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Lender of Last Resort, Buyer of Last Resort, and a Fear of Fire Sales in the Sovereign Bond Market (with Viral Acharya and Sascha Steffen), Financial Markets, Institutions, and Instruments, May 2021.

Abstract: We document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long-term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.

Systemic Risk and the Solvency-Liquidity Nexus of Banks, International Journal of Central Banking, 2015, 11(3), pp. 193-227.


Abstract: This paper highlights the empirical interaction between solvency and liquidity risks of banks that make them particularly vulnerable to an aggregate crisis. In line with the literature explaining bank runs based on the quality of the bank’s fundamentals, I find that banks lose their access to short-term funding when markets expect they will be insolvent in a crisis. This solvency-liquidity nexus is found to be strong under many robustness checks and to contain useful information for forecasting the short-term balance sheet of banks. The results suggest that capital does not only act as a loss-absorbing buffer; it also ensures the confidence of creditors to continue to provide funding to the banks in a crisis. 


Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights (with Viral Acharya and Robert Engle), Journal of Monetary Economics, 2014, 65, pp. 36-53.


Abstract: Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. Financial institutions are required to maintain a capital cushion against such events and stress tests are designed to assess if it is adequate. If it is not, then the capital shortfall is the additional capital needed. We compare the capital shortfall measured by regulatory stress tests, to that of a benchmark methodology — the “V-Lab stress test” — that employs only publicly available market data. We find that when capital shortfalls are measured relative to risk-weighted assets, the ranking of financial institutions is very different from the V-Lab stress test, whereas when measured relative to total assets, the results are quite similar. We show that the risk measures used in risk-weighted assets are cross-sectionally uncorrelated with market measures of risk as they do not account for the “risk that risk will change.” Furthermore, the firms that appeared to be best capitalized relative to risk-weighted assets were no better than the rest when the European economy deteriorated into the sovereign debt crisis in 2011.

Executive summary on

Covered in FT (11/09/14)

Multivariate Volatility Modeling of Electricity Futures (with Luc Bauwens and Christian Hafner), Journal of Applied Econometrics, 2013, 28:5, pp. 743-761.


Abstract: We model the dynamic volatility and correlation structure of electricity futures of the European Energy Exchange index. We use a new multiplicative dynamic conditional correlation (mDCC) model to separate long-run from short-run components. We allow for smooth changes in the unconditional volatilities and correlations through a multiplicative component that we estimate nonparametrically. For the short-run dynamics, we use a GJR-GARCH model for the conditional variances and augmented DCC models for the conditional correlations. We also introduce exogenous variables to account for congestion and delivery date effects in short-term conditional variances. We find different correlation dynamics for long- and short-term contracts and the new model achieves higher forecasting performance compared to a standard DCC model.

Working Papers

The Visible Hand when Revenues Stop: Evidence from Loan and Stock Markets during COVID-19 (with François Koulischer and Roberto Steri), April 2021

Abstract: We document that public interventions in the corporate sector during the COVID-19 pandemic help firms access bank loans, cushion liquidity shortfalls, and boost their market valuations. We use firm-level data on COVID-19-related news to trace firms’ liquidity shocks in several European countries, which differ in public spending for fiscal stimulus and debt guarantees to corporations. As market valuations rebound in spite of the deterioration of firms’ revenues, interventions drive a part of the disconnect between markets and the real economy. Remarkably, the financial sector internalizes part of the benefits of interventions targeting non-financial firms. To interpret these results, we lay out a moral hazard model of corporate borrowing and public interventions. The model suggests that interventions in the corporate sector are effective to mitigate incentive problems leading to credit market failures. Lenders benefit from loan guarantees as a compensation to finance firms with severe debt overhang problems.

Presentations: ECB, BPI-Nova SBE Conference on “Corporate Bankruptcy and Restructuring”, CEPR-Norges Bank Conference on “Frontier Research in Banking”, AEA, Université Catholique de Louvain, Nazarbayev University Graduate School of Business, Benelux Banking Research Day, Swiss Winter Conference on Financial Intermediation, BCBS-CGFS conference on "How effective were policy measures in supporting bank lending during the Covid-19 crisis?"*

Stressed Banks (with Roberto Steri), November 2020.

Abstract: We investigate the risk taking of "stressed banks" — the large financial institutions that have been facing unprecedented regulatory supervision and capitalization requirements. We take steps towards identifying how supervision affects risk taking in the banking system. Supervision in Dodd-Frank Act distinctly improves borrower rating by 0.7 rating classes. Banks respond to supervision heterogeneously, depending on the capital charges associated with their investments. Ignoring the confounding effect of capital requirements misleads the conclusion that Dodd-Frank Act supervision is ineffective. Our results indicate that “stressed banks” are beneficial to financial stability as they are better capitalized and engage in safer lending.

Featured in:

International Banker, "The Role of Stress-Test Supervision" (3/25/2019)

SFI's Practitioner Roundups August 2018

HECimpact November 2017

Covered in Le Temps (8/6/2018), Allnews (6/27/2018)

Presentations: Luxembourg School of Finance, McGill University, Danmarks Nationalbank, BI Norwegian Business School, European Central Bank, Vienna Graduate School of Finance, Norges Bank, FINMA, IESE, Erasmus School of Economics, Bank of England, VU Amsterdam, Deutsche Bundesbank, Federal Reserve Board, Swiss National Bank, CRM Montreal Systemic Risk workshop, ELTE Budapest workshop on Stress Testing and Capital Requirements, 2017 Santiago Finance workshop, 11th Swiss Winter Conference on Financial Intermediation, 2018 Lausanne-Cambridge workshop, 5th Empirical Financial Intermediation Research Network, FEBS 2018, 35th Annual Conference of the French Finance Association, 4th IWH-FIN-FIRE Workshop on "Challenges for Financial Stability", 1st Endless Summer Conference on Financial Intermediation and Corporate Finance, 2018 Federal Reserve Stress Testing Research Conference, CEPR Systemic Risk and Macroprudential Policy conference of the Bank of Israel, Showcasing Women in Finance - EU, 10th European Banking Center Network, Marstrand Finance Conference, WFA, European System of Central Banks' Day‐Ahead Conference, AEA, EFA

Similar Investors (with Co-Pierre Georg and Sascha Steffen), February 2020.

Abstract: Consistent with theoretical predictions, we show that investors incorporate expected joint liquidation costs in their portfolio decisions. Using detailed security-level holdings of U.S. Money Market Mutual Funds (MMFs), we construct a new measure of portfolio similarity among investors and show that investors actively manage asset holdings as a function of how similar their portfolios are with those of other investors. They are less likely to roll over investments and they decrease funding when similarity increases. At the issuer level, average similarity also predicts her total funding in the next period. Importantly, issuers are unable to fully replace the loss in funding when similar investors withdraw.

Presentations: Norwegian School of Economics, CEBRA, BoE-CEPR-Imperial-LSE Conference on Non-bank Financial Sector and Financial Stability, Knut Wicksell Conference in Financial Intermediation, 13th Swiss Winter conference on Financial Intermediation (cancelled), Chicago Financial Institutions Conference (cancelled), CONSOB-ESMA-Bocconi serminar “Securities markets. Trends, risks and policies”

Green Collateral (with Artashes Karapetyan, Maximilian Rohrer and Roberto Steri), work in progress.

Capital Requirements and Regulatory Arbitrage: A Quantitative Analysis (with Roberto Steri), work in progress.

Other Publications

Capital Shortfalls of European Banks following the 2018 Stress Test (with Sascha Steffen), November 6, 2018.

Have European Banks Become Safer? (with Sascha Steffen), November 2, 2018.

High time to tell European banks: No dividends (with Viral Acharya and Sascha Steffen), August 4, 2016.

Introducing the “Leverage Ratio” in Assessing the Capital Adequacy of European Banks (with Viral Acharya and Sascha Steffen), August 1, 2016.

Capital Shortfalls of European Banks since the Start of the Banking Union (with Viral Acharya and Sascha Steffen), July 28, 2016.

Macroprudential stress tests should not rely on regulatory risk weights (with Viral Acharya and Robert Engle), VoxEU March 2014.

The Systemic Risk of Energy Markets, CORE discussion paper no. 2013/53, April 2013.


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