Adi Sunderam

Assistant Professor of Business Administration

Adi Sunderam is an assistant professor of business administration in the Finance Unit, and a Faculty Research Fellow at the National Bureau of Economic Research. He teaches Finance II in the MBA required curriculum and a Ph.D. course in Empirical Methods. In 2009 and 2010, he served in the U.S. Treasury Department as a special assistant and liaison to the White House National Economic Council. 

Professor Sunderam's research interests are in corporate finance, asset pricing, and financial intermediation. His recent work focuses on the organization of financial markets and its effect on asset prices and corporate investment.

Professor Sunderam holds a Ph.D. in business economics and an A.B. in computer science and economics, both from Harvard University.    


Journal Articles

  1. Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Funds

    We document the consequences of money market fund risk taking during the European sovereign debt crisis. Using a novel data set of security-level holdings of prime money market funds, we show that funds with large exposures to risky Eurozone banks suffered significant outflows between June and August 2011. Due to credit market frictions, these outflows have significant spillover effects on other firms: non-European issuers that typically rely on these funds raised less financing in this period. The results are not driven by issuers' riskiness or exposure to Europe: for the same issuer, money market funds with greater exposure to Eurozone banks decrease their holdings more than other funds. We show that relationships are important in short-term credit markets so that these spillover effects cannot be seamlessly offset, even though issuers are large, highly rated firms. Our results illustrate that instabilities associated with money market funds persist despite recent changes to the regulations governing them.

    Keywords: Investment Funds; Financial Crisis; Europe;


    Chernenko, Sergey, and Adi Sunderam. "Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Funds." Review of Financial Studies (forthcoming). View Details
  2. The Growth and Limits of Arbitrage: Evidence from Short Interest

    We develop a novel methodology to infer the amount of capital allocated to quantitative equity arbitrage strategies. Using this methodology, which exploits time-variation in the cross section of short interest, we document that the amount of capital devoted to value and momentum strategies has grown significantly since the late 1980s. We provide evidence that this increase in capital has resulted in lower strategy returns. However, consistent with theories of limited arbitrage, we show that strategy-level capital flows are influenced by past strategy returns as well as strategy return volatility, and that arbitrage capital is most limited during times when strategies perform best. This suggests that the growth of arbitrage capital may not completely eliminate returns to these strategies.

    Keywords: Strategy; Financial Instruments; Capital Markets; Investment;


    Hanson, Samuel G., and Adi Sunderam. "The Growth and Limits of Arbitrage: Evidence from Short Interest." Review of Financial Studies 27, no. 4 (April 2014): 1238–1286. (Winner of the RFS Rising Scholar Prize 2014. Internet Appendix Here.) View Details
  3. Are There Too Many Safe Securities? Securitization and the Incentives for Information Production

    We present a model that helps explain several past collapses of securitization markets. Originators issue too many informationally insensitive securities in good times, blunting investor incentives to become informed. The resulting endogenous scarcity of informed investors exacerbates primary market collapses in bad times. Inefficiency arises because informed investors are a public good from the perspective of originators. All originators benefit from the presence of additional informed investors in bad times, but each originator minimizes his reliance on costly informed capital in good times by issuing safe securities. Our model suggests regulations that limit the issuance of safe securities in good times.

    Keywords: Information; Debt Securities; Financial Crisis;


    Hanson, Samuel G., and Adi Sunderam. "Are There Too Many Safe Securities? Securitization and the Incentives for Information Production." Journal of Financial Economics 108, no. 3 (June 2013): 565–584. (Internet Appendix Here.) View Details
  4. The Real Consequences of Market Segmentation

    We study the real effects of market segmentation due to credit ratings using a matched sample of firms just above and just below the investment-grade cutoff. These firms have similar observables, including average investment rates. However, flows into high-yield mutual funds have an economically significant effect on the issuance and investment of the speculative-grade firms relative to their matches, especially for firms likely to be financially constrained. The effect is associated with the discrete change in label from investment-grade to speculative-grade, not with changes in continuous measures of credit quality. We do not find similar effects at other rating boundaries.

    Keywords: Segmentation; Credit; Investment; Investment Funds; Quality; Markets; Measurement and Metrics; Business Ventures;


    Chernenko, Sergey, and Adi Sunderam. "The Real Consequences of Market Segmentation." Review of Financial Studies 25, no. 7 (July 2012). (Winner of the RFS Young Researcher Prize 2012.) View Details
  5. The Variance of Non-Parametric Treatment Effect Estimators in the Presence of Clustering

    Non-parametric estimators of treatment effects are often applied in settings where clustering may be important. We provide a general methodology for consistently estimating the variance of a large class of non-parametric estimators, including the simple matching estimator, in the presence of clustering. Software for implementing our variance estimator is available in Stata.

    Keywords: treatment effects; matching estimators; clustering; Software; Mathematical Methods;


    Hanson, Samuel G., and Adi Sunderam. "The Variance of Non-Parametric Treatment Effect Estimators in the Presence of Clustering." Review of Economics and Statistics 94, no. 4 (November 2012). (Stata and Matlab Code Here.) View Details

Working Papers

  1. Fiscal Risk and the Portfolio of Government Programs

    This paper proposes a new approach to social cost-benefit analysis using a model in which a benevolent government chooses risky projects in the presence of market failures and tax distortions. The government internalizes market failures and therefore perceives project payoffs differently than do individual private actors. This gives it a "social risk management" motive—projects that generate social benefits are attractive, particularly if those benefits are realized in bad economic states. However, because of tax distortions, government financing is costly, creating a "fiscal risk management" motive. Government projects that require large tax-financed outlays are unattractive, particularly if those outlays tend to occur in bad economic times. At the optimum, the government trades off its social and fiscal risk management motives. Frictions in government financing create interdependence between two otherwise unrelated government projects. The fiscal risk of a project depends on how its fiscal costs covary with the fiscal costs of the government's overall portfolio of projects. This interdependence means that individual projects cannot be evaluated in isolation.

    Keywords: Risk Management; Programs; Government and Politics;


    Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "Fiscal Risk and the Portfolio of Government Programs." Working Paper, June 2014. View Details
  2. The Rise and Fall of Securitization

    The rise and fall of nontraditional securitizations—collateralized debt obligations and mortgage-backed securities backed by nonprime loans—played a central role in the financial crisis. Little is known, however, about the factors that drove the pre-crisis surge in investor demand for these products. Examining insurance companies' and mutual funds' holdings of fixed income securities, we find evidence suggesting that both agency problems and neglected risks played an important role in driving investor demand for nontraditional securitizations prior to crisis. We also use our holdings data to shed light on the factors that drove the dramatic collapse of securitization markets beginning in mid-2007. Contrary to conventional crisis narratives, we find little evidence of widespread fire sales. Instead, our evidence is more consistent with the idea that a self-amplifying buyers' strike drove the dramatic collapse of securitization markets.

    Keywords: Debt Securities; Financial Markets; Financial Crisis;


    Chernenko, Sergey, Samuel G. Hanson, and Adi Sunderam. "The Rise and Fall of Securitization." Working Paper, December 2013. View Details
  3. Money Creation and the Shadow Banking System

    Many explanations for the rapid growth of the shadow banking system in the mid-2000s focus on money demand. This paper asks whether the short-term liabilities of the shadow banking system behave like money. We first present a simple model where households demand money services, which are supplied by three types of claims: deposits, Treasury bills, and asset-backed commercial paper (ABCP). The model provides predictions for the price and quantity dynamics of these claims, as well as the behavior of the banking system (in terms of issuance) and the monetary authority (in terms of open market operations). Consistent with the model, the empirical evidence suggests that the shadow banking system does respond to money demand. An extrapolation of our estimates would suggest that heightened money demand could explain up to approximately 1/2 of the growth of ABCP in the mid-2000s.

    Keywords: Banks and Banking; Governing Rules, Regulations, and Reforms; Money; Behavior; Demand and Consumers; Mathematical Methods;


    Sunderam, Adi. "Money Creation and the Shadow Banking System." December 2013. Mimeo. View Details
  4. Market Power in Mortgage Lending and the Transmission of Monetary Policy

    We present evidence that high concentration in mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. We isolate the direct effect of concentration and rule out alternative explanations in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where bank mergers increase concentration in mortgage lending. Within a county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, the overall impact of a decline in MBS yields is only 42% as large in a high-concentration county as it is in an average one. In the time series, a decrease in MBS yields today has a 32% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.

    Keywords: Mortgages; Banking Industry; United States;


    Scharfstein, David S., and Adi Sunderam. "Market Power in Mortgage Lending and the Transmission of Monetary Policy." September 2014. Mimeo. View Details
  5. An Evaluation of Money Market Fund Reform Proposals

    U.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 global shadow banking system.

    Keywords: Risk Management; Balance and Stability; Investment Funds;


    Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "An Evaluation of Money Market Fund Reform Proposals." Working Paper, May 2014. View Details
  6. Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

    The covariance between U.S. Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953–2009, it was unusually high in the early 1980s and negative in the 2000s, particularly in the downturns of 2000–2002 and 2007–2009. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by four state variables: the real interest rate, temporary and permanent components of expected inflation, the "nominal-real covariance" of inflation, and the real interest rate with the real economy. The last of these state variables enables the model to fit the changing covariance of bond and stock returns. Log bond yields and term premia are quadratic in these state variables, with term premia determined by the nominal-real covariance. The concavity of the yield curve―the level of intermediate-term bond yields, relative to the average of short- and long-term bond yields―is a good proxy for the level of term premia. The nominal-real covariance has declined since the early 1980s, driving down term premia.

    Keywords: Inflation and Deflation; Bonds; Interest Rates; Investment Return; Risk Management; United States;


    Campbell, John Y., Adi Sunderam, and Luis M. Viceira. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds." Harvard Business School Working Paper, No. 09-088, January 2009. (Revised January 2013.) View Details

Book Chapters

Cases and Teaching Materials

  1. Restructuring JAL

    Hideo Seto, the recently appointed chairman of the investment committee of the Enterprise Turnaround Initiative Corporation, must decide whether to push JAL group, Japan's largest airline, into bankruptcy or to act as a sponsor in an out-of-court restructuring. The bankruptcy of JAL would be the largest ever for an industrial firm in Japan's history. The case introduces the mechanics of bankruptcy, the tradeoff between out-of-court restructuring and bankruptcy, and the costs of financial distress. At the level of public policy, the case also serves as a useful backdrop to discuss the role of bankruptcy in the efficient functioning of the economy, and the related comparison between Japan and the U.S. in terms of both the bankruptcy code and the cultural attitudes toward corporate restructuring. This case can fit into an introductory course in a module on capital structure and the tradeoff between the costs and benefits of debt or in an advanced corporate restructuring course in a module on the effect of different legal and cultural environments on bankruptcy proceedings.

    Keywords: bankruptcy; costs of financial distress; capital structure; restructuring; Japan; United States; Asia;


    Baker, Malcolm, Adi Sunderam, Nobuo Sato, and Akiko Kanno. "Restructuring JAL." Harvard Business School Case 214-055, November 2013. View Details
  2. Assured Guaranty

    To be used as an aid in teaching the Assured Guaranty case, #213100.

    Keywords: Insurance; value investing; investment; behavioral finance; Valuation; Insurance; Behavioral Finance; Financial Services Industry;


    Greenwood, Robin, Adi Sunderam, and Jared Dourdeville. "Assured Guaranty." Harvard Business School Teaching Note 213-131, June 2013. View Details
  3. Assured Guaranty

    Nate Katz at Yokun Ridge Capital Management is evaluating an investment in Assured Guaranty, a municipal bond insurance company that is trading at a discount to book value.

    Keywords: Insurance; value investing; Investments; behavioral finance; Valuation; Insurance; Behavioral Finance; Financial Services Industry;


    Greenwood, Robin, Adi Sunderam, and Jared Dourdeville. "Assured Guaranty." Harvard Business School Case 213-100, February 2013. View Details