February 2024

In a new project, Jiayi Zheng (ANU), Min Zhu (UQ) and I study the impact of assumption financing on housing prices and supply. Here is the abstract:

The dramatic increases in mortgage rates over the past two years have sparked heightened interest in assumable mortgages and their impact on housing supply and pricing. Using a novel dataset that encompasses property transactions with assumable financing options across 14 US regions, we document that the assumption feature enhances the value of the average property by nearly $100K. Over 80% of the market value of the option to assume is capitalized into this price premium, with the precise fraction contingent upon various factors including the seller's bargaining power. We present evidence consistent with a lock-in effect induced by high interest rates, and show that mortgage assumption mitigates this effect, thereby promoting household mobility.

February 2024

New work with Jean Helwege (UC Riverside) titled Adaptive Risk Preferences: Unraveling the Impact of Monetary Policy on Output introduces a novel approach for measuring time variation in habit-based preferences using corporate bond data, and employs this approach to estimate moments that describe the link between surplus consumption and output. Using a model that integrates macroeconomic dynamics with habit-based preferences, we show that our evidence on the relationship between surplus consumption and the output gap is most consistent with a model specification where a monetary policy shock of 1% reduces output by 2.2% and has a trough at 9-10 quarters. This evidence is relevant for recent studies that rely on the preference-output gap link to induce hump-shaped output responses to monetary policy shocks.

Seminar and conference presentations at Tsinghua PBCSF, Chicago Fed, Cleveland Fed


August 22, 2023

Darrell Duffie (Stanford), Yichao Zhu (ANU) and I just completed a new version our the paper "The Decline of Too Big To Fail".

For globally systemically important banks (GSIBs) with US headquarters, we find significant reductions in market-implied probabilities of government bailout after the Global Financial Crisis (GFC), along with roughly 170\% higher wholesale debt financing costs for these banks after controlling for insolvency risk.  Since the GFC, bank creditors appear to expect much larger losses in the event that a GSIB approaches insolvency. In this sense, we estimate a decline of ``too big to fail.''

July 2022

In the note Valuation of Bank Assets with Early Government InterventionMick Schaefer, Alexander Szimayer (University of Hamburg) and I solve a dynamic structural model for valuing bank debt and equity that allows for the possibility of government intervention both prior to and at insolvency.