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Discussion Paper
Constructing a Dictionary for Financial Stability
In this note, we explain in detail how we made word-level choices in our dictionary. In the note, we also consolidate our lessons from this process into a framework for thinking about dictionary construction.
Working Paper
The Global Determinants of International Equity Risk Premiums
We examine the commonality in international equity risk premiums by linking empirical evidence for the international stock return predictability of US downside and upside variance risk premiums (DVP and UVP, respectively) with implications from an international asset pricing framework, which takes the perspective of a US/global investor and features asymmetric global macroeconomic, financial market, and risk aversion shocks. We find that DVP and UVP predict international stock returns through different global equity risk premium determinants: bad and good macroeconomic uncertainties, ...
Working Paper
Sentiment in Central Banks' Financial Stability Reports
Using the text of financial stability reports (FSRs) published by central banks, we analyze the relation between the financial cycle and the sentiment conveyed in these official communications. To do so, we construct a dictionary tailored specifically to a financial stability context, which assigns positive and negative connotations based on the sentiment conveyed by words in FSRs. With this dictionary, we construct a financial stability sentiment (FSS) index. Using a panel of 35 countries for the sample period between 2005 and 2015, we find that central banks' FSS indexes are mostly driven ...
Working Paper
The Price of Macroeconomic Uncertainty: Evidence from Daily Options
Using recently available daily S&P 500 index option expirations, we examine the ex ante pricing of uncertainty surrounding key economic releases and the determinants of risk premia associated with these releases. The cost of insurance against price, variance, and downside risk is higher for options that span U.S. CPI, FOMC, Nonfarm Payroll, and GDP releases compared to neighboring expirations. We calculate release-driven forward equity and variance risk premia and find that premia vary considerably across economic releases and increase with risk aversion as well as with monetary policy and ...
Working Paper
Financial Stability Governance and Central Bank Communications
We investigate how central banks' governance frameworks influence their financial stability communication strategies and assess the effectiveness of these strategies in preventing a worsening of financial cycle conditions. We develop a simple conceptual framework of how central banks communicate about financial stability and how communication shapes the evolution of the financial cycle. We apply our framework using data on the governance characteristics of 24 central banks and the sentiment conveyed in their financial stability reports. We find robust evidence that communications by central ...
Working Paper
Variance risk premiums and the forward premium puzzle
This paper presents evidence that the foreign exchange appreciation is predictable by the currency variance risk premium at a medium 6-month horizon and by the stock variance risk premium at a short 1-month horizon. Although currency variance risk premiums are highly correlated with each other over longer horizons, their correlations with stock variance risk premiums are quite low. Interestingly the currency variance risk premium has no predictive power for stock returns. We rationalize these findings in a consumption-based asset pricing model with orthogonal local and global economic ...
Discussion Paper
Central Banks' Financial Stability Communications during the COVID-19 Pandemic
The COVID-19 pandemic has led to the implementation of unprecedented policy actions by central banks around the world. Along with the reduction of interest rates and the use of asset purchase and lending programs, central bank communications have been actively deployed as a policy tool.