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Conference Paper
Stock returns and volatility: pricing the long-run and short-run components of market risk
AUTHORS: Rosenberg, Joshua V.; Adrian, Tobias
DATE: 2005

Report
Regression-based estimation of dynamic asset pricing models
We propose regression-based estimators for beta representations of dynamic asset pricing models with an affine pricing kernel specification. We allow for state variables that are cross-sectional pricing factors, forecasting variables for the price of risk, and factors that are both. The estimators explicitly allow for time-varying prices of risk, time-varying betas, and serially dependent pricing factors. Our approach nests the Fama-MacBeth two-pass estimator as a special case. We provide asymptotic multistage standard errors necessary to conduct inference for asset pricing test. We illustrate our new estimators in an application to the joint pricing of stocks and bonds. The application features strongly time-varying, highly significant prices of risks that are found to be quantitatively more important than time-varying betas in reducing pricing errors.
AUTHORS: Crump, Richard K.; Moench, Emanuel; Adrian, Tobias
DATE: 2011

Report
Monetary policy, financial conditions, and financial stability
We review a growing literature that incorporates endogenous risk premiums and risk taking in the conduct of monetary policy. Accommodative policy can create an intertemporal trade-off between improving current financial conditions and increasing future financial vulnerabilities. In the United States, structural and cyclical macroprudential tools to reduce vulnerabilities at banks are being implemented, but they may not be sufficient because activities can migrate and there are limited tools for nonbank intermediaries and for borrowers. While monetary policy itself can influence vulnerabilities, its efficacy as a tool will depend on the costs of tighter policy on activity and inflation. We highlight that adding a risk-taking channel to traditional transmission channels could significantly alter a cost-benefit calculation for using monetary policy, and that considering risks to financial stability?as downside risks to employment?is consistent with the dual mandate..
AUTHORS: Adrian, Tobias; Liang, J. Nellie
DATE: 2014-09-01

Report
Which financial frictions? Parsing the evidence from the financial crisis of 2007-09
We provide an overview of data requirements necessary to monitor repurchase agreements (repos) and securities lending (sec lending) markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets, and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection should include six characteristics of repo and sec lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty.
AUTHORS: Adrian, Tobias; Colla, Paolo; Shin, Hyun Song
DATE: 2011

Report
Repo and securities lending
We provide an overview of the data required to monitor repo and securities lending markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection would include, at a minimum, six characteristics of repo and securities lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty.
AUTHORS: Adrian, Tobias; Begalle, Brian; Copeland, Adam; Martin, Antoine
DATE: 2012-12-01

Report
Financial amplification of foreign exchange risk premia
Theories of systemic risk suggest that financial intermediaries? balance-sheet constraints amplify fundamental shocks. We provide supporting evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediaries? balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to systemic risk monitoring.
AUTHORS: Adrian, Tobias; Etula, Erkko; Groen, Jan J. J.
DATE: 2010

Report
Liquidity policies and systemic risk
The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries? leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies? implications for household welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.
AUTHORS: Adrian, Tobias; Boyarchenko, Nina
DATE: 2014-12-01

Report
Monetary policy and financial conditions: a cross-country study
Loose financial conditions forecast high output growth and low output volatility up to six quarters into the future, generating time-varying downside risk to the output gap, which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced-form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude of downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable.
AUTHORS: Duarte, Fernando M.; Adrian, Tobias; Mancini-Griffoli, Tommaso; Grinberg, Federico
DATE: 2019-06-01

Report
Financial intermediary leverage and value at risk
We study a contracting model for the determination of leverage and balance sheet size for financial intermediaries that fund their activities through collateralized borrowing. The model gives rise to two features: First, leverage is procyclical in the sense that leverage is high when the balance sheet is large. Second, leverage and balance sheet size are both determined by the riskiness of assets. For U.S. investment banks, we find empirical support for both features of our model, that is, leverage is procyclical, and both leverage and balance sheet size are determined by measured risks. In a system context, increased risk reduces the debt capacity of the financial system as a whole, giving rise to amplified de-leveraging by institutions by way of the chain of repo transactions in the financial system.
AUTHORS: Adrian, Tobias; Shin, Hyun Song
DATE: 2008

Report
Liquidity and leverage
In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, prompting financial intermediaries to adjust the size of their balance sheets. We present evidence that marked-to-market leverage is strongly procyclical and argue that such behavior has aggregate consequences. Changes in dealer repurchase agreements (repos) -the primary margin of adjustment for the aggregate balance sheets of intermediaries - forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index (VIX). Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.>
AUTHORS: Adrian, Tobias; Shin, Hyun Song
DATE: 2008

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