## Publications

**Designing Stress Scenarios**with Thomas Philippon -

*forthcoming, Journal of Finance*

We study the optimal design of stress scenarios. A principal manages the unknown risk exposures of agents by asking them to report losses under hypothetical scenarios before taking remedial actions. We apply a Kalman filter to solve the learning problem and we relate the optimal design to the risk environment, the principal’s preferences and available interventions. Applied to banking stress tests, optimal capital requirements cover losses under an adverse scenario while targeted interventions depend on covariances among residual exposures and systematic risks. Our calibration reveals that information is particularly valuable for targeted interventions as opposed to broad capital requirements.

[bibtex]

**The Value of Arbitrage**with Eduardo Dávila and Daniel Graves -

*Journal of Political Economy,*132(6) (2024), pp. 1947-1993

This paper studies the social value of closing price differentials in financial markets. We show that arbitrage gaps exactly correspond to the marginal social value of executing an arbitrage trade. Moreover, arbitrage gaps and price impact measures are sufficient to compute the total social value from closing an arbitrage gap, which may emerge for different reasons, including non-pecuniary benefits of holding particular assets. Theoretically, we show that, for a given arbitrage gap, the total social value of arbitrage is higher in more liquid markets. We compute the welfare gains from closing arbitrage gaps for covered interest parity violations.

[bibtex] [Video presentation UWFC]

This paper studies the relation between volatility and informativeness in financial markets. We identify two channels (noise-reduction and equilibrium-learning) that determine the volatility-informativeness relation. When informativeness is sufficiently high (low), volatility and informativeness positively (negatively) comove in equilibrium. We identify conditions on primitives that guarantee that volatility and informativeness comove positively or negatively. We introduce the comovement score, a statistic that measures the distance of a given asset to the positive/negative comovement regions. Empirically, comovement scores i) have trended downwards over the last decades, ii) are positively related to value and idiosyncratic volatility and negatively to size and institutional ownership.

[bibtex]

**Volatility and Informativeness**with Eduardo Dávila,*Journal of Financial Economics,*147 (3), 2023, pp. 550-572

This paper studies the relation between volatility and informativeness in financial markets. We identify two channels (noise-reduction and equilibrium-learning) that determine the volatility-informativeness relation. When informativeness is sufficiently high (low), volatility and informativeness positively (negatively) comove in equilibrium. We identify conditions on primitives that guarantee that volatility and informativeness comove positively or negatively. We introduce the comovement score, a statistic that measures the distance of a given asset to the positive/negative comovement regions. Empirically, comovement scores i) have trended downwards over the last decades, ii) are positively related to value and idiosyncratic volatility and negatively to size and institutional ownership.

[bibtex]

Strategic Fragmented Markets with Ana Babus,

We study the determinants of asset market fragmentation in a model with strategic investors that disagree about the value of an asset. Investors choices determine the market structure. Fragmented markets are supported in equilibrium when disagreement between investors is low. In this case, investors take the same side of the market and are willing to trade in smaller markets with a higher price impact to face less competition when trading against a dealer. The maximum degree of market fragmentation increases as investors' priors are more correlated. Dealers can benefit from fragmentation, but investors are always better off in centralized markets.

[bibtex]

*Journal of Financial Economics,*145 (3), 2022, pp. 876-908We study the determinants of asset market fragmentation in a model with strategic investors that disagree about the value of an asset. Investors choices determine the market structure. Fragmented markets are supported in equilibrium when disagreement between investors is low. In this case, investors take the same side of the market and are willing to trade in smaller markets with a higher price impact to face less competition when trading against a dealer. The maximum degree of market fragmentation increases as investors' priors are more correlated. Dealers can benefit from fragmentation, but investors are always better off in centralized markets.

[bibtex]

Trading Costs and Informational Efficiency with Eduardo Dávila,

We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex-ante identical: price informativeness is independent of the level of trading costs. When investors are ex-ante heterogeneous, a change in trading costs can increase or decrease price informativeness, depending on the source of heterogeneity. Our results are valid under quadratic, linear, and fixed costs. Through a reduction in information acquisition, trading costs reduce price informativeness. We discuss how our results inform the policy debate on financial transaction taxes/Tobin taxes.

[bibtex]

*Journal of Finance*, 76 (3), 2021, pp. 1471-1539We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex-ante identical: price informativeness is independent of the level of trading costs. When investors are ex-ante heterogeneous, a change in trading costs can increase or decrease price informativeness, depending on the source of heterogeneity. Our results are valid under quadratic, linear, and fixed costs. Through a reduction in information acquisition, trading costs reduce price informativeness. We discuss how our results inform the policy debate on financial transaction taxes/Tobin taxes.

[bibtex]

Collateralizing Liquidity**,

I develop a dynamic model of optimal funding to understand why financial assets are used as collateral instead of being sold to raise funds. Firms need funds to invest in risky projects with non-observable returns. Since holding these assets allows firms to raise these funds, investing firms value the asset more than non-investing ones. When assets are less than perfectly liquid and investment opportunities are persistent, collateralized debt minimizes asset transfers from investing to non-investing firms and, thus, is optimal. Frictions in asset markets lead to an illiquidity discount and a collateral premium, which increase with the asset's illiquidity.

[bibtex]

**Previously titled " Equilibrium Collateral Constraints".

*Journal of Financial Economics*131 (2019), pp. 299-322I develop a dynamic model of optimal funding to understand why financial assets are used as collateral instead of being sold to raise funds. Firms need funds to invest in risky projects with non-observable returns. Since holding these assets allows firms to raise these funds, investing firms value the asset more than non-investing ones. When assets are less than perfectly liquid and investment opportunities are persistent, collateralized debt minimizes asset transfers from investing to non-investing firms and, thus, is optimal. Frictions in asset markets lead to an illiquidity discount and a collateral premium, which increase with the asset's illiquidity.

[bibtex]

**Previously titled " Equilibrium Collateral Constraints".

Fragility in Money Market Funds: Sponsor Support and Regulation*,

Money Market Funds (MMFs), which are crucial to short-term funding markets, rely on voluntary support of fund sponsors to maintain stable share values. I develop a general equilibrium model of MMFs to study how sponsor support affects the industry’s fragility and regulation. Adverse asset-quality shocks lead MMFs to liquidate assets. When liquidity in asset markets is limited, asset prices are lower if more funds liquidate. Lower asset prices, in turn, make sponsor support costlier and even more liquidations occur. This feedback leads to complementarities in sponsors’ support decisions. Based on the model’s insights, I derive implications for the regulation of MMFs.

[bibtex] [Video presentation UWFC]

* Previously titled "The Regulation of Money Market Funds: Adding Discipline to the Policy Debate".

*Journal of Financial Economics*121 (2016), pp. 595-623Money Market Funds (MMFs), which are crucial to short-term funding markets, rely on voluntary support of fund sponsors to maintain stable share values. I develop a general equilibrium model of MMFs to study how sponsor support affects the industry’s fragility and regulation. Adverse asset-quality shocks lead MMFs to liquidate assets. When liquidity in asset markets is limited, asset prices are lower if more funds liquidate. Lower asset prices, in turn, make sponsor support costlier and even more liquidations occur. This feedback leads to complementarities in sponsors’ support decisions. Based on the model’s insights, I derive implications for the regulation of MMFs.

[bibtex] [Video presentation UWFC]

* Previously titled "The Regulation of Money Market Funds: Adding Discipline to the Policy Debate".

Modernization of Tax Administrations and Optimal Fiscal Policies with Martin Besfamille, Journal of Public Economic Theory 11 (6), 2009, 897 - 926, December

Since Sandmo (1981), many articles have analyzed optimal fiscal policies in economies with tax evasion. All share a feature: they assume that the cost of enforcing the tax law is exogenous. However, governments often invest resources to reduce these enforcement costs. In a very simple model, we incorporate such investments in the analysis of an optimal fiscal policy. We characterize their optimal level and we show numerically how they interact with the other dimensions of the optimal fiscal policy. Finally, we highlight the differences between our results and those obtained in a model without investment in the tax administration.

[bibtex]

Since Sandmo (1981), many articles have analyzed optimal fiscal policies in economies with tax evasion. All share a feature: they assume that the cost of enforcing the tax law is exogenous. However, governments often invest resources to reduce these enforcement costs. In a very simple model, we incorporate such investments in the analysis of an optimal fiscal policy. We characterize their optimal level and we show numerically how they interact with the other dimensions of the optimal fiscal policy. Finally, we highlight the differences between our results and those obtained in a model without investment in the tax administration.

[bibtex]