1) The Macroeconomic Implications of Uncertainty and Risk Aversion Shocks

Single authored. Reject & Resubmit at the European Economic Review

Abstract: Inspired by standard risk neutral measures of volatility, this paper identifies two types of volatility shocks, namely quantity and price of risk shocks, which can intuitively be interpreted as uncertainty and risk aversion shocks, respectively. Identification is achieved in a shock-restricted SVAR framework using narrative restrictions. We find that uncertainty shocks have large negative effects on output, while risk aversion shocks are particularly damaging to asset prices and are deflationary. We also quantify to which extent risk aversion shocks can exacerbate the real effects of uncertainty shocks, thereby providing an estimate of the quantitative relevance of the risk-premium channel of uncertainty shocks. Our results suggest that both uncertainty and risk aversion shocks were important drivers of the Great Financial Crisis. For the COVID recession, uncertainty shocks were the main drivers while risk aversion played a more limited role.

[Working Paper]

2) The Economic Effects of Climate Policies

Joint work with A. Cesa-Bianchi (Bank of England), F. di Pace (Bank of England), & A. Haberis (Bank of England).

Abstract: This paper explores both country and firm-level responses to carbon pricing shocks using a large panel of countries member of the EU Carbon ETS. We document that carbon pricing shocks have a limited average effect on real variables such as real GDP and consumer prices, while they coincide with significantly larger drop in equity prices and a tightening of financial conditions. At the same time, we document significant cross-country heterogeneity, suggesting that more energy intensive countries may suffer more than others. Using granular firm-level data, we document that firms with higher CO2 intensity tend to suffer more from carbon pricing policy shocks. At the same time, firms operating in browner sectors do not suffer more, thereby suggesting that investors’ funds reallocation tend to happen within, rather than across sectors. We develop a theoretical model that can account for these empirical patterns.

[Working Paper coming soon / draft available on demand]

3) Climate Policy Risk and Asset Prices in Switzerland

Single authored.

Abstract: This paper develops an index of climate policy risk using text-analysis techniques on Swiss newspapers. I show that an industry-balanced portfolio that shorts carbon intensive firms is a valuable hedge out-of-sample to innovation in the climate policy risk variable. I further identify a number of arguably exogenous regulatory events that lead to a tightening of climate policy in Switzerland, and analyse the response of the stock prices of public firms around these events. The results suggest that stock prices of brown firms perform significantly worse following such events, both at high frequency and at a longer horizon. The results provide evidence on the pricing of climate transition risk and allows to quantify the financial effect of climate policies.

[Working Paper]

4) Foreign Exchange Interventions with UIP and CIP Deviations: The Case of Safe-Haven Economies

Joint with P. Bacchetta (UNIL, SFI, CEPR) & K. Benhima (UNIL, CEPR)

Abstract: We examine the opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We examine the optimal policy of a constrained central bank planner in this context. We find that there may be a benefit, rather than a cost, of FX reserves if international intermediaries value more the safe haven properties of a currency that domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen.

[Working Paper]