Research

Here you will find my previous and current research.

Papers

Log scale plot of system equity lost from a small shock vs. price impacts. The dashed vertical line indicates the limit of fire sales calculated in the paper. The full line indicates the baseline value.

Identification and assessment of systemic risks in financial networks: Modelling fire sales from regulatory cliff effects, Danmarks Nationalbank Working Paper, Number 117.

This paper investigates fire sales triggered by regulatory cliff effects induced by the loss of Capital Requirements Regulation (CRR) compliance on covered bonds. The loss of CRR compliant status leads to banks holding these covered bonds to lose several regulatory advantages, one consequence being a lower solvency. In our analysis, following the loss of CRR compliance, banks sell off their covered bonds in a fire sale, in an attempt to return to their initial solvency, resulting in losses of equity for the system as a whole. Further, we find that, for price impacts larger than a critical threshold, even small shocks lead to explosive fire sales and large losses of equity. While these losses can be averted if the banks allow their solvency levels to fall temporarily, other regulations, such as those relating to large exposures to other banks, could still trigger similar fire sales.

Work in Progress

Regulatory Cliff effects and Systemic Risk.

Since the financial crises much legislation has been implemented to decrease systemic risk, however have these implementations lead to new risks? This paper investigates systemic risks arising from Basel implemented cliff effects. Sudden discrete changes to asset properties, from regulatory cliff effects, cause financial banks to act simultaneously in a homogeneous way, exacerbating systemic risk. We develop a model which quantifies these non-linear effects, and find that under certain circumstances, even small changes have drastic consequences. Taking the model to the data, we find that current market measures imply that the circumstances are satisfied for the Danish financial system.

Regulatory Uncertainty and Capital Buffers (with Jens Dick-Nielsen).

Financial regulation has since the crises been uncertain, leading to significant changes for financial agents. Using a simple model, we show how uncertainty about future regulation might affect current behaviour.

The Ethical Pricing Factor (with Alexander Kronies).

The last 10 years has seen a large inflow to Ethical Social and Governance responsible funds (ESG). By constructing a long-short ESG portfolio factor, we document how ESG helps explain expected returns. As funding costs, like the expected cost of capital, has implications for which projects get financed, we further test this relationship on real investments.