Emil N. Siriwardane

Assistant Professor of Business Administration

Emil Siriwardane is an assistant professor of business administration in the Finance Unit. He teaches the Finance II course in the MBA required curriculum.

Professor Siriwardane’s research interests lie in asset pricing, the interplay between macroeconomics and finance, and financial intermediation. In recent work, he has studied how the risk-bearing capacity of large financial institutions impacts the pricing of credit risk in credit default swap markets.

Professor Siriwardane earned his PhD in finance from the Stern School of Business at New York University and a BSE in operations research and financial engineering from Princeton University.

Working Papers

  1. The Probability of Rare Disasters: Estimation and Implications

    Emil Siriwardane

    I analyze a rare disasters economy that yields a measure of the risk neutral probability of a macroeconomic disaster, p*t. A large panel of options data provides strong evidence that p*t is the single factor driving option-implied jump risk measures in the cross section of firms. This is a core assumption of the rare disasters paradigm. A number of empirical patterns further support the interpretation of p*t as the risk-neutral likelihood of a disaster. First, standard forecasting regressions reveal that increases in p*t lead to economic downturns. Second, disaster risk is priced in the cross section of U.S. equity returns. A zero-cost equity portfolio with exposure to disasters earns risk-adjusted returns of 7.6% per year. Finally, a calibrated version of the model reasonably matches the (i) sensitivity of the aggregate stock market to changes in the likelihood of a disaster and (ii) loss rates of disaster risky stocks during the 2008 financial crisis.

    Keywords: Financial Markets; Forecasting and Prediction; Financial Crisis; Macroeconomics;

    Citation:

    Siriwardane, Emil. "The Probability of Rare Disasters: Estimation and Implications." Harvard Business School Working Paper, No. 16-061, November 2015. View Details
  2. Concentrated Capital Losses and the Pricing of Corporate Credit Risk

    Emil N. Siriwardane

    Using proprietary data on all credit default swap (CDS) transactions in the U.S. from 2010 to 2014, I show that a firm's CDS spreads are driven by capital fluctuations of that firm's net protection sellers. Capital fluctuations of sellers account for 10% of the time-series variation in spread changes, a significant amount given that observable firm and macroeconomic factors account for less than 16% of variation during this span. Sellers of protection are also highly concentrated, with five sellers responsible for nearly half of net selling. This concentration leads to market fragility—losses at the largest sellers have an outsized impact on CDS pricing. These findings suggest a high degree of short-run market segmentation and support theories where capital market frictions play a first-order role in determining market prices.

    Keywords: credit risk; derivatives; capital markets; Credit Derivatives and Swaps; Financial Institutions; Credit; Capital Markets;

    Citation:

    Siriwardane, Emil N. "Concentrated Capital Losses and the Pricing of Corporate Credit Risk." Harvard Business School Working Paper, No. 16-007, July 2015. (Revised July 2016.) View Details
  3. Concentrated Capital Losses and the Pricing of Corporate Credit Risk—Online Appendix

    Emil N. Siriwardane

    This appendix contains the following supplements to the main text: (i) additional facts regarding the size and concentration of the CDS market; (ii) some analysis relating buyer and seller capital to the CDS-bond basis; (iii) a discussion and some support evidence as to why capital might be slow moving in the CDS market; (iv) supportive analysis of the impact of the 2011 Japanese tsunami on CDS markets; and (v) a discussion of why the role of dealers as prime brokers does not impact the stylized facts and results presented throughout the paper.

    Keywords: credit risk; derivatives; financial institutions; Credit Derivatives and Swaps; Financial Institutions; Credit; Capital Markets;

    Citation:

    Siriwardane, Emil N. "Concentrated Capital Losses and the Pricing of Corporate Credit Risk—Online Appendix." Harvard Business School Working Paper, No. 16-008, July 2015. (Revised July 2016.) View Details
  4. Structural GARCH: The Volatility-Leverage Connection

    Robert F. Engle and Emil N. Siriwardane

    We propose a new model of volatility where financial leverage amplifies equity volatility by what we call the "leverage multiplier." The exact specification is motivated by standard structural models of credit; however, our parameterization departs from the classic Merton (1974) model and can accommodate environments where the firm's asset volatility is stochastic, asset returns can jump, and asset shocks are non-normal. In addition, our specification nests both a standard GARCH and the Merton model, which allows for a statistical test of how leverage interacts with equity volatility. Empirically, the Structural GARCH model outperforms a standard asymmetric GARCH model for approximately 74 percent of the financial firms we analyze. We then apply the Structural GARCH model to two empirical applications: the leverage effect and systemic risk measurement. As a part of our systemic risk analysis, we define a new measure called "precautionary capital" that uses our model to quantify the advantages of regulation aimed at reducing financial firm leverage.

    Keywords: Volatility; leverage; credit risk; crisis management; Volatility; Credit; Financial Crisis; Financial Institutions; Risk Management;

    Citation:

    Engle, Robert F., and Emil N. Siriwardane. "Structural GARCH: The Volatility-Leverage Connection." Harvard Business School Working Paper, No. 16-009, July 2015. View Details