"Green Portfolios" (with Frederik Lundtofte and Thomas Fischer) Reject-and-Resubmit [Online Appendix]
Abstract.
We develop a long-horizon framework that merges Merton’s intertemporal portfolio theory with the damage-based logic of Nordhaus-type climate models. In this setting, equity investments can damage future production and consumption possibilities through their climate impact. We identify the Social Cost of Carbon (SCC) as a key determinant of both optimal portfolio allocation and equilibrium asset pricing. We derive a four-fund separation result and characterize equilibrium returns. Stocks that have a sufficiently adverse impact on the climate may appear to have positive alphas relative to the CAPM. Using US stock market data for 2007–2019, we estimate the SCC and show that, although the portfolio and pricing effects are moderate, climate externalities translate into measurable adjustments in the cost of capital, offering a tractable benchmark for integrating environmental damages into portfolio theory.
"Medium-term impacts of immigration on the housing market: Evidence from a quasi-experimental shift-share instrument" RFBerlin Discussion Paper No. 78/25 (2025) (with Anna Piil Damm, Ahamad Hassani, and Anil Kumar, Aarhus University) [Media Coverage]
Abstract.
To estimate the causal effect of immigration flows on housing market variables in the medium-run, we address the key problem of immigrant sorting by exploiting exogenous variation from push-factor migration and a unique institutional setting that allocates refugee immigrants to municipalities on a quasi-random basis. Economic theory predicts that immigrant influx will increase demand for residential space, increasing house rents and prices as well as residential construction at the aggregate level, but will have ambiguous effects at the neighborhood level in case of native flight. We find a large positive impact on house rents and prices and little evidence of native flight at the municipal level. At the neighborhood level, we also find a positive impact on house rents and prices, albeit more modest, as well as evidence of native flight. We further provide evidence of inelastic supply. Our findings support economic policies that increase housing supply elasticities and re-distribute part of the gains from immigration to groups that bear the burden from immigration and thereby decrease political opposition to immigration.
"Time-varying disaster risk models: An empirical assessment of the Rietz-Barro hypothesis" CREATES Research Paper No. 2015-08 (2015) (with Alfonso Irarrazabal, BI Norwegian Business School)
Abstract.
This paper revisits the fit of disaster risk models where a representative agent has recursive preferences and the probability of a macroeconomic disaster changes over time. We calibrate the model as in Wachter (2013) and perform two sets of tests to assess the empirical performance of the model in long run simulations. The model is solved using a two step projection-based method that allows us to find the equilibrium consumption-wealth ratio and dividend-yield for different values of the intertemporal elasticity of substitution. By fixing the elasticity of substitution to one, the first experiment indicates that the overall fit of the model is adequate. However, we find that the amount of aggregate stock market volatility that the model can generate is sensible to the method used to solve the model. We also find that the model generates near unit root interest rates and a puzzling ranking of volatilities between the risk free rate and the expected return on government bills. We later solve the model for values of the elasticity of substitution that differ from one. This second experiment shows that while a higher elasticity of substitution helps to increase the aggregate stock market volatility and hence to reduce the Sharpe Ratio, a lower elasticity of substitution generates a more reasonable level for the equity risk premium and for the volatility of the government bond returns without compromising the ability of the price-dividend ratio to predict excess returns.
Pre-doctoral work:
"Hechos estilizados de la economía colombiana: fundamentos empíricos para la construcción y evaluación de un modelo DSGE" ("Stylized facts of the Colombian economy: Empirical foundations for the construction and evaluation of DSGE models"), Borradores de Economía No. 509, Banco de la República (2008)
Abstract.
En este documento se presentan los resultados obtenidos de un ejercicio empírico que pretende extraer los principales hechos estilizados de la economía colombiana para el período 1994: I 2007: I. El objetivo es servir de apoyo tanto para el diseño y especificación como para la evaluación de un modelo de equilibrio general dinámico y estocástico (DSGE) que actualmente desarrolla el Departamento de Modelos Macroeconómicos del Banco de la República. Para ello se emplea una base de datos que permite descomponer algunos de los principales agregados macroeconómicos calculados por el DANE a través del sistema de cuentas nacionales anuales en sus componentes doméstico e importado, así como construir una medida de los márgenes de comercialización adicionados a los bienes de consumo e inversión importados. Una vez se dispone de los datos, se analiza la estructura de la economía colombiana por componentes de oferta y demanda siguiendo de cerca la metodología empleada por Restrepo y Soto (2004) en Chile y Restrepo y Reyes (2000) en Colombia.
"Testing a DSGE model and its partner database" (with Lavan Mahadeva), Borradores de Economía No. 412, Banco de la República (2008)
Abstract.
There is now an impetus to apply dynamic stochastic general equilibrium models to forecasting. But these models typically rely on purpose-built data, for example on tradable and nontradable sector outputs. How then do we know that the model will forecast well, in advance? We develop an early warning test of the database-model match and apply that to a Colombian model. Our test reveals where the combination should work (consumption) and where not (in investment). The test can be adapted to look at many likely sources of DSGE model failure.
"Specification of DSGE models: A business cycle accounting application for Colombia", Universidad de los Andes (2010)
Abstract.
In this document we apply the Business Cycle Accounting (BCA) procedure in order to study which mechanisms are more relevant to interpret the dynamics of the Colombian GDP between 1994 and 2009. The neoclassical growth model with endogenous variable capital utilization of Cavalcanti et al. (2008) is used as a benchmark model. This reference model can be seen as a reduced form of a greater number of DSGE models with different frictions commonly used in the literature. This equivalence allows us to assess the importance of each of those detailed models in explaining the fluctuation in the economic activity. The results suggest that in order to achieve better predictions for the GDP, macroeconomic models should include distortions that alter the consumption-savings decisions and the labor supply of the households. These distortions can be obtained with the inclusion of capital and labor wedges on the benchmark model. Furthermore, frictions related to movements in the total factor productivity tend to overestimate periods of persistent economic downturn such as the one registered between 1998 and 2000 after the Asian crisis.
Abstract.
We develop a long-horizon framework that merges Merton’s intertemporal portfolio theory with the damage-based logic of Nordhaus-type climate models. In this setting, equity investments can damage future production and consumption possibilities through their climate impact. We identify the Social Cost of Carbon (SCC) as a key determinant of both optimal portfolio allocation and equilibrium asset pricing. We derive a four-fund separation result and characterize equilibrium returns. Stocks that have a sufficiently adverse impact on the climate may appear to have positive alphas relative to the CAPM. Using US stock market data for 2007–2019, we estimate the SCC and show that, although the portfolio and pricing effects are moderate, climate externalities translate into measurable adjustments in the cost of capital, offering a tractable benchmark for integrating environmental damages into portfolio theory.
"Medium-term impacts of immigration on the housing market: Evidence from a quasi-experimental shift-share instrument" RFBerlin Discussion Paper No. 78/25 (2025) (with Anna Piil Damm, Ahamad Hassani, and Anil Kumar, Aarhus University) [Media Coverage]
Abstract.
To estimate the causal effect of immigration flows on housing market variables in the medium-run, we address the key problem of immigrant sorting by exploiting exogenous variation from push-factor migration and a unique institutional setting that allocates refugee immigrants to municipalities on a quasi-random basis. Economic theory predicts that immigrant influx will increase demand for residential space, increasing house rents and prices as well as residential construction at the aggregate level, but will have ambiguous effects at the neighborhood level in case of native flight. We find a large positive impact on house rents and prices and little evidence of native flight at the municipal level. At the neighborhood level, we also find a positive impact on house rents and prices, albeit more modest, as well as evidence of native flight. We further provide evidence of inelastic supply. Our findings support economic policies that increase housing supply elasticities and re-distribute part of the gains from immigration to groups that bear the burden from immigration and thereby decrease political opposition to immigration.
"Time-varying disaster risk models: An empirical assessment of the Rietz-Barro hypothesis" CREATES Research Paper No. 2015-08 (2015) (with Alfonso Irarrazabal, BI Norwegian Business School)
Abstract.
This paper revisits the fit of disaster risk models where a representative agent has recursive preferences and the probability of a macroeconomic disaster changes over time. We calibrate the model as in Wachter (2013) and perform two sets of tests to assess the empirical performance of the model in long run simulations. The model is solved using a two step projection-based method that allows us to find the equilibrium consumption-wealth ratio and dividend-yield for different values of the intertemporal elasticity of substitution. By fixing the elasticity of substitution to one, the first experiment indicates that the overall fit of the model is adequate. However, we find that the amount of aggregate stock market volatility that the model can generate is sensible to the method used to solve the model. We also find that the model generates near unit root interest rates and a puzzling ranking of volatilities between the risk free rate and the expected return on government bills. We later solve the model for values of the elasticity of substitution that differ from one. This second experiment shows that while a higher elasticity of substitution helps to increase the aggregate stock market volatility and hence to reduce the Sharpe Ratio, a lower elasticity of substitution generates a more reasonable level for the equity risk premium and for the volatility of the government bond returns without compromising the ability of the price-dividend ratio to predict excess returns.
Pre-doctoral work:
"Hechos estilizados de la economía colombiana: fundamentos empíricos para la construcción y evaluación de un modelo DSGE" ("Stylized facts of the Colombian economy: Empirical foundations for the construction and evaluation of DSGE models"), Borradores de Economía No. 509, Banco de la República (2008)
Abstract.
En este documento se presentan los resultados obtenidos de un ejercicio empírico que pretende extraer los principales hechos estilizados de la economía colombiana para el período 1994: I 2007: I. El objetivo es servir de apoyo tanto para el diseño y especificación como para la evaluación de un modelo de equilibrio general dinámico y estocástico (DSGE) que actualmente desarrolla el Departamento de Modelos Macroeconómicos del Banco de la República. Para ello se emplea una base de datos que permite descomponer algunos de los principales agregados macroeconómicos calculados por el DANE a través del sistema de cuentas nacionales anuales en sus componentes doméstico e importado, así como construir una medida de los márgenes de comercialización adicionados a los bienes de consumo e inversión importados. Una vez se dispone de los datos, se analiza la estructura de la economía colombiana por componentes de oferta y demanda siguiendo de cerca la metodología empleada por Restrepo y Soto (2004) en Chile y Restrepo y Reyes (2000) en Colombia.
"Testing a DSGE model and its partner database" (with Lavan Mahadeva), Borradores de Economía No. 412, Banco de la República (2008)
Abstract.
There is now an impetus to apply dynamic stochastic general equilibrium models to forecasting. But these models typically rely on purpose-built data, for example on tradable and nontradable sector outputs. How then do we know that the model will forecast well, in advance? We develop an early warning test of the database-model match and apply that to a Colombian model. Our test reveals where the combination should work (consumption) and where not (in investment). The test can be adapted to look at many likely sources of DSGE model failure.
"Specification of DSGE models: A business cycle accounting application for Colombia", Universidad de los Andes (2010)
Abstract.
In this document we apply the Business Cycle Accounting (BCA) procedure in order to study which mechanisms are more relevant to interpret the dynamics of the Colombian GDP between 1994 and 2009. The neoclassical growth model with endogenous variable capital utilization of Cavalcanti et al. (2008) is used as a benchmark model. This reference model can be seen as a reduced form of a greater number of DSGE models with different frictions commonly used in the literature. This equivalence allows us to assess the importance of each of those detailed models in explaining the fluctuation in the economic activity. The results suggest that in order to achieve better predictions for the GDP, macroeconomic models should include distortions that alter the consumption-savings decisions and the labor supply of the households. These distortions can be obtained with the inclusion of capital and labor wedges on the benchmark model. Furthermore, frictions related to movements in the total factor productivity tend to overestimate periods of persistent economic downturn such as the one registered between 1998 and 2000 after the Asian crisis.
