“Reference Points In Refinancing Decisions”
Job Market Paper

Presented at: NYU Stern (May, New York, Phd seminar), Columbia University (New York, Phd seminar), USI Lugano (Lugano, Brown Bag Seminar), CREDIT 2019 (Venice, poster session), SFI Job Market Workshop (Lausanne), NYU Stern (October, New York, PhD Seminar), Austrian Working Group on Banking and Finance (Vaduz), Goethe University (Frankfurt), Paris December 2019 Finance Meeting, 59th Annual Southwestern Finance Association (SWFA) Conference (San Antonio), EFA 2020 (scheduled)

Abstract: This paper shows that households’ mortgage refinancing decisions suboptimally depend on uninformative reference points, imposing a friction to the refinancing channel of monetary policy. I study refinancing behavior in the UK, where on pre-determined dates initial fixed rates reset and mortgagors automatically move onto a reversion rate above market rates. A borrower’s expired fixed rate determines whether failing to refinance is perceived as a loss or as a gain, thus serving as a salient reference point. I find that borrowers for whom inaction implies a relative gain refinance on average 13.4% less than borrowers who face a loss. This evidence is at odds with optimal models of refinancing since future borrowing costs are unrelated to past rates.

“Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan”
Review of Asset Pricing Studies (forthcoming)

with Andrea Barbon

Presented at: JEN conference (2018), USI Lugano (2018), AFA 2018 (poster session), SFI Research Days (2018), 2017 OFCE/Science-Po Workshop, SFI PhD Workshop (2017)

Media: Interview on L’Universo (in Italian)

Abstract: Since the introduction of its Quantitative and Qualitative Easing program in 2013, the Bank of Japan has been increasing its holdings of Japanese equity through large scale purchases of index-linked ETFs, with the intention of lowering risk premia. In this paper, we exploit the cross-sectional heterogeneity of the shock to supply induced by the policy to identify a positive, sizeable and persistent impact on stock prices consistent with a portfolio balance channel. The evidence suggests that demand curves for stocks are downward sloping in the long-run. We estimate an increase of 22 basis points in aggregate market valuation per trillion Yen invested into the program, corresponding to a price elasticity of 1. We show that the purchases of ETFs tracking the price-weighted Nikkei 225 index generate significant pricing distortions relative to a value-weighted benchmark. Finally, we provide a rigorous framework to discuss the consequences of a potential exit strategy from QE.

 [SSRN] [Internet Appendix] [Slides]

“Residential Mortgage Defaults and Positive Equity: Lessons from Europe”

with Loriana Pelizzon and Alberto Plazzi

Presented at: CREDIT 2018, Ca’ Foscari University of Venice (seminar 2018), Collegio Carlo Alberto (seminar 2018), ECB (seminar 2019), Aalto University (seminar 2019)

Abstract: We empirically investigate mortgage default behavior in the European market where mortgages are recourse loans, i.e. borrowers are responsible upon default for the difference between the value of the outstanding debt and the value of the house. We show that the majority of defaults happen when collateral would be in principle enough to repay the debt. We find that equity at default is significantly negatively related with the households income at origination, which is consistent with the threat of recoursability being greater for borrowers with a higher marginal utility of consumption. Moreover, a tightening in credit conditions reinforces the relation between equity at default and income and negative shocks to house prices have a larger impact on the de- fault probability of low-income borrowers, everything else controlled for. This evidence poses the question on what is best between principal reduction or temporary payment moratorium to prevent borrowers from losing their homes during crisis periods.

“Securities Lending and Quantitative Easing”

with Loriana Pelizzon, Marti Subrahmanyam and Davide Tomio

We shed light on the trade-off between the effectiveness of QE and the well-functioning of repo markets when central banks allow market participants to borrow the securities they purchased. We focus on the effect of the introduction of the cash-collateralized securities lending facility by the Eurosystem, which, next to potentially “undoing” some of the scarcity created by QE, it is also draining part of the excess liquidity the ECB has been injecting.