Publications
Volatility Risk PassThrough
Review of Financial Studies (2022)
We produce novel empirical evidence on the relevance of output volatility (vol) shocks for both currency and international quantity dynamics. Focusing on G17 countries, we document that: (1) consumption and output vols are imperfectly correlated within countries; (2) across countries, consumption vol is more correlated than output vol; (3) the passthrough of relative output vol shocks onto relative consumption vol is significant, especially for small countries; and (4) consumption differentials vol and exchange rate vol are disconnected. We rationalize these findings in a frictionless model with multiple goods and recursive preferences featuring a novel and rich risksharing of vol shocks. (with M. Croce, Y. Liu, Ivan Shaliastovich) 
Business Cycles and Currency Returns
Journal of Financial Economics (2020)
We find a strong link between currency excess returns and the relative strength of the business cycle. Buying currencies of strong economies and selling currencies of weak economies generates high returns both in the cross section and time series of countries. These returns stem primarily from spot exchange rate predictability, are uncorrelated with common currency investment strategies, and cannot be understood using traditional currency risk factors in either unconditional or conditional asset pricing tests. We also show that a business cycle factor implied by our results is priced in a broad currency cross section. (with S. Riddiough and L. Sarno) 
Temperature and Growth: a Panel Analysis of the United States
Journal of Money, Credit, and Banking (2019)
We document that seasonal temperatures have significant and systematic effects on the U.S. economy, both at the aggregate level and across a wide crosssection of economic sectors. This effect is particularly strong for the summer: a 1^{o}F increase in the average summer temperature is associated with a reduction in the annual growth rate of statelevel output of 0.15 to 0.25 percentage points. We combine our estimates with projected increases in seasonal temperatures and find that rising temperatures could reduce U.S. economic growth by up to onethird over the next century. (with B. Hoffmann and Toan Phan) 

The Term Structures of Coentropy in International Financial Markets
Management Science (2019)
We propose a new entropybased correlation measure (coentropy) to evaluate the performance of international asset pricing models. Coentropy captures the codependence of two random variables beyond normality. We document that the coentropy of international stochastic discount factors (SDFs) can be decomposed into a series of entropybased correlations of permanent and transitory components of the SDFs. We employ the cross section of G10 countries to obtain modelfree estimates of all the components of coentropy at various horizons and we show that the generalization of the longrun risk model featuring two predictable components of consumption growth rates, global disasters, and recursive preferencesÂ can account for the composition of codependence at all horizons. (with F. ChabiYo) 
Recursive Allocations and Wealth Distribution with Multiple Goods: Existence, Survivorship, and Dynamics
Quantitative Economics (2019)
We characterize the equilibrium of a complete markets economy with multiple agents featuring a preference for the timing of the resolution of uncertainty. Utilities are defined over an aggregate of two goods. We provide conditions under which the solution of the plannerâ€™s problem exists, and it features a nondegenerateÂ invariant distribution of Pareto weights. We also show that perturbation methods replicate the salient features of our recursive risksharing scheme, provided that higherorder terms are included. (with Croce and Liu) 
Currency Risk Factors in a Recursive MultiCountry Economy
The Journal of Finance (2018)
We study a risksharing model featuring multiple countries with recursive preferences defined over bundles of consumption goods whose supply is subject to both global and local short and longrun shocks. First, we quantify the extent of contagion and insurance possibilities as we vary the number of countries in the economy. Second, we introduce persistent heterogeneous exposure to global longrun news shocks and analyze the properties of several carry trade strategies in the context of our model (Lustig et al. 2011 HMLFX, and Della Corte et al. (2013) HMLNA). (with M. Croce, F. Gavazzoni, R.Ready) 
We study the response of international investment flows to short and longrun growth news. Among developed G7 countries, positive longrun news for domestic productivity induces a net outflow of investments, in contrast to the effects of shortrun growth shocks. We document that a standard Backus, Kehoe, and Kydland (1994) (BKK) model fails to reproduce this novel empirical evidence. We augment this model with Epstein and Zin (1989) preferences (EZBKK) and characterize the resulting recursive risksharing scheme. The response of international capital flows in the EZBKK model is consistent with the data. (with Max Croce, Steven Ho, and Philip Howard) 
Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory
Review of Financial Studies (2016)
We show that introducing timevarying skewness in the distribution of expected growth prospects in an otherwise standard endowment economy can up to double the model implied equity Sharpe ratios, and produce a substantial amount of fluctuation in equity risk premia. Looking at the Livingston Survey, we document that the first and third crosssectional moments of the distribution of GDP growth rates made by professional forecasters can predict equity excess returns, a finding which is consistent with our consumption based asset pricing model. (withÂ Eric Ghysels,Â Jinghan Meng, andÂ Wasin Siwasarit).Â 
International Asset Pricing with Recursive Preferences
The Journal of Finance (2013)
Focusing on US and UK, we document that both the Backus and Smith findingâ€”concerning the low correlation between consumption differentials and exchange ratesâ€”and the forwardpremium anomalyâ€”concerning the tendency of high interest rate currencies to appreciateâ€”have become more severe through time. After accounting for different capital mobility regimes, we show that these anomalies turn into general equilibrium regularities in a twocountry and twogood economy with Epstein and Zin preferences, frictionless markets, and correlated longrun growth prospects. (withÂ Max Croce)

Oâ€™ Sole Mio: An Experimental Analysis of Weather and Risk Attitudes in Financial Decisions
Review of Financial Studies (2013)
Although weather has been shown to affect financial markets and financial decision making,Â a still open question is the channel through which such influence is exerted. By employingÂ a multiple price list method, this paper provides direct experimental evidence that sunshineÂ and good weather promote risktaking behavior. This effect is present whether relying onÂ objective measures of meteorological conditions or subjective weather assessments. Finally,Â employing a psychological test, we find evidence that weather may affect individual riskÂ tolerance through its effect on mood.Â (withÂ Anna Bassi and Paolo Fulghieri)


International Robust Disagreement
The American Economic Review Papers & Proceedings (2012)
We characterize the equilibrium of a twocountry, twogood economy in which agents have opposite bias toward one of the two consumption goods and fear model misspecification. We document that disagreement about endowmentsâ€™ growth prospects is a natural outcome of this class of economies. (withÂ Max Croce)

A component model for dynamic correlations
Journal of Econometrics (2011)
The idea of component models for volatility is extended to dynamic correlations. We propose a model of dynamic correlations with a short and longrun component specification. We call it the class of models DCCMIDAS as the key ingredients are a combination of the Engle (2002) DCC model, the Engle and Lee (1999) component GARCH model to replace the original DCC dynamics with a component specification and the Engle, Ghysels, and Sohn (2006) GARCHMIDAS component specification that allows us to extract a longrun correlation component via mixed data sampling. We provide a comprehensive econometric analysis of the new class of models, including conditions for positive semidefiniteness, and provide extensive empirical evidence that supports the model specification. (withÂ Robert Engle and Eric Ghysels)

Risks for the long run and the real exchange rateÂ Â
Journal of Political Economy (2011)
Brandt, Cochrane, and SantaClara (2004) point out that the implicit stochastic discount factors computed using prices on the one hand and consumption growth on the other hand have very different implications for their cross country correlation. They leave this as an unresolved puzzle. We explain it by combining Epstein and Zin (1989) preferences with a model of predictable returns and by positing a very correlated long run component. We also assume that the intertemporal elasticity of substitution is larger than one. This setup brings the stochastic discount factors computed using prices and quantities close together, by keeping the volatility of the depreciation rate in the order of 14% and the cross country correlation of consumption growth around 30%. (withÂ Max Croce)

The short and longrun benefits of financial integrationÂ Â
American Economic Review Papers & Proceedings (2010)
Cole and Obstfeld (1991) pointed out that the welfare benefits of international portfolio diversification might be negligible. They obtain this result in the context of a model in which agents have timeadditive constant relative risk aversion preferences. We revisit their conclusion by showing that a preference for the timing of the resolution of uncertainty combined with endowments containing a slowly moving trend can result in extremely high welfare gains.Â (withÂ Max Croce)

Robustness and US Monetary Policy Experimentation
Journal of Money, Credit, and Banking (2008)
We study how a concern for robustness modifies a policy makerâ€™s incentive to experiment. A policy maker has a prior over two submodels of inflationunemployment dynamics. One submodel implies an exploitable tradeoff, the other does not. Bayesâ€™ law gives the policy maker an incentive to experiment. The policy maker fears that both submodels and prior probability distribution over them are misspecified. We compute decision rules that are robust to misspecifications of the dynamics posited by each submodel as well as the prior distribution over submodels. We compare robust rules to ones that Cogley, Colacito, and Sargent (2007) computed assuming that the models and the prior distribution are correctly specified. We explain why the policy makerâ€™s desires to protect against misspecifications of the submodels, on the one hand, and misspecifications of the prior over them, on the other, have different effects on the decision rule. (With Tim W. Cogley, Lars Peter Hansen and Tom J. Sargent)

Term structure of risk, the role of Known and Unknown Risks and Nonstationary Distributions
The Known, the Unknown and the Unknowable in Financial Risk Management
In this paper we document the presence of a time structure of risk and we propose how to measure it using alternative models to forecast volatility and the VaR at different horizons. We then quantify the benefits of an investor that is aware of the existence of a term structure of risk in the context of an asset allocation exercise. (With Robert Engle)

Benefits from U.S. Monetary Policy Experimentation
Journal of Money, Credit, and Banking (2006)
A policy maker knows two models of inflationunemployment dynamics. One implies an exploitable tradeoff. The other does not. The policy makerâ€™s prior probability over the two models is part of his state vector. Bayes law converts the prior into a posterior at each date and gives the policy maker an incentive to experiment. For a model calibrated to U.S. data through the early 1960s, we isolate the component of government policy that is due to experimentation by comparing the outcomes from two Bellman equations, the first of which embodies a `experiment and learnâ€™ setup, the second of which embodies a `donâ€™t experiment, do learnâ€™ view. We interpret the second as an example of an `anticipated utilityâ€™ model and study how well its outcomes approximate those from the `experiment and learnâ€™ Bellman equation. (With Tim Cogley and Tom Sargent)

Testing and valuing dynamic correlation for asset allocation
Journal of Business and Economic Statistics (2006)
We evaluate alternative models of variances and correlations with an economic loss function. We construct portfolios to minimize predicted variance subject to a required return. It is shown that the realized volatility is smallest for the correctly specified covariance matrix for any vector of expected returns. A test of relative performance of two covariance matrices is based on Diebold and Mariano (1995). The method is applied to stocks and bonds and then to highly correlated assets. On average dynamically correct correlations are worth around 60 basis points in annualized terms but on some days they may be worth hundreds. (With Robert F. Engle)
