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Working Paper
Learning from History : Volatility and Financial Crises
We study the effects of volatility on financial crises by constructing a cross-country database spanning over 200 years. Volatility is not a significant predictor of crises whereas unusually high and low volatilities are. Low volatility is followed by credit build-ups, indicating that agents take more risk in periods of low financial risk consistent with Minsky hypothesis, and increasing the likelihood of a banking crisis. The impact is stronger when financial markets are more prominent and less regulated. Finally, both high and low volatilities make stock market crises more likely, while ...
Working Paper
Searching for Yield Abroad : Risk-Taking Through Foreign Investment in U.S. Bonds
The risk-taking effects of low interest rates, now prevailing in many advanced countries, "search-for-yield," can be hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique U.S. corporate bonds between 2003 and 2016, we show that declining home-country interest rates lead investors to shift their portfolios toward riskier U.S. corporate bonds, consistent with "search-for-yield". We ...
Working Paper
Risk-Taking Spillovers of U.S. Monetary Policy in the Global Market for U.S. Dollar Corporate Loans
We study the effects of U.S. interest rates and other factors on risk-taking in the global market for U.S. dollar syndicated term loans. We find that, before the Global Financial Crisis, both U.S. and non-U.S. lenders originated ex ante riskier loans to non-U.S. borrowers in response to a decline in short-term U.S. interest rates and, after the crisis, in response to a decline in longer-term U.S. interest rates. After the crisis, this behavior was more prominent for shadow banks and less prominent for banks with relatively low capital. Separately, before the crisis, lenders originated less ...
Working Paper
The impact of risk cycles on business cycles: a historical view
We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their ...