Person: Hanson, Samuel
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Hanson, Samuel
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Publication Business Credit Programs in the Pandemic Era(2020-09) Hanson, Samuel; Stein, Jeremy; Sunderam, Aditya; Zwick, EricWe develop a pair of models that speak to the goals and design of the sort of business-lending and corporate-bond purchase programs that have been introduced by governments in response to the ongoing COVID-19 pandemic. An overarching theme is that, in contrast to the classic lender-of-last-resort thinking that underpinned much of the response to the 2007–2009 global financial crisis, an effective policy response to the pandemic will require the government to accept the prospect of significant losses on credit extended to private sector firms.Publication Asset Price Dynamics in Partially Segmented Markets(Oxford University Press (OUP), 2018-09) Greenwood, Robin; Hanson, Samuel; Liao, Gordon YWe develop a model in which capital moves quickly within an asset class but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists can gradually reallocate capital across markets. Upon the arrival of a large supply shock, prices of risk in the directly impacted asset class become disconnected from those in others. Over the long run, capital flows between markets and prices of risk become more closely aligned. While prices in the directly impacted market initially overreact to the supply shock, we show that prices in related asset classes underreact under plausible conditions. We use the model to assess event-study evidence on the impact of recent large-scale asset purchases by central banks.Publication A Quantity-Driven Theory of Term Premia and Exchange Rates(Oxford University Press (OUP), 2023-05-27) Greenwood, Robin; Hanson, Samuel; Stein, Jeremy; Sunderam, AdityaWe develop a model in which specialized bond investors must absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, a shift in the supply of long-term bonds in one currency influences the foreign exchange rate between the two currencies, as well as bond term premia in both currencies. Our model matches several important empirical patterns, including the comovement between exchange rates and term premia, and the finding that central banks’ quantitative easing policies affect exchange rates. An extension of our model links spot exchange rates to the persistent deviations from covered interest rate parity that have emerged since 2008.Publication Mortgage Convexity(Elsevier, 2014-05-13) Hanson, SamuelMost home mortgages in the U.S. are fixed-rate loans with an embedded prepayment option. When long-term rates decline, the effective duration of mortgage-backed securities (MBS) falls due to heightened refinancing expectations. I show that these changes in MBS duration function as large-scale shocks to the quantity of interest rate risk that must be borne by professional bond investors. I develop a simple model in which the risk tolerance of bond investors is limited in the short run, so these fluctuations in MBS duration generate significant variation in bond risk premia. Specifically, bond risk premia are high when aggregate MBS duration is high. The model offers an explanation for why long-term rates may appear to be "excessively sensitive" to movements in short rates and explains how changes in MBS duration act as a positive-feedback mechanism that amplifies interest rate volatility. I find strong support for these predictions in the time series of U.S. government bond returns.Publication Monetary Policy and Long-Term Real Rates(Elsevier, 2014-10-28) Hanson, Samuel; Stein, JeremyChanges in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis point increase in the two-year nominal yield on a Federal Open Markets Committee announcement day is associated with a 42 basis point increase in the ten-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Instead, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that could generate such variation in term premia is based on demand effects due to the existence of what we call yield-oriented investors. We find some evidence supportive of this channel.Publication Banks as Patient Fixed-Income Investors(Elsevier, 2015) Hanson, Samuel; Shleifer, Andrei; Stein, Jeremy; Vishny, Robert W.We examine the business model of traditional commercial banks when they compete with shadow banks. While both types of intermediaries create safe "money-like" claims, they go about this in different ways. Traditional banks create money-like claims by holding illiquid fixed-income assets to maturity, and they rely on deposit insurance and costly equity capital to support this strategy. This strategy allows bank depositors to remain "sleepy": they do not have to pay attention to transient fluctuations in the market value of bank assets. In contrast, shadow banks create money-like claims by giving their investors an early exit option requiring the rapid liquidation of assets. Thus, traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. In equilibrium, traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk but are illiquid and have substantial transitory price volatility, whereas shadow banks tend to hold relatively liquid assets.Publication Issuer Quality and Corporate Bond Returns(Oxford University Press (OUP), 2013) Greenwood, Robin; Hanson, SamuelWe show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns.Publication A Comparative-Advantage Approach to Government Debt Maturity(Wiley-Blackwell, 2015-02-19) Greenwood, Robin; Hanson, Samuel; Stein, JeremyWe study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of short-term, money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk and, hence, should aim to partially crowd out the private sector's use of short-term debt.Publication A Model of Credit Market Sentiment(2016-08-22) Greenwood, Robin; Hanson, Samuel; Jin, Lawrence J.We present a model of credit market sentiment in which investors form beliefs about future creditworthiness by extrapolating past defaults. Our key contribution is to model the endogenous two-way feedback between credit market sentiment and credit market outcomes. This feedback arises because investors’ beliefs depend on past defaults, but beliefs also drive future defaults through investors’ willingness to refinance debt at low interest rates. Our model is able to capture many documented features of credit booms and busts, including the link between credit growth and future returns, and the “calm before the storm” periods in which fundamentals have deteriorated but the credit market has not yet turned.Publication An Evaluation of Money Market Fund Reform Proposals(2015-09-29) Hanson, Samuel; Scharfstein, David; Sunderam, AdityaU.S. money market mutual funds (MMFs) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the U.S. MMFs proved to be a source of considerable instability during the financial crisis of 2007–2009, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which we analyze in this paper. We assume that the main goal of MMF reform is safeguarding global financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that an MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating NAV, may be less effective in protecting financial stability. Our analysis sheds light on the fundamental tensions inherent in regulating the shadow banking system. U.S. money market mutual funds (MMFs) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the United States. MMFs proved to be a source of considerable instability during the financial crisis of 2007–2009, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which we analyze in this paper. We assume that the main goal of MMF reform is safeguarding global financial stability. In light of this goal, reforms should reduce the ex-ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that an MMF suffers losses large enough to trigger a run and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating NAV, may be less effective in protecting financial stability. Our analysis sheds light on the fundamental tensions inherent in regulating the shadow banking system.