics*, ECB Conference on Financial Stability and Macroprudential Policy, ESEM, EFA*, BSE Summer Forum*, BIS*, IMF*, 10th Sovereign Bonds Market Conference, BIS Banks’ liquidity in volatile macroeconomic and market environments Conference*, Banco de Portugal & CEPR Conference on Financial Intermediation*, Fed Board, Boston Fed
Media coverage: Financial Times
[Updated Oct 2024!] The Ring-Fencing Bonus (first version: Oct 2022)– with Irem Erten (Warwick Business School) and John Thanassoulis (Warwick Business School) – R&R at Review of Finance
We study the impact of ring‑fencing on risk‑taking in the financial sector using short‑term money markets. Ring‑fencing is when the government restricts some activities to a subsidiary of the group while restricting intragroup transfers. Exploiting confidential data on sterling‑denominated repo transactions, we document that banking groups subject to ring‑fencing are perceived to be safer; repo investors lend to ring‑fenced groups at lower rates. We show that ring‑fenced groups reduce their risk‑appetite and that the safety perception is amplified during times of market stress. Our paper suggests that structural reforms can create a ‘safe haven’ bank in the financial system.
Selected presentations: FMA Applied Finance, FMA Annual Conference*, OCC Symposium on Emerging Risks in the Banking System*, ERMAS, EFMA*, IFABS*, NFA Annual Meeting
Media coverage: Faculti.net , Financial Times: Martin Wolf , Financial Times: Helen Thomas, The Banker
In public policy: The Edinburgh Reforms, His Majesty’s Treasury Call for Evidence
Banks’ internal capital allocation, the leverage ratio requirement and risk-taking (first version: December 2021) – with Quynh-Anh Vo (BoE) – Submitted
This paper examines how banks’ asset risk is affected by the level (ie group or business unit) at which regulatory requirements are applied. We develop a theoretical model and calibrate it to UK banks. Our main finding is that the impact differs depending on which regulatory constraint is binding at the group level. If that is the leverage ratio requirement, then the allocation of regulatory constraints to business units either maintains or decreases the riskiness of banks’ investment portfolios. However, if the risk-weighted requirement is the binding constraint at the group level, applying regulatory requirements at the business unit level can lead to banks selecting riskier asset portfolios as optimal. We also find that the impact on banks’ asset risk differs across bank business models.
Selected presentations: 2022: AEA, ERMAS; 2021: EFMA, IFABS, 37th Symposium on Money Banking and Finance BdF 2021*, WinE EEA , 20th Annual FDCI/JFSR Bank Research Conference*
Work in Progress
The global reach of monetary policy through hedging and exchange rates – with Laura Alfaro (HBS) and Simon Lloyd (BoE)
Dormant projects
Risk-Taking, Competition and Uncertainty. Do CoCo Bonds Increase the Risk Appetite of Banks? (first version: Aug 2021) – with Mahmoud Fatouh (Bank of England) and Sweder van Wijnbergen (UvA)
Presented at (selected): 2022: 19th Winter School of Mathematical Finance, 2021: Royal Economic Society Symposium, IFABS, Money Macro and Finance Society Annual Conference
Multiple buffer CoCos and their impact on financial stability (first version: Jan 2020)
Presented at: 2019: INFER, Queen Mary Economics and Finance PhD Workshop, ERMAS; 2018: GSE Barcelona, IFABS, FMA European Conference
(Updated: October 2024. * presentations by co-authors.)