Thomas M. Eisenbach — New York Fed

Welcome to the personal webpage of Thomas Eisenbach,
Senior Economist at the Federal Reserve Bank of New York

Curriculum Vitae

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Working Papers

Cournot Fire Sales
with Gregory Phelan.
In standard Walrasian macro-finance models, pecuniary externalities such as fire sales lead to overinvestment in illiquid assets or underprovision of liquidity. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. In a standard model of liquidity shocks, when liquidity is sufficiently scarce, Cournot competition leads to even less liquidity than the Walrasian equilibrium. In a standard model of productivity shocks, the Cournot equilibrium overcorrects for the fire-sale externality and holds less capital than socially efficient. Implications for welfare and regulation therefore depend highly on the nature of the shocks and the competitiveness of the industry considered.
Horizon-Dependent Risk Aversion and the Timing and Pricing of Uncertainty
with Marianne Andries and Martin Schmalz.
We address two fundamental critiques of established asset pricing models: that they (1) require a controversial degree of preference for early resolution of uncertainty; and (2) do not match the term structures of risk premia observed in the data. Inspired by experimental evidence, we construct preferences in which risk aversion decreases with the temporal horizon. The resulting model implies term structures of risk premia consistent with the evidence, including time-variations and reversals in the slope, without imposing a particular preference for early or late resolutions of uncertainty or compromising on the ability to match standard moments in the returns distributions.
The Economics of Bank Supervision
with David Lucca and Robert Townsend.
We study bank supervision by combining a theoretical model of asymmetric information and a novel dataset on work hours of Federal Reserve supervisors. We highlight the trade-offs between the benefits and costs of supervision and use the model to interpret the relation between supervisory efforts and bank characteristics observed in the data. More supervisory hours are spent on larger, more complex, and riskier banks. However, hours increase less than proportionally with bank size, suggesting technological scale economies in supervision. We provide evidence of constraints on supervisory resources, documenting reallocation of hours at times of stress and in the post-2008 period. Using variation implied by this resource reallocation, we find evidence that supervision lowers risk.
The Term Structure of the Price of Variance Risk
with Marianne Andries, Martin Schmalz and Yichuan Wang.
We estimate the term structure of the price of variance risk (PVR), which helps distinguish between competing asset-pricing theories. First, we measure the PVR as proportional to the Sharpe ratio of short-term holding returns of delta-neutral index straddles; second, we estimate the PVR in a Heston (1993) stochastic-volatility model. In both cases, the estimation is performed separately for different maturities. We find the PVR is negative and decreases in absolute value with maturity; it is more negative and its term structure is steeper when volatility is high. These findings are inconsistent with calibrations of established asset-pricing models that assume constant risk aversion across maturities.
Watering a Lemon Tree: Heterogeneous Risk Taking and Monetary Policy Transmission
with Dong Choi and Tanju Yorulmazer.
We build a general equilibrium model with maturity transformation that impedes monetary policy transmission. In equilibrium, productive agents choose higher leverage, exposing themselves to greater liquidity risk, which limits their responsiveness to interest rate changes. A reduction in the interest rate then leads to a deterioration in aggregate investment quality, which blunts the monetary stimulus and decreases liquidation values. This, in turn, reduces loan demand, decreasing the interest rate further and generating a negative spiral. Overall, the allocation of credit is distorted and monetary stimulus can become ineffective even with significant interest rate drops.
Anxiety, Overconfidence and Excessive Risk Taking
with Martin Schmalz.
We provide a model that rationalizes variation in confidence in the time-series and the cross-section. Combining horizon-dependent risk aversion (“anxiety”) and selective memory, we show that overly precise beliefs (“overconfidence”) can arise in the equilibrium of a Bayesian agent’s intra-personal game. In the time-series, overconfidence is more prevalent when actual risk levels are high, while underconfidence occurs when risks are low. As more confident agents take more risk, fluctuations in confidence amplify boom-bust cycles. More anxious agents’ beliefs fluctuate more, leading them to buy in booms and sell in crashes.
Fire-Sale Spillovers and Systemic Risk
with Fernando Duarte. R&R at the Review of Financial Studies.
We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed repo market data for broker-dealers and regulatory balance sheet data for U.S. bank holding companies. For broker-dealers, vulnerabilities in the repo market are driven by flight-to-quality episodes, when liquidity and leverage can change rapidly. We estimate that an exogenous 1 percent decline in the price of all assets financed with repos leads to losses due to fire sale spillovers of 8 percent of total broker-dealer equity on average and over 12 percent during the financial crisis. For bank holding companies, vulnerabilities to fire sales are equally sizable but build up slowly over time. Our measure signals build-up of systemic risk starting in the early 2000s, ahead of many other measures. Our measure also predicts low quantiles of macroeconomic outcomes above and beyond other existing measures, especially at longer horizons.


Rollover Risk as Market Discipline: A Two-Sided Inefficiency
2017, Journal of Financial Economics, 126(2), 252–269. [WP Version]
Why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises? This paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk. However, if assets are correlated, a two-sided inefficiency arises: Good aggregate states have intermediaries taking excessive risks, while bad aggregate states suffer from costly fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline. In equilibrium, financial intermediaries inefficiently amplify both positive and negative aggregate shocks.
Supervising Large, Complex Financial Institutions: What Do Supervisors Do?
with Andrew Haughwout, Beverly Hirtle, Anna Kovner, David Lucca, and Matthew Plosser, 2017, Federal Reserve Bank of New York Economic Policy Review, 23(1), 57–77.
The Federal Reserve is responsible for the prudential supervision of bank holding companies (BHCs) on a consolidated basis. Prudential supervision involves monitoring and oversight to assess whether these firms are engaged in unsafe or unsound practices, as well as ensuring that firms are taking corrective actions to address such practices. Prudential supervision is interlinked with, but distinct from, regulation, which involves the development and promulgation of the rules under which BHCs and other regulated financial intermediaries operate. This paper describes the Federal Reserve’s supervisory approach for large, complex financial companies and how prudential supervisory activities are structured, staffed, and implemented on a day‐to‐day basis at the Federal Reserve Bank of New York as part of the broader supervisory program of the Federal Reserve System. The goal of the paper is to generate insight for those not involved in supervision into what supervisors do and how they do it. Understanding how prudential supervision works is a critical precursor to determining how to measure its impact and effectiveness.
Anxiety in the Face of Risk
with Martin Schmalz, 2016, Journal of Financial Economics, 121(2), 414–426. [WP Version]
We model an ‘anxious’ agent as one who is more risk averse with respect to imminent risks than with respect to distant risks. Based on a utility function that captures individual subjects’ behavior in experiments, we provide a tractable theory relaxing the restriction of constant risk aversion across horizons and show that it generates rich implications. We first apply the model to insurance markets and explain the high premia for short-horizon insurance. Then, we show that costly delegated portfolio management, investment advice, and withdrawal fees emerge as endogenous features and strategies to cope with dynamic inconsistency in intratemporal risk–return tradeoffs.
Sooner or Later: Timing of Monetary Policy with Heterogeneous Risk-Taking
with Dong Choi and Tanju Yorulmazer, 2016, American Economic Review (Papers and Proceedings), 106(5), 490–495.
We analyze the effects and interactions of monetary policy tools that differ in terms of their timing and their targeting. In a model with heterogeneous agents, more productive agents endogenously expose themselves to higher interim liquidity risk by borrowing and investing more. Two inefficiencies impair the transmission of monetary policy: an investment- and a hoarding inefficiency. Heterogeneous agents respond disparately to ex-ante, conventional and ex-post, unconventional monetary policy. However, we show that the two policies are equivalent due to the endogeneity of hoarding. In contrast, targeted interventions such as discount-window lending can alleviate both inefficiencies at the same time.
Stability of Funding Models: An Analytical Framework
with Todd Keister, James McAndrews and Tanju Yorulmazer, 2014, Federal Reserve Bank of New York Economic Policy Review, 20(1), 29–49.
We use a simple analytical framework to illustrate the determinants of a financial intermediary’s ability to survive stress events. An intermediary in our framework faces two types of risk: the value of its assets may decline and/or its short-term creditors may decide not to roll over their debt. We measure its stability by looking at what combinations of shocks it can experience while remaining solvent. We study how stability depends on the intermediary’s balance-sheet characteristics such as its leverage, the maturity structure of its debt, and the liquidity and riskiness of its asset portfolio. We also show how our framework can be applied to study current policy issues, including liquidity requirements, discount window policy, and different approaches to reforming money market mutual funds.
Macroeconomics with Financial Frictions: A Survey
with Markus Brunnermeier and Yuliy Sannikov, 2013, in Advances in Economics and Econometrics, Tenth World Congress of the Econometric Society, ed. by D. Acemoglu, M. Arellano and E. Dekel, Cambridge University Press.
This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.