“Correlated Risk Factors in Currency Markets” [JOB MARKET PAPER]
I document several properties of a novel predictor of excess returns on a standard dollar-neutral carry trade strategy. A regression of one-month-ahead excess returns on the predictor, the average interest rate differential in the carry trade portfolio, and their interaction term, produces an adjusted R² of 4.8%. The predictor can also be used to predict drawdowns/crashes at the daily frequency.
[A less transparent, and more detailed, abstract will be supplied once there is a proper working paper version]
“Operational Cash Holdings in a Real Business Cycle Model with Financial Frictions”
In the data, I observe the procyclical behavior of aggregate cash holdings of U.S. firms. That is, firms tend to hold more cash in good times, than in bad times. To address the question of why this is, I first distinguish between operational cash (used to run the day-to-day business operations), and non-operational cash (used for pre-cautionary motives). Then, I present a real business cycle model, in which firms hold operational cash. There are two important types of shocks in the model: (i) an ordinary productivity shock; and (ii) a financial shock, affecting how much firms can borrow against a given amount of collateral. I find that the procyclical behavior of operational cash holdings can be explained by both shocks. The productivity shock is the main driver of output in the model, and as such, it is tightly connected to the firm’s need for operational cash to finance wages and investments. When extracting the financial shock series from the data, we see a procyclical pattern. As a result, in good economic times, firms tend to shift their financing from equity to debt. To facilitate this shift, firms engage in share repurchases and dividend payments, which require operational cash. I also find that the implied volatility of non-operational cash holdings is significantly larger than that of operational cash holdings, for which I provide solid intuition.