Research

Here you will find my previous and current research.

Working Papers

Cumulative Excess Returns for stocks with different ESG levels within high amounts of unconstrained ownership (top quantile). The shaded area denotes recession.

Skills and Sentiment in Sustainable Investing, Available at SSRN.

We document a positive Environmental Social Governance (ESG) premium amongst stocks with high socially unconstrained ownership. And, importantly, the premium evaporates amongst stocks with high socially constrained ownership. In fact, we find that constrained investors chase high ESG stocks with high abnormal returns. Once purchased, however, abnormal returns vanish. The returns do not seem to be driven by consumption risk, as they are especially high during the financial crisis. Instead, they are explained by two facts that we further uncover. First, constrained investors have higher sustainability preferences than unconstrained, which is revealed through their ESG tilt. This yields a sustainability premium. Secondly, unconstrained investors are skilled investors who research firms and are able to predict their future ESG scores, which they trade on. This earns them an abnormal return due to the sustainability premium. They are able to exploit this especially during periods of high Climate sentiment and in times of crisis.

Price of risk (Sharpe Ratio) vs buffer size. Shown for reasonable market volatility (10 %), and risk aversion (3).

Macroprudential Buffers: Trading Systemic Risk for Risk Premia, Available at SSRN.

I document that equity prices fall as macroprudential buffers are announced. This is consistent with macroprudential buffers leading to an increase in risk premia, from a heightened price of risk. Theoretically, I develop a model that predicts that as buffers are announced 1) The price of risk increases, 2) Systemic risk falls, and 3) Intermediaries' risky asset allocation decreases, as other agents with higher risk aversion increase their portfolio weights in the risky asset. Empirically, I find evidence consistent with the first and third prediction. The second remains a testable implication of my model. In summary, this paper sheds light on the equilibrium effects of implementing new financial regulation on asset prices and systemic risk.

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 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.

Andreas Brøgger