Working Papers

Sovereign default and the decline in interest rates

with Max Miller and Jessica A. Wachter

Abstract: Sovereign debt yields have declined dramatically over the last half-century. Standard explanations for this decline, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence across asset classes. We propose instead that the decline in inflation and default risk caused falling interest rates, a phenomenon that is not unique to our century. We show that a model with investment, inventory storage, and sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the recent reduction in investment and output growth corresponding to the zero lower bound.

First draft: July 2020 | Current version: September 2020

A new participation puzzle: Public equity participation through the financial crisis

Abstract: I document two new facts in household portfolio choice. First, intertemporal changes in the distribution of wealth resulted in a decrease in public equity ownership after, but not during, the financial crisis. Second, holding fixed the level of wealth over time, the participation rate temporarily increased during the crisis, then returned to pre-crisis levels. These results can be explained by, and serve as strong evidence for, decreasing relative risk aversion and portfolio inertia. I discuss implications of these findings for existing models of participation, including participation costs and background risks.

First draft: August 2019 | Current version: July 2020