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Working Paper
Credit market shocks: evidence from corporate spreads and defaults
Several recent papers have found that exogenous shocks to spreads paid in corporate credit markets are a substantial source of macroeconomic fluctuations. An alternative explanation of the data is that spreads respond endogenously to expectations of future default. We use a simple model of bond spreads to derive sign restrictions on the impulse-response functions of a VAR that identify credit shocks in the bond market, and compare them to results from a benchmark recursive VAR. We find that credit market shocks cause a persistent decline in output, prices and policy rates. Historical ...
Working Paper
Stationarity and the term structure of interest rates: a characterisation of stationary and unit root yield curves
The nature of yield curve dynamics and the determinants of the integration order of yields are investigated using a benchmark economy in which the logarithmic expectations theory holds and the regularity condition of a limiting yield and limiting term premium is satisfied. By considering a zero-coupon yield curve with a complete term structure of maturities, a linear vector autoregressive process is constructed that provides an arbitrarily accurate moving average representation of the complete yield curve as its cross-sectional dimension (n) goes to infinity. We use this to prove the ...
Working Paper
The dynamics of economics functions: modelling and forecasting the yield curve
The class of Functional Signal plus Noise (FSN) models is introduced that provides a new, general method for modelling and forecasting time series of economic functions. The underlying, continuous economic function (or "signal") is a natural cubic spline whose dynamic evolution is driven by a cointegrated vector autoregression for the ordinates (or "y-values") at the knots of the spline. The natural cubic spline provides flexible cross-sectional fit and results in a linear, state space model. This FSN model achieves dimension reduction, provides a coherent description of the observed ...
Journal Article
Financial crisis casts shadow over commercial real estate
The commercial market is only moderately off its most recent peak. But tougher times appear to lie ahead.