Research

Publications

[1] "Channels of US Monetary Policy Spillover in International Bond Markets" (with Elias Albagli, Sebastian Claro and Damian Romero), Journal of Financial Economics, 2019, 134(2), 447-473.

We show significant US monetary policy (MP) spillovers to international bond markets. Our methodology identifies US MP shocks as the change in short-term Treasury yields around FOMC meetings and traces their effects on international bond yields using panel regressions. We emphasize three main results. First, US MP spillovers to long-term yields have increased substantially after the 2007–2009 global financial crisis. Second, spillovers are large compared with the effects of other events, and at least as large as the effects of domestic MP after 2008. Third, spillovers work through different channels, concentrated in risk-neutral rates (expectations of future MP rates) for developed countries, but predominantly on term premia in emerging markets. In interpreting these findings, we provide evidence consistent with an exchange rate channel, according to which foreign central banks face a trade-off between narrowing MP rate differentials or experiencing currency movements against the US dollar.

Abstracted in the CFA Institute Journal Review (July 2020).

[2] "Decomposing Long-term Interest Rates: An International Comparison" (with Damian Romero), Journal of Fixed Income, 2016, 26(1), 61-73.

This paper analyzes the behavior of long-term interest rates for several developed and developing economies, identifying the risk-neutral and term premium components under different methodologies. We analyze which of these two channels affected interest rate movements in different monetary policy regimes and quantify the transmission of U.S. long-term yield to these economies using a spillover index. We find that movements in long-term interest rates in different monetary policy regimes are related to changes in the term premium for most countries.

[3] "Nominal Term Structure and Term Premia: Evidence from Chile" (with Alberto Naudon and Damian Romero), Applied Economics, 2016, 48(29), 2721-2735.

The downwards trend exhibited in Chile’s nominal term structure since 2003 has been a common pattern shared by other developed and developing economies. To understand the behaviour of the nominal yield curve in Chile, we rely on an affine dynamic term structure model which allows the term structure to decompose into the expected short-term interest rate (related to the monetary policy expectation) and the term premium. We show that most of the fall of long-term interest rates as well as its dynamics are related to the term premium rather than the expected short-term interest rate. Moreover, we find evidence that term premium is driven primarily by the US term premium and domestic nominal uncertainty derived from expected inflation.

Working papers

[1] "Inflation Volatility Risk and the Cross-section of Corporate Bond Returns" (Job Market Paper).

As corporate bonds are primarily denominated in nominal terms, inflation uncertainty arises as a relevant source of risk. This paper analyzes the relevance of inflation volatility risk as an additional factor in predicting the cross-section of corporate bond returns. I find a negative and significant inflation volatility risk premium (IVRP) obtained from the difference between high inflation and low inflation beta portfolios. Further, common risk factors in the equity and corporate bond markets do not explain the IVRP, it responds to ex-post inflation risk and is partially explained by market risk and monetary policy shocks. Lastly, I show that the IVRP is associated with firms that incur in debt maturity management to mitigate refinancing risks.

Presentations: 34th Australasian Finance and Banking Conference (scheduled), FMA Special Ph.D. Paper Session, FMA Doctoral Consortium 2021, New Zealand Finance Meeting 2021 (scheduled), SFA 2021 Annual Meeting (scheduled), INQUIRE UK, World Finance & Banking Symposium (scheduled), SWFA 2022 Annual Meeting (scheduled), Frontiers in International Finance and Banking, Central Bank of Chile (2021).

[2] "Price Pressure in the Government Bond Market: Long-term Impact of Short-term Advice" (with Damian Romero).

We analyze the systemic impact of massive pension funds' portfolio reallocations triggered by a financial advisory firm. We explore the main channels by which government yields are affected and trace their impact on households and firms' financing costs. We document significant price pressure in the domestic government bond market after portfolio switching recommendations. Further, we find persistent changes in government yields, particularly in long-term inflation-linked bond yields, triggered by the term premium component. Consistent with the relevance of inflation-linked bonds as the primary benchmark in setting interest rates, we find a substantial impact on firms' and households' financing costs.

Presentations: Penn State (2021), EFA Annual Meeting (2021), SWFA Annual Meeting (2021), FMA Annual Meeting (2020), SFA Annual Meeting (2020), and Central Bank of Chile (2020).

[3] "UIP: a Partial Reconciliation from Event Studies" (with Elias Albagli, Sebastian Claro and Damian Romero).

We develop a model where foreign investors in domestic markets react partially to deviations from a UIP condition for long-term bonds. The model predicts that the sign between yield differentials and exchange rate movements is conditional on the source of shocks. Using event studies for identification, we test the model in a sample of 24 developed and emerging economies, finding a UIP-consistent correlation for monetary shocks, but the opposite around episodes of large market uncertainty. The model predicts that exchange rate stabilization policies, prevalent among emerging countries, weaken both correlations, which we confirm in the data.

Presentations: Czech National Bank (scheduled), International Monetary Fund (2021), Universidad de los Andes (2021), PBC School of Finance, Tsinghua University (2019).

[4] "Smart Financing Decisions: Evidence from the Corporate Bond Market" (with Anh Le and Joel Vanden).

We use floating rate bond offerings and data from interest rate swaps to study the impact of firms’ financing decisions. A trading strategy that is long the stock of firms that make smart decisions and short the stock of firms that make non-smart decisions earns a significant alpha relative to the three-factor, four-factor, and five-factor asset pricing models. Our results remain significant even after controlling for swap usage, different stock holding periods, operating performance hedging, and a quality minus junk factor. Both smart and non-smart firms experience jumps in abnormal investor attention around floating bond issuance dates, but smart firms on average experience greater overall abnormal attention with lower attention volatility. Smart firms in our sample tend to be more profitable, more liquid, have more long-term debt, and have significantly higher market-to-book ratios.

Conference discussions

"Pricing Climate Change Risk in Corporate Bonds" by Elsa Allman (WFBS 2021).[Slides].
"Monetary Reforms and Inflation Expectations in Japan: Evidence from Inflation-Indexed Bonds" by Jens Christensen and Mark M. Spiegel (AFBC 2021) [Slides].
"Switching Perspective: How Does Firm-Level Distress Risk Price the Cross-Section of Corporate Bond Returns?" by Kevin Aretz and Shuwen Yang (NZFM 2021) [Slides].
"Black Tax: Evidence of Racial Discrimination in Municipal Borrowing Costs" by A. Eldemire, K. Luchtenberg and M. Wynter (FMA 2021) [Slides].
"Downside Risk and the Cross-section of Corporate Bond Returns" by R. Lopez Aliouchkin, P. Augustin, L. Cong and R. Tedongap (SFA 2021) [Slides].
"International Yield Spillovers" by Don Kim and Marcelo Ochoa (EFA 2021) [Slides].
"Sources of Herding in Bond Mutual Funds" by Artem Malinin and Anita Pennathur (SWFA 2021) [Slides].
"Unconventional Monetary Policy and International Equity Capital Flows to Emerging Markets" by C. Andreou, N. Dimic, V. Piljak and A. Svvides (SFA 2020).
"Aggregating Information for Optimal Portfolio Weights" by Xiao Li (FMA 2020) [Slides].