Publications:
"Marketwide Private Information in Stocks: Forecasting Currency Returns," (with Rui Albuquerque and Eva De Francisco), The Journal of Finance Vol. 63(5), pp. 2297-2343 (2008) . Click here for full article (.pdf)
Abstract: We present a model of equity trading with informed and uninformed investors where informed investors trade on firm-specific and marketwide private information. The model is used to identify the component of order flow due to marketwide private information. Estimated trades driven by marketwide private information display little or no correlation with the first principal component in order flow. Indeed, our estimation suggests that comovement in order flow captures variation mostly in liquidity trades. Marketwide private information obtained from equity market data forecasts industry stock returns. It also forecasts currency returns consistent with Evans and Lyons’ (2004a) model of exchange rate determination.
Working Papers:
"Excess Volatility of Consumption in Developed and Emerging Markets: The Role of Durable Goods," September 2009. Click here for full paper (.pdf) Abstract: We examine how much of the excess volatility of consumption puzzle in small open economies (Aguiar and Gopinath (2007)) can be explained away by adding consumption of durable goods. Once we account for that, consumption is not as volatile as income for both developed and emerging market economies. However, the fact remains that consumption is still more volatile (relative to income) in emerging markets than in developed ones. We extend Aguiar and Gopinath’s model of a small open economy with shocks to trend and cycle to include consumption of durable goods. Based on our simulations of a small open economy model with consumption of durable goods , we question the role for shocks to trend that have been previously documented in the literature. Furthermore, we find that financial frictions, in the form of collateral requirements, seem to be shaping the business cycle in developing economies. "Welfare Implications of Exchange Rate Changes," July 2008. Click here for full paper (.pdf)
Abstract: This paper measures the welfare implications of a depreciation of the U.S. dollar against the euro using a dynamic equilibrium model. I calibrate a simple two country stochastic endowment economy with trade in goods and financial assets and exogenous variations in the exchange rate. The model displays both a trade channel effect and an asset channel effect after a change in the value of the exchange rate. The welfare loss coming from the trade channel translates into the relatively higher price that consumers have to pay for imports. The asset channel effect arises from three sources. One is the traditional valuation effect associated with U.S. debt being denominated mostly in dollars. The other two novel effects are: (1) the dollar value of investors net worth, mostly denominated in local currency, increases more in Europe than in the U.S.; (2) asset prices change, causing a portfolio rebalancing effect which results in a fall in the share of world assets owned by the U.S. I show that a dollar depreciation has potentially large negative welfare effects as measured by the net present value of future consumption. After a temporary 10% depreciation of the dollar, with a half-life of one year, I calculate a 0.25% decrease in lifetime aggregate consumption for the U.S. consumer. "The Costs to Consumers of a Depreciated Conversion Rate to the Euro," June 2007. Click here for full paper (.pdf)
Abstract: This paper measures the welfare cost to consumers of the bloc of Central and Eastern European countries (CEEC), plus Malta and Cyprus, of choosing a depreciated conversion rate when joining the European Monetary Union. For this, I present and solve an appropriately calibrated small open economy model where a euro-denominated bond and the equity on a traded goods sector are traded internationally. I show that the cost of depreciating the domestic currency against the euro by 20%, at the time of joining the European Monetary Union, entails a cost of approximately 1.65% in terms of lost lifetime utility (measured in equivalent units of consumption).
"International Differences in the Level of CEO Compensation," March 2006, with Sayantani Ghose. Click here for full paper (.pdf) Abstract: Relative CEO compensation, as measured by the ratio of average CEO compensation to the average wage in a country shows great variation across countries. By 2004, this ratio varied from anywhere between 10 (Netherlands) and 246 (Mexico). While it is impossible to account for such variation through a traditional Hecksher-Ohlin model by itself, incorporating the differences in the levels of corporate governance in these countries provide a clearer understanding. This paper provides a theoretical model that builds on the Lucas (1978) model of firm-size distribution. It proposes three main underlying forces behind the observed variation in this ratio: (i) Scale (Size) Effect; (ii) Relative Endowment Effect (Capital Labor Ratio of the country) and (iii) Rent Seeking Effect (inversely related to the level of Corporate Governance). The main conclusions are: (a) The bigger the scale of operation; the greater the ratio of CEO pay to that of average wage; (b) Improvement in the level of corporate governance reduces this ratio; (c) Greater dispersion in firm ownership lowers relative CEO compensation and (d) A higher capital-labor ratio increases this ratio. A panel data set is constructed using data on 27 countries for 15 years and an error components model is estimated. The results confirm the testable implications of the model. cycle in developing economies. |
