Working Papers

The Term Structure of Corporate Bond Risk Premia

(Job Market Paper)

Abstract: I construct a forward-looking estimate of the term structure of corporate bond risk premia based on yields and estimated default probabilities. I document an upward-sloping term structure of risk premia both at the aggregate bond market level and across various cross-sectional sorts over 2002-2020. The forward-looking estimates reveal that most of the credit risk, value and size premia in corporate bonds are earned on short-duration bonds, suggesting that the investors are particularly averse to the short- and intermediate-horizon risks. These patterns are not detectable by the average realized returns that in the same sample period exhibit a slightly downward-sloping term structure. I show that a significant fraction of the realized returns is driven by downward-trending risk premia over the last 20 years, which substantially reduced the informativeness of realized returns about risk premia.

The Shadow Value of Unconventional Monetary Policy

(with Ugo Albertazzi, Lorenzo Burlon, and Nicola Pavanini)

R&R at Review of Economic Studies

Abstract: We quantify how central bank unconventional monetary policy, in the form of funding facilities, reduced the banking sector's intrinsic fragility in the euro area in 2014-2021. We estimate a micro-structural model of imperfect competition in the banking sector that allows for multiple equilibria with bank runs, banks' default and contagion, and central bank funding. Our framework incorporates demand and supply for insured and uninsured deposits, for loans to firms and households, and borrowers' default. We use confidential granular data for the euro area banking sector, including information on banks' borrowing from the European Central Bank (ECB). We document the presence of alternative equilibria with run-type features, but also that central bank interventions exerted a crucial role in containing this risk. Our counterfactuals show that, on average across equilibria, a 1 percentage point reduction in the ECB lending rate leads to a 1.4 percentage points reduction in banks' default probability.

The Implied Equity Term Structure

(with Lieven Baele, and Joost Driessen)

Abstract: We propose a new methodology to estimate the equity term structure, based on the cross-section of stock prices and the implied cost of capital approach. Specifically, instead of focusing on the realized returns of maturity-specific dividend assets, we imply the term structure of expected returns based on the observed market prices and projected firm-level cash flows. Using US data for 1976-2019, we find an unconditionally upward sloping term structure of risk premia with rich cross-sectional patterns. Namely, large and growth firms exhibit an upward sloping term structure, whereas the smallest and value firms mostly have a downward sloping term structure. We also detect that the slope of the term structure changes from negative to positive in the late 1990s for the largest firms, as well as that the slope tends to flatten out or even invert in recessions. Thus, using a direct measure of ex-ante returns, we are able to provide new evidence on the debated properties of the equity term structure