ESG Investing: A Tale of Two Preferences (Job Market Paper)
- Finalist, BlackRock Applied Research Award (2022)
Abstract: What motivates ESG integration? I find both non-pecuniary and risk-mitigating preferences explain its prominence. A novel test based on changes in mutual funds’ portfolio holdings and several empirical findings establish the two widely endorsed ESG ratings proxy these preferences. With this, I show each preference induces sizable equity premium identified through option-implied expected returns. Due to unexpectedly persistent demand growth for ESG-conscious assets, realized returns mask true ESG pricing effects, especially those attributable to non-pecuniary preference. Consequently, this paper lends support to recent theoretical frameworks with non-pecuniary preference and explains why empirical literature has lacked consensus.
Presentations: 2023 Helsinki Finance Summit, 2023 FIASI, 2023 Alliance for Research on Corporate Sustainability (invited), 2023 Eastern FA, 2023 MFA, University of Notre Dame (Mendoza), American University (Kogod), 2023 AFA Poster, 2022 Colorado Finance Summit Job Market Session, 2022 BlackRock, 2022 Australasian Finance & Banking Conference (scheduled), 2022 FMA, 2022 NFA, 2022 Young Economist Symposium, 2022 Trans-Atlantic Doctoral Conference, UNC Brown Bag × 2, UNC Finance PhD Seminars × 2
Abstract: We build a financial intermediation model wherein bank and fintech intermediaries compete or partner within frictional credit markets. Banks and fintechs differ in their enforcement technology and funding cost. Fintech lenders can directly extract a fraction of borrowers' output upon default, while banks rely on collateralized lending. The model explains the emergence and coexistence of three forms of lending associated with: (i) standalone banks, (ii) standalone fintechs, and (iii) bank-fintech partnerships. Fintech disruption enhances market competition and facilitates credit intermediation to previously underserved borrowers, but crowds out bank-captive borrowers as traditional banks experience low profitability and get displaced. In equilibrium, fintech entry and the prevalence of bank-fintech partnerships do not necessarily benefit all borrowers, leading to ambiguous credit and welfare effects at the aggregate level.
Presentations: 2023 NFA, 2023 Annual Conference in Financial Economics Research at Reichman University, 2023 HEC-McGill Winter Finance Workshop, 2023 AFA, 2022 HEC Paris Conference on “Banking in the Age of Challenges”, 2022 OCC FinTech Symposium, 2022 Fixed Income and Financial Institution, UNC Junior Faculty Brown Bag, UNC Brown Bag
R&R at Journal of Money, Credit, & Banking
Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)—policies aimed at stabilizing the output growth—less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.
Presentations: Bank of Japan, Univ. of Tokyo, FRB Brown Bag, ECB Brown Bag
Works in Progress
Financial Technology and Labor in Credit Intermediation (w/ Yasser Boualam)
Abstract: We develop a theory centered around the role of financial technology and loan officers in credit intermediation. Within a general equilibrium setting, we study how imperfections stemming from either credit or labor markets can shape bank lending decisions and contractual terms, and eventually spill over to real economic activity. Our main contribution resides in (i) designing a double-layered search model for both labor and credit, (ii) exploring how financial technology interacts with the employment of loan officers, bank monitoring, and aggregate lending, and (iii) analyzing its welfare implications.
Optimal ESG Disclosure Mandate (w/ Jacob Sagi)
Stakeholder Awakenings (w/ Greg Brown)
Coverage: Kenan Insight
Journal of Economic Dynamics & Control (2019) 105:90-106
Abstract: We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and a discounted Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, a future rate cut becomes less effective in stimulating current economic activity. Under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer.
Presentations: FRB Brown Bag, UNC PhD Seminar, 13th Dynare Conference, 21st T2M Conference, 24th International Conference for Computing in Economics and Finance, Mannheim University