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.
Selected Conference Presentations: Wabash River Conference 2026 (scheduled), Chicago Fed Inaugural Annual Conference on Insurance 2026 (scheduled), Paris December Finance Meeting 2026 (scheduled)
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 rebalanced product issuance toward shorter-duration products to hedge. This response reduced long-duration life insurance coverage by 12.1% 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: Why does the same monetary tightening lead some banks to write safer loans? We identify a deposit-franchise mechanism within the risk-taking channel of monetary policy. Sticky deposits generate rents that are lost in failure, giving low-deposit-beta banks more skin in the game. Our model predicts that these banks cut risk more after tightening. We test this prediction with U.S. supervisory loan-level data, monetary policy shocks, predetermined deposit betas, and borrower-time fixed effects. Tightening reduces risk-taking, especially at low-beta banks, beyond bank capital. New originations reveal the margin: for the same borrower-quarter, low-beta banks write more collateralised and senior loans.
Selected Conference Presentations: Empirical Financial Intermediation Workshop 2025, Oxford Saïd - VU SBE Macro-Finance Conference 2026, IAAE 2026, FMARC 2026, NBER Summer Institute - Capital Markets and the Economy 2026
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
Publications
Long Rates, Life Insurers, and Credit Spreads [ | Paper | Internet Appendix ] The Review of Financial Studies, Forthcoming
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 proposes a new channel through which long-term interest rates transmit to credit spreads. When life insurers carry negative duration gaps, higher rates reduce their liabilities more than assets. Rate increases therefore boost equity and risk-bearing capacity, lowering equilibrium credit spreads. Empirically, I test this channel with bond-level yields and a maturity-based discontinuity in bond ownership. Insurers’ trades confirm the mechanism: after rates rise, insurers shift portfolios toward riskier, high-yield bonds. As rates increase, bonds more heavily held by life insurers experience greater spread reductions. The results show that institutional duration mismatch shapes credit spreads and corporate financing conditions.
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.
