Research

Residential real estate
with Tarun Ramadorai, December 2015
Abstract: What explains house price variation in global cities like London and New York? A widely-held view is that foreign demand, especially during crises, is part of the explanation, but the rarity of crises renders pure time-series methods ineffective at evaluating this explanation. Our new approach is based on the insight that foreigners exhibit "home bias abroad," concentrating demand in particular areas within global cities. Using the approach on large databases of housing transactions in London over two decades, we find that foreign risk strongly affects house prices and transactions volumes. The effects are long-lasting but temporary, and vary interestingly across countries.
Presentations (including co-author): University of Oxford; Dutch National Bank; Duisenberg Institute of Finance; Goethe University; MIT Sloan Finance Seminar; Cass Business School; IMF; Imperial College; Darden School of Business; NBER Asset Pricing Program Meeting; Paul Woolley Centre at LSE; ABFER Meeting, Singapore; Meeting of the European Finance Association, University of Lugano; Babes-Bolyai University, Cluj-Napoca; University of Texas at Austin; University of Illinois at Urbana-Champaign.

February 2015
Abstract: Prices and liquidity are closely related in residential real estate markets, both at local level and across neighbourhoods. In this paper, I provide empirical evidence for spatial correlation in housing market turnover, controlling for the role of migration flows. Using micro-level panel data on household valuations of their own non-traded properties, I find that perceived house price growth rates are strongly linked to developments in neighbouring areas, consistent with a framework in which spillovers arise through spatial learning.
Presentations: Saïd Business School; Oxford-Man Institute of Quantitative Finance.

with Tarun Ramadorai, April 2014
Abstract: The United Kingdom's Leasehold Valuation Tribunal hears extension and enfranchisement cases between landlords (freeholders) and tenants (leaseholders). In these cases, the two parties argue about the terms of housing lease extensions of up to 90 years in length, and about enfranchisements to convert leasehold contracts of specific durations to perpetual ownership freeholds. The widely-followed decisions of the leasehold valuation tribunal provide a unique insight into household-level variation in expectations of long-run discount rates and cash-flows, and set bounds on the prices that market participants may be willing to pay for housing over long periods of time. We use the record of decisions since 1995 to extract information about long-run cash-flow and discount rate expectations in this unique setting, which requires no estimation, but has real stakes for the participants in these negotiations. We find evidence that the discount rate associated with these decisions causes values of properties discounted for long periods (above 90 years) to be close to zero.


Household Finance
with John Y. Campbell and Tarun Ramadorai, March 2015
Abstract: This paper reviews the literature on international comparative household finance. The paper presents summary statistics on household balance sheets for 13 developed countries, and uses these statistics to discuss common features and contrasts across countries. The paper then discusses retirement savings, investments in risky assets, unsecured debt, and mortgages.

with John Y. Campbell and Tarun Ramadorai, September 2015
Abstract: The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates affect the share of ARMs in total mortgage issuance. Using a nine-country panel and instrumental variables methods, we present evidence that near-term (one-year) rational expectations of future movements in ARM rates do affect mortgage choice, particularly in more recent data since 2001. However longer-term (three-year) rational forecasts of ARM rates have a weaker effect, and the current spread between FRM and ARM rates also matters, suggesting that households are concerned with current interest costs as well as with lifetime cost minimization. These conclusions are robust to alternative (adaptive and survey-based) models of household expectations.
Presentations: Einaudi Institute for Economics and Finance, Rome.

Revised version, January 2014
Abstract: I analyse the implications of social status concerns on debt holdings at individual and aggregate level, in a partial equilibrium life-cycle framework with heterogeneous agents. The focal point of the analysis is the explicit consideration of durable goods, in their triple role as a part of utility, a collateralizable portion of life-time wealth and a social positioning device. In an economy featuring social status concerns, the debt-to-income ratio is higher, a shift of resources towards the beginning of life arises and the effects of changes in financial conditions are more pronounced.

with Marco Gross, December 2013
Abstract: We assess the extent to which the heterogeneity of inflation expectations is driven by the flow of information related to current and future price developments. We propose different measures of attention that have either a sender/producer or a receiver/consumer perspective, present empirical results for the United States and major European countries that public news lead to convergence in forecasts and augment some otherwise standard models of expectation formation by allowing the individual updating frequency to depend on the observed measure of information flow. Since the allocation of attention over the business cycle is tilted towards times of high inflation and decreasing thereafter, time-varying information flows can contribute to persistent biases in expectations over long periods of time.
Presentations: Federal Reserve Bank of New York; Centre for European Economic Research, Mannheim; ETH Zurich, Switzerland.


Macro-Finance
with Emil Margaritov. ECB Working Paper No. 1313.
Abstract: We study the effects of information shocks on macroeconomic and term structure dynamics in an estimated medium-scale DSGE model for the US economy. We consider news about total factor productivity and investment-specific technology, as well as foresight about monetary policy. Our empirical investigation confirms the findings of previous studies on the limited role played by productivity news in this class of models. In contrast, we uncover a non-trivial role for investment-specific news and anticipated monetary policy shocks not only in the historical and variance decomposition of real economic variables but also for the overall dynamic behavior of the term structure of interest rates. We also document substantial qualitative differences in the dynamic responses of the macroeconomy and the bond yield term structure to anticipated and surprise structural and policy innovations.
Presentation: Goethe University, Frankfurt am Main.

with Marco Buchmann. ECB Working Paper No. 1407.
Abstract: We study the potential of changing levels of disagreement to influence the propensity of the economy to switch between different regimes. Our hypotheses find robust empirical support from a conditional switching model with endogenous transition probabilities for output growth and realized stock market volatility. We argue that disagreement metrics can be of avail for the purpose of measuring and assessing financial stability: while the focus traditionally lies on interest rates, credit market spreads, insurance premia and volatilities as means of measuring stress in financial markets, disagreement measures capture ex ante misperceptions of uncertainty which can indicate market vulnerabilities and signal potential systemic disruptions in advance.
Presentation: European Central Bank, Frankfurt am Main.