Abstract: We study how ratings inflation can undermine financial regulation and inadvertently fuel the growth of privately rated credit. We exploit the 2021 Risk-Based Capital reform for U.S. life insurers, which aimed to curb reaching-for-yield through its treatment of credit ratings. Following the reform, more exposed insurers—especially those with tighter capital constraints—shifted toward privately rated bonds. These bonds exhibit within-issuer ratings inflation and offer higher yields within rating categories, consistent with greater underlying risk behind similar regulatory labels. Accounting for this inflation substantially attenuates the reform’s apparent improvement in portfolio risk. Despite targeting ratings rather than market structure, the reform indirectly increased demand for private bonds. Consistent with this demand shift, firms more connected to exposed life insurers increased their private debt issuance.
Abstract: This paper explores how financial institutions pass interest rate risk through to product markets using the life insurance industry as a setting. We show theoretically that it is optimal for insurers to distort product issuance across maturities to offset duration gaps. We examine insurers exogenously exposed to interest rate risk through their variable annuity liabilities after the 2008 financial crisis. Consistent with our mechanism, exposed insurers developed negative duration gaps, increased markups on long-duration products, and shifted issuance toward shorter-duration products to hedge. As a result, long-term life insurance coverage declined by 31\% of GDP between 2005 and 2023.
Selected Conference Presentations: CICF 2025, AFA 2026, MFA 2026, Columbia Workshop in New Empirical Finance 2026, NBER Insurance Working Group Meeting 2026, BIS-CEPR-Gerzensee-SFI Conference on Financial Intermediation 2026 (poster)
Abstract: We develop a tractable model in which a bank's deposit franchise shapes its risk-taking response to monetary policy. Banks with weaker pass-through to deposit rates (lower deposit betas) see larger profit gains when rates rise and therefore reduce risk-taking more after contractionary shocks. We test this channel using the Federal Reserve's confidential loan-level data, interacting high-frequency monetary policy surprises with pre-determined banks' deposit betas, in regressions saturated with bank and borrower-time fixed effects. We find that low-deposit-beta banks reduce risk-taking significantly more following monetary tightening, confirming that the deposit franchise plays a crucial role in the interaction of monetary policy and financial stability. In a horse race against bank capital-based explanations of risk-taking (e.g., search-for-yield), our deposit-franchise mechanism retains independent explanatory power.
Selected Conference Presentations: EFI Workshop 2025, Oxford Saïd - VU SBE Macro-finance Conference 2026 (scheduled), FMARC 2026 (scheduled), NBER Summer Institute - Capital Markets and the Economy 2026 (scheduled)
Long Rates, Life Insurers, and Credit Spreads [ | | Paper (December 2025) ] — Conditionally Accepted, Review of Financial Studies
Ben Bernanke Prize in Financial and Monetary Economics, Princeton University (2023)
Brattle Group Ph.D. Candidate Award For Outstanding Research, WFA (2024)
Kuldeep Shastri Outstanding Doctoral Student Paper, Eastern FA (2024)
Engelbert Dockner Memorial Prize for the Best Paper by Young Researchers, EFA (2025)
Abstract: This paper examines the relationship between the duration mismatch of life insurers, the largest institutional investors in the US corporate bond market, and credit spread dynamics. Post-GFC, US life insurers face large and negative duration gaps. When long-term interest rates increase, life insurers realize equity gains, which boost their risk-bearing capacity and compress credit spreads. Empirically, post-2008, corporate bond credit spreads decline when long rates rise, which holds both unconditionally and around monetary policy announcements. In the cross-section, I utilize a regression discontinuity design to confirm that this negative co-movement is more pronounced for bonds held more by life insurers.
Selected Conference Presentations: Young Scholars Finance Consortium 2024, WFA 2024, EEA-ESEM 2024, Eastern FA 2024, Bank of Canada FSRC Macro-Finance Conference 2024, AFA 2025, Conference on Fixed Income Markets at San Francisco Fed 2025, CEBRA 2025, EFA 2025, Chicago Booth Asset Pricing Conference 2025
Abstract: In an experiment that elicits subjects’ willingness to pay (WTP) for the outcome of a lottery, we document a systematic effect of stake sizes on the magnitude and sign of the relative risk premium, and find that there is a log-linear relationship between the monetary payoff of the lottery and WTP, conditional on the probability of the payoff and its sign. We account quantitatively for this relationship, and the way in which it varies with both the probability and sign of the lottery payoff, in a model in which all departures from risk-neutral bidding are attributed to an optimal adaptation of bidding behavior to the presence of cognitive noise. Moreover, the cognitive noise required by our hypothesis is consistent with patterns of bias and variability in judgments about numerical magnitudes and probabilities that have been observed in other contexts. In addition to providing foundations for the kind of nonlinear distortions in lottery valuation posited by prospect theory, our model explains why the degree of stake-dependence should be greater for certainty-equivalents elicited by requiring subjects to assign a dollar value to lotteries than for those implied by binary choices.
Selected Conference Presentations : Cowles Foundation Conference on General Equilibrium and its Applications 2022, SITE Workshop on Psychology and Economics 2023, Workshop on Cognitive Noise and Economic Decisions 2023, Foundations of Utility and Risk Conference 2024, Cognitive Foundation of Finance Conference 2025
Abstract: We incorporate flight to safety in a tractable New Keynesian model with incomplete markets and nominal safe assets. A rise in uncertainty induces a flight to safety, where investors shift portfolios from risky productive capital to nominal government bonds. Under price stickiness, the real value of nominal safe assets cannot adjust flexibly, causing capital price overshooting and aggregate demand recessions. Conventional monetary policy through the nominal rate has limited power in mitigating these recessions, as it fails to directly affect portfolio reallocation between safe and risky assets. Instead, optimal monetary policy allows temporary deviations from price stability, leveraging inflation dynamics to indirectly manage safe asset supply.
Selected Conference Presentations : CESifo Area Conference on Macro, Money, and International Finance 2021, BSE Summer Forum - Safety, Liquidity, and the Macroeconomy 2025, NBER Summer Institute - Macro, Money and Financial Frictions 2025, London Junior Macro Conference 2025
Abstract: Observed choices between risky lotteries are difficult to reconcile with expected utility maximization, both because subjects appear to be too risk averse with regard to small gambles for this to be explained by diminishing marginal utility of wealth, as stressed by Rabin (2000), and because subjects’ responses involve a random element. We propose a unified explanation for both anomalies, similar to the explanation given for related phenomena in the case of perceptual judgments: they result from judgments based on imprecise (and noisy) mental representations of the decision situation. In this model, risk aversion results from a sort of perceptual bias — but one that represents an optimal decision rule, given the limitations of the mental representation of the situation. We propose a quantitative model of the noisy mental representation of simple lotteries, based on other evidence regarding numerical cognition, and test its ability to explain the choice frequencies that we observe in a laboratory experiment.
Abstract: Recent experiments suggest that search direction causally affects the discounted valuation of delayed payoffs. Comparisons between options can increase individuals’ patience toward future payoff options, while searching within options instead promotes impatient choices. We further test the robustness and specificity of this relationship using a novel choice task. Here individuals choose between pairs of delayed payoffs instead of single delayed outcomes. We observe a relationship between search styles and temporal discounting that are the opposite of those previously reported. Integrators — those who tend to compare attributes within alternatives — discount and choose more slowly than comparators — those who are more likely to compare between alternatives. This finding supports and augments the view that individuals’ search strategy is predictive of subsequent discount rates. In particular, the direction of this relationship is further modifiable based on the spatial layout and varying information within an individual’s decision-making environment.
Abstract: We document a novel fact about the cross-section of banks’ risk-taking behavior — banks with high deposit market power take on significantly less credit risk. In particular, the loan portfolios of high-market-power banks are much safer than those of low-market-power banks. This persistent relationship is not driven by banks' size, funding structure, loan market power, or geography. Consequently, high-market-power banks earn higher profits, are less exposed to business cycle fluctuations, and sustain smaller losses in recessions. We propose a model where deposit market power increases banks’ franchise value and induces them to take on less risk to avoid defaults.
