Our paper is motivated by recent work by @HannoLustig et al. (AER 2019) who found that currency carry trade strategies with T-bonds are different from those with T-bills because local currency term premia offset currency premia 2/n
Results in Lustig et al. (AER 2019) are for advanced economies with no/low default risk and imply that the volatility of the permanent component of investors’ SDF must be equalized across countries 3/n
In our paper we also consider currency carry trade strategies with T-bonds and T-bills, but for #EmergingMarkets with sizeable default risk 4/n
In contrast with results for advanced economies, we find negative and significant carry trade returns which further decrease with the maturity of the bonds 5/n
This means that, as bond maturity increases, low-interest rate currency bonds offer larger returns in US dollars than those denominated in high-interest rate currencies, just the opposite of the traditional carry trade strategy using short-term instruments. 6/n
We estimate an affine model with global and idiosyncratic shocks that prices defaultable bonds across currencies and maturities. In order to replicate our empirical findings, the exposure to the global shock must be inversely related to the loading on the global state 7/n
This is a novel restriction on the SDFs of domestic and foreign investors that implies that the volatility of the permanent component of the SDFs must be different for low and high interest rate EM currencies 8/n
The focus of our paper is on EM government bonds and one might think that a default premium drives their returns. We decompose returns in components associated with currency, default, and term premia, and show that the local currency term premium drives bond excess returns 9/n
In order to obtain this decomposition, we use the methodology in @WenxinDu and @JSchreger (JF 2016) to construct default-free returns from zero-coupon yield curves in local currency by swapping dollar cash flows from default-free US T-bonds 10/n
We build portfolios sorted by one of the strongest predictors of currency returns: the short-term interest rate. We find a declining cross-section of term premia that more than offsets the increasing cross-section of currency excess returns. 11/n
The default premium is positive for all countries, does not change with bond maturities, and contributes to the level, but not to the slope, of carry trade returns because it is similar for low and high-interest rate currencies 12/n
Our results contribute to literature on bond risk premia, default risk and term structure. The novel restriction on the SDF of EM investors is related to work by Aguiar and Gopinath (JIE 2007) who find that shocks to trend growth are a primary source of fluctuations in EM 13/n
We focus on Italy -- one of the first country struck by #COVIDー19 -- where the lockdown design offers a source of exogenous variation in the intensity of the lockdown at a granular level 2/n
In the second (economic) lockdown (March 22) the Italian government defined a detailed list of essential economic activities. All other activities were either suspended or allowed to operate only remotely 3/n
I am very happy to share that my paper "Optimal Taxation with Home Ownership and Wealth Inequality" with Pietro Reichlin has been now accepted for publication at the @RevEconDyn [1/n] #EconTwitter
In the paper we consider optimal taxation in a model with wealth-poor and wealth-rich households, where wealth derives from business capital and home ownership, and investigate the consequences of a rising wealth inequality at steady state on these tax rates [2/n]
We find that the optimal tax structure includes some taxation of labor, zero taxation of financial and business capital, and critically a housing wealth tax on the wealth-rich households and a housing subsidy on the wealth-poor households [3/n]
My paper with K. Shakhnov on Regulation spillovers across cryptocurrency markets is now available on FRL at this link authors.elsevier.com/c/1bjLs5VD4Kcw… (with 50 days free access) #EconTwitter [thread 1/n]
In this paper we look at the unprecedented drop in trading volume on the Chinese cryprocurrency market after a significant regulatory change that de facto banned bitcoin in early 2017 in China [thread 2/n]
We find large spillovers of this regulatory shock on other cryptocurrency markets: 1) we observe a large increase in trading volume for bitcoin vs. Korean won, Japanese yen and U.S. dollars; ... [3/n]
1/n A new version of my paper with Kirill Shakhnov on "Cryptomarket Discounts" is now available at: ssrn.com/abstract=31243…#EconTwitter [short thread]
2/n Investors buy #bitcoin on a multitude of exchanges, located in different countries, and against different fiat and cryptocurrencies.
3/n Their distribution is leptokurtic, with negative skewness for fiat pairs, and a standard deviation of 4.5%.
1/ Deaths: 119 deaths today, more than 32K since the beginning of the pandemic according to official estimates. But rate is slowly but constantly approaching zero.
2/ 669 new cases today. Combining this number with deaths and recoveries, the total number of active cases today drops by 1570 units and is currently around 57K. Also the rate of new cases is on stable downward path.
1/n Happy to share a new working paper (w/A. Consiglio and G. Bonaccolto) on "Breakup and Defaul Risks in the Great Lockdown" papers.ssrn.com/sol3/papers.cf…#EconTwitter [thread]
2/n Since the #Covid19 shock, fears of a Eurozone breakup have once again invaded the nightmares of many investors. We exploit a contractual difference between CR and CR14 sovereign CDS contracts to identify redenomination risk for France, Italy and Germany.
3/n Since January 1, 2020 redenomination risk for all three countries has increased. We decompose this risk in a direct redenomination premium, and in a conditional currency premium (ie, expected euro depreciation conditional to credit event). In the figure Italy.