Job Market Paper. Submitted.
A long-standing policy of mortgage relief---forbearance and modification---after natural disasters implicitly encourages homeownership in areas increasingly threatened by climate risk. In this paper, I introduce climate risk into a canonical lifecycle model of consumption and housing choice to estimate how ending this mortgage relief would be capitalized into home prices, affect the borrower pool, and alter welfare in flood-prone areas. I use Hurricane Sandy's landfall in New Jersey as a natural experiment to estimate the transfer to flooded households due to mortgage relief: $49,000 on average. I use this estimate to calibrate the model. The model predicts that ending this mortgage relief would reduce (i) home prices in the risky region, (ii) borrower quality in risky regions, and (iii) welfare for predominantly poorer but creditworthy homeowners. Potential gains from pricing in the cost of this relief into the mortgage, akin to increasing insurance premium, would be offset by welfare losses among creditworthy households across the wealth distribution, resulting in an even greater decline in borrower quality in risky areas.
FIASI-Gabelli Research Award, Honorary Mention, 2022.
with Charles M. Kahn and Joao A.C. Santos. Submitted.
FRB NY Working Paper; FEDS Working Paper
In this paper, we introduce a model to study the interaction between insurance and banking. We build on the Federal Crop Insurance Act of 1980, which significantly expanded and restructured the decades-old federal crop insurance program and adverse weather shocks – over-exposure of crops to heat and acute weather events – to investigate some insights from our model. Banks increased lending to the agricultural sector in counties with higher insurance coverage after 1980, even when affected by adverse weather shocks. Further, while they increased risky lending, they were sufficiently compensated by insurance such that their overall risk did not increase meaningfully. We discuss the implications of our results in the light of potential changes to insurance availability as a consequence of global warming.
with Lionel Melin. Submitted.
This paper proposes a parsimonious framework for designing contingent capital contracts (CoCos). CoCos designed this way (i) are either optimal or incentive compatible for equity holders, (ii) implement a unique equilibrium, and (iii) result in an optimal capital structure for the firm. We consider CoCos with equity conversion and write-down modalities. Equity conversion CoCos are optimal; write-down CoCos are incentive-compatible. Both types of CoCos can be implemented by exogenously specifying a capital ratio rule that triggers conversion and, hence, qualify as additional tier 1 (AT1) capital. A policymaker can use a normative criterion, e.g., capital ratio after conversion, to determine the desired capital ratio rule ex-ante. Given the policymaker's choice of the capital ratio rule, our model pins down the CoCo that respects (i), (ii), and (iii). We show that including such a CoCo in the firm's capital structure increases its optimal levered value while making it more resilient to bankruptcy. Lastly, CoCos in this framework are time-consistent. This characteristic alleviates the risk of renegotiation by stakeholders and removes the uncertainty of a discretionary trigger: precisely what spooked markets during the run on Credit Suisse in March 2023.
with Lionel Melin and Benoit Mercereau
Journal of Portfolio Management. 2023.
Do firms that report more carbon emissions—particularly scope 3 emissions—face a higher cost of borrowing in credit markets? In this paper, we find that firms that disclose scope 3 emissions face a lower cost of borrowing in credit markets and estimate a scope 3 disclosure premium of -20 basis points on average. However, credit markets do not significantly discriminate the quantitative amount of reported scope 3 emissions despite penalizing scope 1 + 2 carbon generation. Is this trend because markets reward advertised rather than actual pollution reduction efforts—greenwashing—or because scope 3 data is not yet mature enough to provide reliable information? While the literature has documented evidence of investors rewarding greenwashing, we find substantial discrepancies in firms' scope 3 disclosures across time, regions, and sectors. We show that these discrepancies are mainly concentrated in downstream data. Based on these findings, we highlight possible areas of engagement between firms and investors or policymakers that would be beneficial to all stakeholders.