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• Article | Brookings Papers on Economic Activity | Fall 2020

  Sizing Up Corporate Restructuring in the COVID Crisis

  Robin Greenwood, Benjamin Iverson and David Thesmar

  In the wake of the COVID-19 pandemic, the financial and legal system will need to deal with a surge of financial distress in the business sector. Some firms will be able to survive, while others will face bankruptcy and thus need to be liquidated or reorganized. Many surviving firms will need to be downsized or acquired. In normal times, this triage is supported by the court system, banks, and financial markets. The goal of this paper is to size up the coming surge of financial distress, list the challenges it presents in the current environment, and offer potential policy solutions. Overall, our analysis suggests that the two key issues will be court congestion and excess liquidation and failure of small firms.

  Keywords: COVID-19; Health Pandemics; Economy; System Shocks; Financial Crisis; Restructuring;

  Citation:

  Greenwood, Robin, Benjamin Iverson, and David Thesmar. "Sizing Up Corporate Restructuring in the COVID Crisis." Brookings Papers on Economic Activity (Fall 2020).  View Details

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• Article | Journal of Political Economy | August 2020

  Macroeconomic Drivers of Bond and Equity Risks

  John Y. Campbell, Carolin E. Pflueger and Luis M. Viceira

  Our new model of consumption-based habit generates time-varying risk premia on bonds and stocks from loglinear, homoskedastic macroeconomic dynamics. Consumers' first-order condition for the real risk-free bond generates an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. We estimate that the correlation between inflation and the output gap switched from negative to positive in 2001. Higher inflation lowers real bond returns, and higher output raises stock returns, explaining why the bond-stock return correlation changed from positive to negative. In the model, risk premia amplify this change in bond-stock return comovement and are crucial for a quantitative explanation.

  Keywords: consumption-based habit formation; consumption Euler equation; time-varying risk premia; inflation dynamics; bond-stock correlation; Risk and Uncertainty; Bonds; Macroeconomics;

  Citation:

  Campbell, John Y., Carolin E. Pflueger, and Luis M. Viceira. "Macroeconomic Drivers of Bond and Equity Risks." Journal of Political Economy 128, no. 8 (August 2020): 3148–3185.  View Details

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• Case | HBS Case Collection | July 2020

  Mortgage Backed Securities and the Covid-19 Pandemic

  Emil N. Siriwardane, Luis M. Viceira and Dean Xu

  In April 2020, global financial markets were still reeling as the COVID-19 pandemic spread rapidly across the world. Global equity markets had initially fallen by 30% in response to the pandemic, and high-yield credit markets had dropped by nearly 20%. In contrast, U.S. Treasury markets were up 20% year-to-date (YTD). Interestingly, the U.S. Mortgage Backed Security (MBS) market had been much less responsive to the health crisis, exhibiting very low volatility throughout this period and returning about 2% YTD. Maya Russell, head of asset allocation research at a large global institutional investor, must make a recommendation on whether her fund’s board should invest in MBS, and if so, whether this is a good time for the fund to implement the allocation and whether it should do so pursuing an active or a passive investment approach. This case covers a wide range of topics in fixed-income investing, including duration and interest rate risk, prepayment risk, mortgage securitization, and the design of mortgage-backed securities. These concepts are analyzed from the perspectives of both individual and professional investors in fixed-income and mortgage markets.

  Keywords: COVID-19; mortgage-backed securities; Health Pandemics; Financial Markets; Assets; Resource Allocation; Financial Instruments; Decision Making;

  Citation:

  Siriwardane, Emil N., Luis M. Viceira, and Dean Xu. "Mortgage Backed Securities and the Covid-19 Pandemic." Harvard Business School Case 221-010, July 2020.  View Details

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