Adi Sunderam is a Marvin Bower associate professor of business administration in the Finance Unit, and a Faculty Research Fellow at the National Bureau of Economic Research. He teaches Investment Management in the MBA elective curriculum and Ph.D. courses in Corporate Finance and Empirical Methods. Professor Sunderam holds a Ph.D. in business economics and an A.B. in computer science and economics, both from Harvard University. 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.
Adi Sunderam is a Marvin Bower associate professor of business administration in the Finance Unit, and a Faculty Research Fellow at the National Bureau of Economic Research. He teaches Investment Management in the MBA elective curriculum and Ph.D. courses in Corporate Finance and Empirical Methods. Professor Sunderam holds a Ph.D. in business economics and an A.B. in computer science and economics, both from Harvard University. 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.
We develop three novel measures of how much of the price impact of their trading different mutual funds internalize. We show that mutual funds that internalize more of their price impact hold larger cash buffers and use these buffers more aggressively to accommodate inflows and outflows. As a result, stocks held by these funds have lower volatility, and flows out of these funds have smaller spillover effects on other funds holding the same securities. Our results provide evidence of meaningful fire sale externalities in the mutual fund industry.
Samuel G. Hanson, David S. Scharfstein and Adi Sunderam
We develop a model of government portfolio choice in which a benevolent government chooses the scale of risky projects in the presence of market failures and tax distortions. These two frictions generate motives to manage social risk and fiscal risk. Social risk management makes attractive programs that ameliorate market failures in bad economic times. Fiscal risk management makes unattractive programs that entail large government outlays at times when other programs in the government's portfolio also require large outlays. We characterize the determinants of social and fiscal risk and argue that these two risk management motives often conflict. Using the model, we explore how the attractiveness of different financial stability programs varies with the government's fiscal burden and with characteristics of the economy.
Robin Greenwood, Samuel Gregory Hanson, Jeremy C. Stein and Adi Sunderam
We propose three core principles that should inform the design of bank capital regulation. First, wherever possible, multiple constraints on the minimum level of equity capital should be consolidated into a single constraint. This helps to avoid a distortionary situation where different constraints bind for different banks performing the same activity. Second, while a regulatory framework that relies primarily on minimum capital ratios is appropriate for normal times, such a framework is inadequate in the wake of a large negative shock to the system. Following an adverse shock, it becomes critical to emphasize dynamic resilience, which involves forcing banks to actively recapitalize—i.e., regulation needs to focus on getting banks to raise new dollars of equity capital, rather than just maintaining their capital ratios. Third, the best way to deal with the inevitable gaming of any set of ex ante capital rules is not to propose further rules, but rather to allow the regulator sufficient flexibility to address unforeseen contingencies ex post. We use these principles to suggest a number of modifications to the current set of risk-based capital requirements, to the leverage ratio, and to the Federal Reserve’s stress-testing framework.
We develop a model of monetary policy with two key features: (i) the central bank has some private information about its long-run target for the policy rate, and (ii) the central bank is averse to bond-market volatility. In this setting, discretionary monetary policy is gradualist: the central bank only adjusts the policy rate slowly in response to changes in its target. Such gradualism represents an attempt to not spook the bond market. However, this effort is partially undone in equilibrium, as long-term rates rationally react more to a given move in short rates when the central bank moves more gradually. The same desire to mitigate bond-market volatility can lead the central bank to lower short rates sharply when publicly observed term premiums rise. In both cases, there is a time-consistency problem, and society would be better off with a central banker who cares less about the bond market.
John Y. Campbell, Adi Sunderam and Luis M. Viceira
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.
Sergey Chernenko, Samuel Gregory Hanson and Adi Sunderam
Many have argued that overoptimistic thinking on the part of lenders helps fuel credit booms. We use new microdata on mutual funds' holdings of securitizations to examine which investors are susceptible to such boom-time thinking. We show that firsthand experience plays a key role in shaping investors' beliefs. During the 2003–2007 mortgage boom, inexperienced fund managers loaded up on securitizations linked to nonprime mortgages, accumulating twice the holdings of more seasoned managers. Moreover, inexperienced managers who personally experienced severe or recent adverse investment outcomes behaved more like seasoned managers. Training and institutional memory can serve as partial substitutes for personal experience.
Samuel G. Hanson, David S. Scharfstein and Adi Sunderam
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 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.
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 half the growth of ABCP in the mid-2000s.
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.
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.
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.
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.
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.
Robin Greenwood, Samuel G. Hanson, Jeremy C. Stein and Adi Sunderam
We develop a model in which risk-averse, specialized bond investors must be paid to 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, our model naturally links the predictability of long-term bond returns to the predictability of foreign exchange returns. Specifically, a shift in the net supply of long-term bonds in one currency influences bond term premiums in both currencies as well as the foreign exchange rate between the two currencies. Our model matches several important empirical patterns, including the co-movement between exchange rates and bond term premiums as well as the finding that central banks' quantitative easing policies impact not only local-currency long-term yields, but also foreign exchange rates. We also show that this quantity-driven approach provides a unified account explaining both why foreign exchange tends to outperform when the foreign interest rates exceed domestic rates and why long-term bonds tend to outperform when the yield curve is steep.
Carolin E. Pflueger, Emil Siriwardane and Adi Sunderam
We propose a novel measure of risk perceptions: the price of volatile stocks (PVS), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVS is high when perceived risk directly measured from surveys and option prices is low. When perceived risk is high according to our measure, safe asset prices are high, risky asset prices are low, the cost of capital for risky firms is high, and real investment is forecast to decline. Perceived risk as measured by PVS falls after positive macroeconomic news. These declines are predictably followed by upward revisions in investor risk perceptions. Our results suggest that risk perceptions embedded in stock prices are an important driver of the business cycle and are not fully rational.
We present a framework for analyzing “model persuasion,” where persuaders influence people’s beliefs by proposing models (likelihood functions) that suggest how to organize past data (e.g., on investment performance) to make predictions (e.g., about future returns). Receivers are assumed to find models more compelling when they better explain the past. A key tradeoff persuaders face is that models that better fit the data induce less movement in receivers’ beliefs. Model persuasion sometimes makes the receiver worse off than if he interprets data through the lens of a default model. The receiver is most misled by persuasion when there is a lot of publicly available data that is open to interpretation and exhibits randomness, as this gives the persuader “wiggle room” to highlight false patterns. Even when the receiver is exposed to the true model, the wrong model often wins because it better fits the past. Competition more broadly pushes persuaders towards overfitting available data and as a result tends to neutralize the data by leading receivers to view it as unsurprising. With multiple receivers, a persuader is more effective when receivers share similar priors and default interpretations. We illustrate with examples from finance, politics, and law.
We study the determinants of value creation within U.S. commercial banks. We begin by constructing two new measures of bank productivity: one focused on deposit-taking productivity and one focused on asset productivity. We then use these measures to evaluate the cross-section of bank value. Both productivity measures are strongly value relevant, with variation in banks' deposit productivity responsible for the majority of variation in bank value. We also find evidence consistent with synergies between deposit-taking and lending activities: banks with high deposit productivity have high asset productivity, a relationship driven by the tendency of deposit-productive banks to hold illiquid loans. Our results suggest that both sides of the balance sheet contribute meaningfully to bank value creation, with the liability side playing a primary role.
Egan, Mark, Stefan Lewellen, and Adi Sunderam. "The Cross Section of Bank Value." NBER Working Paper Series, No. 23291, March 2017. (Revise and Resubmit at the Review of Financial Studies.)
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Robin Greenwood, Samuel G. Hanson, Jeremy C. Stein and Adi Sunderam
We take stock of the post-crisis financial regulatory reform agenda. We highlight and summarize areas of clear progress, where post-crisis reforms should either be maintained or built upon. We then identify several areas where the new regulations could be streamlined or rolled back in an effort to reduce the burden on the financial sector, particularly on smaller banks.
We study liquidity transformation in mutual funds using a novel dataset on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds' cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.
Sergey Chernenko, Samuel G. Hanson and Adi Sunderam
Collateralized debt obligations (CDOs) and private-label mortgage-backed securities (MBS) backed by nonprime loans played a central role in the recent financial crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on insurers' and mutual funds' bond holdings, we find considerable heterogeneity in investor demand for securitizations in the pre-crisis period. We argue that both investor beliefs and incentives help to explain this variation in demand. By contrast, our data paints a more uniform picture of investor behavior in the crisis. Consistent with theories of optimal liquidation, investors largely traded in more liquid securities, such as government-guaranteed MBS, to meet their liquidity needs during the crisis.
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.
This paper analyzes the two leading types of proposals for reform of the housing finance system: (i) broad-based, explicit, priced government guarantees of mortgage-backed securities (MBS) and (ii) privatization. Both proposals have drawbacks. Properly-priced guarantees would have little effect on mortgage interest rates relative to unguaranteed mortgage credit during normal times, and would expose taxpayers to moral-hazard risk with little benefit. Privatization reduces, but does not eliminate, the government’s exposure to mortgage credit risk. It also leaves the and financial system exposed to destabilizing boom and bust cycles in mortgage credit. Based on this analysis, we argue that the main goal of housing finance reform should be financial stability, not the reduction of mortgage interest rates. To this end, we propose that the private market should be the main supplier of mortgage credit, but that it should be carefully regulated. This will require new approaches to regulating mortgage securitization. Moreover, we argue that
while government guarantees of MBS have little value in normal times, they can be valuable in periods of significant stress to the financial system, such as in the recent financial crisis. Thus, we propose the creation of a government-owned corporation that would play the role of “guarantor-of-last-resort” of newly-issued (not legacy) MBS during periods of crisis.
Scharfstein, David S., and Adi Sunderam. "The Economics of Housing Finance Reform." In The Future of Housing Finance: Restructuring the U.S. Residential Mortgage Market, edited by Martin Neil Baily. Brookings Institution Press, 2011.
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Sunderam, Adi, Luis M. Viceira, and Shawn O'Brien. "Puerto Rico's COFINA Bonds: Hold or Fold?" Harvard Business School Teaching Note 219-070, December 2018.
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Sunderam, Adi, Luis M. Viceira, and Shawn O'Brien. "Baupost Group: Finding a Margin of Safety in London Real Estate." Harvard Business School Teaching Note 219-068, December 2018.
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Samuel G. Hanson, Robin Greenwood, David Scharfstein and Adi Sunderam
In February and March 2009, the U.S. economy was in the midst of a terrifying financial and economic crisis. Between the beginning of 2008 and early 2009, four of the 25 largest U.S. financial institutions had failed, and nine of these 25 institutions had taken extraordinary steps to avoid failure—either receiving one-off government support, merging with another firm, or submitting to heightened regulation to qualify for future government support. Led by Treasury Secretary Timothy Geithner, the government had to quickly devise policies to stabilize the financial system and the economy. The case explores the details of policies, and the decision making process that led to them, that Geithner and his team devised under immense time pressure to stabilize the system. The case features an extended discussion of Geithner’s innovative “stress test,” which would reveal the longer-term health of the country’s largest banks.
Adi Sunderam, Robin Greenwood, Sam Hanson and David Scharfstein
On the afternoon of Monday October 13, 2008, Hank Paulson Jr., the Secretary of the Treasury of the United States, walked into the large conference room across the hall from his office in the Treasury Department. Joining him were Federal Reserve Chairman Ben Bernanke, President of the Federal Reserve Bank of New York Timothy Geithner, Chair of the Federal Deposit Insurance Corporate Sheila Bair, and the Chief Executive Officers of nine of the largest banks in the United States. This distinguished group had been brought together by the most serious financial crisis since the Great Depression of the 1930s. Financial panic was pushing the U.S. and European financial systems to the brink of failure. Paulson hoped his meeting with the bank CEOs would be a turning point. U.S. financial markets were closed for Columbus Day, and Paulson was planning to announce the latest government actions to stabilize the financial system before markets reopened on Tuesday.
Sunderam, Aditya Vikram, and Luis M. Viceira. "Prudential Financial and Asset-Liability Management." Harvard Business School Spreadsheet Supplement 219-726, September 2018.
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Mark S. Seasholes, Adi Sunderam, Luis Viceira and Shawn O'Brien
Teaching Note for HBS No. 216-076.
Citation:
Seasholes, Mark S., Adi Sunderam, Luis Viceira, and Shawn O'Brien. "Prudential Financial and Asset-Liability Management." Harvard Business School Teaching Note 218-121, June 2018. (Revised June 2018.)
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Sunderam, Adi. "Investing in Commodities at Global Endowment Management." Harvard Business School Teaching Note 218-118, June 2018. (Revised January 2019.)
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Sunderam, Adi, and Shawn O'Brien. "Closed-End Funds at Saba Capital Management." Harvard Business School Teaching Note 218-105, March 2018. (Revised December 2018.)
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Sunderam, Adi, and David Biery. "Raising Capital at ShawSpring Partners." Harvard Business School Teaching Note 217-076, May 2017. (Revised December 2018.)
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Stafford, Erik, and Aditya Vikram Sunderam. "Evanston Capital Management Spreadsheet Supplement." Harvard Business School Spreadsheet Supplement 215-702, September 2014.
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Scharfstein, David, Adi Sunderam, John Ference, and Philip Roane. "Lending Club: Time to Join?" Harvard Business School Case 214-046, January 2014. (Revised November 2014.)
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Malcolm Baker, Adi Sunderam, Nobuo Sato and Akiko Kanno
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.
Baker, Malcolm, Adi Sunderam, Nobuo Sato, and Akiko Kanno. "Restructuring JAL." Harvard Business School Case 214-055, November 2013. (Revised January 2015.)
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Greenwood, Robin, Adi Sunderam, and Jared Dourdeville. "Assured Guaranty." Harvard Business School Teaching Note 213-131, June 2013. (Revised February 2015.)
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Greenwood, Robin, Adi Sunderam, and Jared Dourdeville. "Assured Guaranty (CW)." Harvard Business School Spreadsheet Supplement 213-724, March 2013. (Revised December 2016.)
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Robin Greenwood, Adi Sunderam and Jared Dourdeville
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.
Greenwood, Robin, Adi Sunderam, and Jared Dourdeville. "Assured Guaranty." Harvard Business School Case 213-100, February 2013. (Revised November 2016.)
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