Found 24 article(s) for author 'Adi Sunderam'

A Measure of Risk Appetite for the Macroeconomy

A Measure of Risk Appetite for the Macroeconomy. Emil Siriwardane, Adi Sunderam, March 2018, Paper, “We document a strong and robust positive relationship between the one-year real rate and the contemporaneous valuation of volatile stocks, which we contend measures the economy’s risk appetite. Our novel proxy for risk appetite explains 41% of the variation in the real rate since 1970, while the valuation of the aggregate stock market explains just 1%. In addition, the real rate forecasts returns on volatile stocks, confirming our interpretation that changes in risk appetite drive the real rate. Increases in our measure of risk appetite are followed by a boom in investment and output.Link

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Corporate Bond Liquidity: A Revealed Preference Approach

Corporate Bond Liquidity: A Revealed Preference Approach. Adi Sunderam, March 20, 2018, Paper, “We propose a novel measure of bond market liquidity that does not depend on transaction data. Capturing how the strength of the relation between mutual fund cash holdings and uncertainty about fund flows varies in the cross section, our measure reflects funds’ perceived illiquidity of their portfolio holdings at a given point in time. Speculative grade and smaller bonds are perceived to be significantly less liquid, with the illiquidity of speculative grade bonds in particular deteriorating in the post-crisis period.Link

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Do Fire Sales Create Externalities?

Do Fire Sales Create Externalities? Adi Sunderam, October 12, 2017, Opinion, “We develop three novel measures of how much of the price impact of their trading different mutual funds internalize. We show that mutual funds that internalize more of their price impact hold larger cash buffers and use these buffers more aggressively to accommodate inflows and outflows. As a result, stocks held by these funds have lower volatility, and flows out of these funds have smaller spillover effects on other funds holding the same securities. Our results suggest that there are meaningful fire sale externalities in the mutual fund industry, and that a planner coordinating among funds would choose different liquidity management policies.Link

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Strengthening and Streamlining Bank Capital Regulation

Strengthening and Streamlining Bank Capital Regulation. Robin Greenwood, Samuel Hanson, Jeremy Stein, Adi Sunderam, August 2017, Paper, “We propose three core principles that should inform the design of bank capital regulation. First, wherever possible, multiple constraints on the minimum level of equity capital should be consolidated into a single constraint. This helps to avoid a distortionary situation where different constraints bind for different banks performing the same activity. Second, while a regulatory framework that relies primarily on minimum capital ratios is appropriate for normal times, such a framework is inadequate in the wake of a large negative shock to the system. Following an adverse shock, it becomes critical to emphasize dynamic resilience, which involves forcing banks to actively recapitalize—i.e. regulation needs to focus on getting banks to raise new dollars of equity capital, rather than just maintaining their capital ratios.Link

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Does Precautionary Savings Drive the Real Interest Rate? Evidence from the Stock Market

Does Precautionary Savings Drive the Real Interest Rate? Evidence from the Stock Market. Emil Siriwardane, Adi Sunderam, August 6, 2017, Paper, “We document a strong and robust relation between the one-year real rate and precautionary savings motives, as measured by the stock market. Our novel proxy for precautionary savings, based on the difference in valuations between low- and highvolatility stocks, explains 37% of variation in the real rate. In addition, the real rate forecasts returns on the low-minus-high volatility portfolio, though it appears unrelated with measures of the quantity of risk. Our results suggest that precautionary savings motives, and thus the real rate, are driven by time-varying attitudes towards risk. We rationalize these findings in a stylized model with segmented investor clienteles and habit formation.Link

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The Financial Regulatory Reform Agenda in 2017

The Financial Regulatory Reform Agenda in 2017. Robin Greenwood, Samuel Hanson, Jeremy Stein, Adi Sunderam, February 2017, Paper, “We take stock of the post-crisis financial regulatory reform agenda. We highlight and summarize areas of clear progress, where post-crisis reforms should either be maintained or built upon. We then identify several areas where the new regulations could be streamlined or rolled back in an effort to reduce the burden on the financial sector, particularly on smaller banks.Link

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The Cross Section of Bank Value

The Cross Section of Bank Value. Adi Sunderam, November 2016, Paper, “We study the determinants of value creation within U.S. commercial banks. We focus on three theoretically-motivated drivers of bank value: screening and monitoring, “safe” deposit production, and synergies between deposit-taking and lending. To assess the relative contributions of each, we develop novel measures of banks’ deposit productivity and asset productivity and use these measures to evaluate the cross-section of bank value. We find that variation in deposit productivity explains the majority of variation in bank value, consistent with theories emphasizing safe-asset production. We also find evidence of meaningful value creation from synergies between deposit-taking and lending. Overall, our findings suggest that banks are primarily “special” due to their unique liability structure rather than their ability to screen and monitor borrowers.Link

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Liquidity Transformation in Asset Management: Evidence form the Cash Holdings of Mutual Funds

Liquidity Transformation in Asset Management: Evidence form the Cash Holdings of Mutual Funds. Adi Sunderam, July 2016, Paper, “We study liquidity transformation in mutual funds using a novel data set on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds’ cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.Link

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The Fed, the Bond Market, and Gradualism in Monetary Policy

The Fed, the Bond Market, and Gradualism in Monetary Policy. Adi Sunderam, Jeremy Stein, February 2016, Paper. “We develop a model of monetary policy with two key features: (i) the central bank has some private information about its long-run target for the policy rate; and (ii) the central bank is averse to bond-market volatility. In this setting, discretionary monetary policy is gradualist: the central bank only adjusts the policy rate slowly in response to changes in its target. Such gradualism represents an attempt to not spook the bond market. However, this effort is unsuccessful in equilibrium, as long-term rates rationally react more to a given move in short rates when the central bank moves more gradually. The same desire to mitigate bond-market volatility can lead the central bank to lower short rates sharply when publicly-observed term premiums rise. In both cases, there is a time-consistency problem, and society would be better off with a central banker who cares less about the bond market.Link

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