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Author:Ajello, Andrea 

Journal Article
No-arbitrage restrictions and the U.S. Treasury market
What is the role of arbitrage trading in the U.S. Treasury market? In this article, the authors discuss the pricing of risk-free Treasury securities via no-arbitrage arguments and illustrate how this approach works in models of the term structure of interest rates. The article ends with an evaluation of market frictions (for example, transaction costs, leverage constraints, and the limited availability of arbitrage capital) in the government debt market and their implications for bond pricing using no-arbitrage term structure models.
AUTHORS: Ajello, Andrea; Benzoni, Luca; Chyruk, Olena
DATE: 2012-04

Working Paper
Core and 'Crust': Consumer Prices and the Term Structure of Interest Rates
We propose a no-arbitrage model that jointly explains the dynamics of consumer prices as well as the nominal and real term structures of risk-free rates. In our framework, distinct core, food, and energy price series combine into a measure of total inflation to price nominal Treasuries. This approach captures different frequencies in inflation fluctuations: Shocks to core are more persistent and less volatile than shocks to food and, especially, energy (the 'crust'). We find that a common structure of latent factors determines and predicts the term structure of yields and inflation. The model outperforms popular benchmarks and is at par with the Survey of Professional Forecasters in forecasting inflation. Real rates implied by our model uncover the presence of a time-varying component in TIPS yields that we attribute to disruptions in the inflation-indexed bond market. Finally, we find a pronounced declining pattern in the inflation risk premium that illustrates the changing nature of inflation risk in nominal Treasuries.
AUTHORS: Ajello, Andrea; Benzoni, Luca; Chyruk, Olena
DATE: 2012-12-19

Working Paper
Financial Stability and Optimal Interest-Rate Policy
We study optimal interest-rate policy in a New Keynesian model in which the economy can experience financial crises and the probability of a crisis depends on credit conditions. The optimal adjustment to interest rates in response to credit conditions is (very) small in the model calibrated to match the historical relationship between credit conditions, output, inflation, and likelihood of financial crises. Given the imprecise estimates of key parameters, we also study optimal policy under parameter uncertainty. We find that Bayesian and robust central banks will respond more aggressively to financial instability when the probability and severity of financial crises are uncertain.
AUTHORS: Ajello, Andrea; Laubach, Thomas; Lopez-Salido, J. David; Nakata, Taisuke
DATE: 2016-08

Working Paper
Financial intermediation, investment dynamics and business cycle fluctuations
I use micro data to quantify key features of U.S. firm financing. In particular, I establish that a substantial 35% of firms' investment is funded using financial markets. I then construct a dynamic equilibrium model that matches these features and fit the model to business cycle data using Bayesian methods. In the model, stylized banks enable trades of financial assets, directing funds towards investment opportunities, and charge an intermediation spread to cover their costs. According to the model estimation, exogenous shocks to the intermediation spread explain 35% of GDP and 60% of investment volatility.
AUTHORS: Ajello, Andrea
DATE: 2012


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