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Discussion Paper
Drivers of Option-Implied Interest Rate Volatility
Option-implied volatilities of U.S. short-term interest rates have risen sharply since late 2021, reaching their highest levels in over a decade. Although these measures declined moderately since early 2023, they remain at around the 70th percentile of their historical distribution. This note links the implied volatility of short-term interest rates to macroeconomic uncertainty and highlights two fundamental drivers of short-term interest rate volatility over the past 30 years: inflation uncertainty and growth uncertainty.
Discussion Paper
Elevated Option-Implied Interest Rate Volatility and Downside Risks to Economic Activity
Measures of uncertainty about U.S. short maturity interest rates derived from options have risen sharply since October 2021, reaching their highest levels in more than a decade. This note first uses survey-based measures of economic uncertainty to argue that this increase in option-implied measures likely reflect higher uncertainty about inflation, the associated monetary policy response, and the perceived resulting downside risks to economic activity.
Working Paper
Linear Factor Models and the Estimation of Expected Returns
This paper analyzes the properties of expected return estimators on individual assets implied by the linear factor models of asset pricing, i.e., the product of β and λ. We provide the asymptotic properties of factor--model--based expected return estimators, which yield the standard errors for risk premium estimators for individual assets. We show that using factor-model-based risk premium estimates leads to sizable precision gains compared to using historical averages. Finally, inference about expected returns does not suffer from a small--beta bias when factors are traded. The more ...
Discussion Paper
Estimating Retail Credit in the U.S.
In this note, we estimate the size of an understudied segment of the consumer credit market—retail credit. Retail credit consists of the amounts owed to retail stores by their customers for purchases made on credit extended in partnership with a financial institution. Although retail credit is included in the consumer credit totals in Federal Reserve Statistical Release G.19, "Consumer Credit," a principal economic indicator providing the official estimate for consumer credit holdings in the U.S., it is not separately categorized on the release.
Working Paper
What is Certain about Uncertainty?
Researchers, policymakers, and market participants have become increasingly focused on the effects of uncertainty and risk on financial market and economic outcomes. This paper provides a comprehensive survey of the many existing measures of risk, uncertainty, and volatility. It summarizes what these measures capture, how they are constructed, and their effects, paying particular attention to large uncertainty spikes, such as those appearing concurrently with the outbreak of COVID-19. The measures are divided into three types: (1) news-based, survey- based, and econometric; (2) asset market ...