Steven D. Baker

Senior Financial Economist
Quantitative Supervision and Research

Federal Reserve Bank of Richmond
530 E Trade Street
Charlotte, NC 28202

This is my personal website. It does not necessarily reflect the views of the Federal Reserve Bank of Richmond or the Federal Reserve System.

Research Focus: Multi-agent macro-finance models, with applications to asset pricing, portfolio theory, and commodities markets.

Working Papers:

Activism, Stock Selection, and Indexing in Equilibrium
(With Michael Gallmeyer and David Chapman)

We study a dynamic general equilibrium production economy intermediated by actively and passively managed funds. Two actively managed types arise endogenously through a search mechanism.  Activists are socially valuable because they improve productive efficiency that spills over to a low-cost index fund. Stock selectors, through security selection, also improve productive efficiency, with no spillover to other funds. A representative household allocates its wealth to activist, stock selector, and index funds. We characterize the equilibrium impact of changes in search costs, productive efficiency, and index fees. While a decrease in the passive index fee is beneficial to households through cheaper diversification, it also impacts the composition of the managed fund industry where activist funds increase relative to stock selector funds. This effect increases the productive efficiency of the index fund beyond just lower fees.

Disagreement and Control Rights: Implications for Debt Policy and Aggregate Dynamics
(With Zhaohui Chen and Timothy Johnson.)

We examine firm capital structure when heterogeneous agents optimally hold different claims, and  control of the firm may change hands. When agents cannot commit to firm value maximization,  controlling agents have the incentive to alter firm policy to maximize their preferred portfolio at the expense of other claim-holders. We consider settings that can include partial control rights to minority share-holders and/or debt-holders.  In general equilibrium, the distortions relative to complete contracting are large even with small disagreement.  However, it need not be the case that the distortions amplify the business cycle nor that stronger protection of debt holders mitigates the problem.

The Price of Oil Risk
(With Bryan Routledge)

We solve a Pareto risk-sharing problem with heterogeneous agents with recursive utility over multiple goods.  We use this optimal consumption allocation to derive a pricing kernel and the price of oil and related futures contracts.  This gives us insight into the dynamics of risk premia in commodity markets for oil.  As an example, in a calibrated version of our model we show how rising oil prices and falling oil risk premium are an outcome of the dynamic properties of the optimal risk sharing solution.  We also compute portfolios that implement the optimal consumption policies and demonstrate that large and variable open interest is a property of optimal risk sharing.


Asset Prices and Portfolios with Externalities
Review of Finance, 2022
(With Burton Hollifield and Emilio Osambela)
(Working paper version.)

The Financialization of Storable Commodities
Management Science, 2021
(Working paper version.)

Preventing Controversial Catastrophes
Review of Asset Pricing Studies, 2020
(With Burton Hollifield and Emilio Osambela)
(Working paper version.)

Disagreement, Speculation, and Aggregate Investment,
Journal of Financial Economics, 2016
(With Burton Hollifield and Emilio Osambela)
(Working paper version. Code. Errata.)

[A related earlier paper,
Disagreement, Financial Markets, and the Real Economy, is incorporated into my Ph.D. dissertation. It characterizes a production model with disagreement in a discrete time setting without capital adjustment costs, but considers a case with multiple firms.]