Assistant Professor of Finance
"The Network of Firms Implied by the News" (with H. Zheng)
Data on business connections between firms are notoriously hard to collect although the network structure of firms matters for aggregate risks. This paper shows that readily available news provides information about business connections between firms that can be used to infer a precise network of firm interconnections. Links in the news-implied network reflect business relations that facilitate the transmission of risks between firms. Interconnectivity in our network is positively related and also predicts out-of-sample common measures of aggregate risks. The results of this paper enable the extraction of business networks from readily accessible data, facilitating the accurate measurement of risks.
We estimate models of consumption growth that allow for long-run risks and disasters using data for a series of countries over a time span of 200 years. Our estimates indicate that a model with small and frequent disasters that arrive at a mean-reverting rate best fits international consumption data. The implied posterior disaster intensity in such a model predicts equity returns without compromising the unpredictability of consumption growth. It also generates time-varying excess stock volatility, empirically validating key economic mechanisms often assumed in consumption-based asset pricing models.
"The Systemic Effects of Benchmarking" (with D. Duarte and K. Lee)
We show that an institutional investor whose performance is evaluated relative to a narrow benchmark trades in ways that exposes a retail investor to higher risks and welfare losses. In our model, the institutional investor is different from the retail investor because she derives higher utility when her benchmark outperforms. This forces institutional investors to overreact (underreact) to cash flow news in bad (good) states of the world, increasing individual and aggregate volatilities. While asset prices and wealth are higher in the presence of benchmarking, the retail investor is worse off due to the exposure to higher risks. We empirically validate the mechanisms in our model using data on U.S. equity mutual funds with sector-specific mandates.
This paper develops estimators of the transition density, filters, and parameters of multivariate jump-diffusions with latent components. The drift, volatility, jump intensity, and jump magnitude are allowed to be general functions of the state. Our density and filter estimators converge at the canonical square-root rate, implying computational efficiency. Our parameter estimators have the same asymptotic properties as true maximum likelihood estimators, implying statistical efficiency. Numerical experiments highlight the superior performance of our estimators.
"Inference for Large Financial Systems" (with K. Giesecke and J. Sirignano), forthcoming at Mathematical Finance.
We consider the problem of parameter estimation for large interacting stochastic systems where data is available on the aggregate state of the system. Parameter inference is computationally challenging due to the scale and complexity of such systems. Weak convergence results, similar in spirit to a law of large numbers and a central limit theorem, can be used to approximate large systems in distribution. We exploit these weak convergence results in order to develop approximate maximum likelihood estimators for such systems. The approximate estimators are shown to converge to the true parameters and are asymptotically normal as the number of observations and the size of the system become large. Numerical studies demonstrate the computational efficiency and accuracy of the approximate MLEs. Although our approach is widely applicable to large systems in many fields, we are particularly motivated by examples arising in finance such as systemic risk in banking systems and large portfolios of loans.
"Simulated Likelihood Estimators for Discretely-Observed Jump-Diffusions" (with K. Giesecke), forthcoming at Journal of Econometrics. Codes
This paper develops an unbiased Monte Carlo approximation to the transition density of a jump-diffusion process with state-dependent drift, volatility, jump intensity, and jump magnitude. The approximation is used to construct a likelihood estimator of the parameters of a jump-diffusion observed at fixed time intervals that need not be short. The estimator is asymptotically unbiased for any sample size. It has the same large-sample asymptotic properties as the true but uncomputable likelihood estimator. Numerical results illustrate its properties.
"Exploring the Sources of Default Clustering" (with K. Giesecke and S. Azizpour), Journal of Financial Economics 129 (2018), 154-183.
We study the sources of corporate default clustering in the United States. We reject the hypothesis that firms’ default times are correlated only because their conditional default rates depend on observable and latent systematic factors. By contrast, we find strong evidence that contagion, through which the default by one firm has a direct impact on the health of other firms, is a significant clustering source. The amount of clustering that cannot be explained by contagion and firms’ exposure to observable and latent systematic factors is insignificant. Our results have important implications for the pricing and management of correlated default risk.
Point processes are used to model the timing of defaults, market transactions, births, unemployment and many other events. We develop and study likelihood estimators of the parameters of a marked point process and of incompletely observed explanatory factors that influence the arrival intensity and mark distribution. We establish an approximation to the likelihood and analyze the convergence and large-sample properties of the associated estimators. Numerical results highlight the computational efficiency of our estimators, and show that they can outperform EM Algorithm estimators.