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Working Paper
Investment decisions and negative interest rates
Bracha, Anat
(2016-11-01)
While the current European Central Bank deposit rate and 2-year German government bond yields are negative, the U.S. 2-year government bond and deposit rates are positive. Insights from Prospect Theory suggest that this situation may lead to an excess flow of funds into the United States. Yet the environment of negative interest rates is different from the environment considered in Prospect Theory and subsequent literature, since decisions are framed in terms of rates of return rather than absolute amounts and the task involves the allocation of funds rather than a choice or a pricing task as ...
Working Papers
, Paper 16-23
Working Paper
Growth and Welfare Gains from Financial Integration Under Model Uncertainty
Luo, Yulei; Young, Eric R.; Nie, Jun
(2018-12-07)
We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model shows that financial integration leads to significantly larger gains in growth and welfare for advanced countries than developing countries, with some developing countries experiencing growth and welfare loss in financial integration. Our analytical solutions help uncover the key mechanisms by which this ...
Research Working Paper
, Paper RWP 18-12
Working Paper
A New Way to Quantify the Effect of Uncertainty
Throckmorton, Nathaniel A.; Richter, Alexander W.
(2017-05-04)
This paper develops a new way to quantify the effect of uncertainty and other higher-order moments. First, we estimate a nonlinear model using Bayesian methods with data on uncertainty, in addition to common macro time series. This key step allows us to decompose the exogenous and endogenous sources of uncertainty, calculate the effect of volatility following the cost of business cycles literature, and generate data-driven policy functions for any higherorder moment. Second, we use the Euler equation to analytically decompose consumption into several terms--expected consumption, the ex-ante ...
Working Papers
, Paper 1705
Report
Risk Preferences at the Time of COVID-19: An Experiment with Professional Traders and Students
Cipriani, Marco; http://fedora:8080/fcrepo/rest/objects/authors/; Angrisani, Marco; Ortiz de Zarate Pina, Julen; Guarino, Antonio
(2020-05-01)
We study whether the COVID-19 pandemic has impacted risk preferences, comparing the results of experiments conducted before and during the outbreak. In each experiment, we elicit risk preferences from two sample groups: professional traders and undergraduate students. We find that, on average, risk preferences have remained constant for both pools of participants. Our results suggest that the increases in risk premia observed during the pandemic are not due to changes in risk appetite; rather, they are solely due to a change in beliefs by market participants. The findings of our paper support ...
Staff Reports
, Paper 927
Working Paper
Should defaults be forgotten? Evidence from variation in removal of negative consumer credit information
Nakamura, Leonard I.; Bos, Marieke
(2014-07-01)
Practically all industrialized economies restrict the length of time that credit bureaus can retain borrowers? negative credit information. There is, however, a large variation in the permitted retention times across countries. By exploiting a quasi-experimental variation in this retention time, we investigate what happens when negative information is deleted earlier from credit files. We find that the loss of information led banks to tighten their lending standards significantly as the expected retention time was diminished from on average three-and-a-half to three years exactly. ...
Working Papers
, Paper 14-21
Report
Barriers to household risk management: evidence from India
Cole, Shawn; Gine, Xavier; Tobacman, Jeremy; Vickery, James; Townsend, Robert M.; Topalova, Petia
(2009-05-01)
Financial engineering offers the potential to significantly reduce the consumption fluctuations faced by individuals, households, and firms. Yet much of this potential remains unfulfilled. This paper studies the adoption of an innovative rainfall insurance product designed to compensate low-income Indian farmers in the event of insufficient rainfall during the primary monsoon season. We first document relatively low adoption of this new risk management product: Only 5-10 percent of households purchase the insurance, even though they overwhelmingly cite rainfall variability as their most ...
Staff Reports
, Paper 373
Working Paper
Complementarity and Macroeconomic Uncertainty
Plante, Michael D.; Atkinson, Tyler; Throckmorton, Nathaniel A.; Richter, Alexander W.
(2020-03-31)
Macroeconomic uncertainty—the conditional volatility of the unforecastable component of a future value of a time series—shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and ...
Working Papers
, Paper 2009
Working Paper
Implications of Labor Market Frictions for Risk Aversion and Risk Premia
Swanson, Eric T.
(2013)
A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to absorb shocks along both margins can greatly alter the household?s attitudes toward risk, as shown in Swanson (2012). The present paper analyzes how frictional labor markets affect that analysis. Risk aversion is higher: 1) in recessions, 2) in countries with more frictional labor markets, and 3) for households that have more difficulty finding a job. These predictions are consistent with empirical evidence from a variety of sources. ...
Working Paper Series
, Paper 2013-30
Report
Anxiety and pro-cyclical risk taking with Bayesian agents
Schmalz, Martin C.; Eisenbach, Thomas M.
(2015-02-01)
We provide a model that can explain empirically relevant variations in confidence and risk taking by combining horizon-dependent risk aversion (?anxiety?) and selective memory in a Bayesian intrapersonal game. In the time series, overconfidence is more prevalent when actual risk levels are high, while underconfidence occurs when risks are low. In the cross section, more anxious agents are more prone to biased confidence and their beliefs fluctuate more. This systematic variation in confidence levels can lead to objectively excessive risk taking by ?insiders? with the potential to amplify ...
Staff Reports
, Paper 711
Working Paper
Does Smooth Ambiguity Matter for Asset Pricing?
Gallant, A. Ronald; Jahan-Parvar, Mohammad; Liu, Hening
(2018-01)
We use the Bayesian method introduced by Gallant and McCulloch (2009) to estimate consumption-based asset pricing models featuring smooth ambiguity preferences. We rely on semi-nonparametric estimation of a flexible auxiliary model in our structural estimation. Based on the market and aggregate consumption data, our estimation provides statistical support for asset pricing models with smooth ambiguity. Statistical model comparison shows that models with ambiguity, learning and time-varying volatility are preferred to the long-run risk model. We analyze asset pricing implications of the ...
International Finance Discussion Papers
, Paper 1221
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