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Discussion Paper
Making a Statement: How Did Professional Forecasters React to the August 2011 FOMC Statement?
The Federal Open Market Committee (FOMC) statement released on August 9, 2011, was the first to incorporate language on “forward guidance” with an explicit date tied to the Committee’s expected path of monetary policy. In this post, we exploit the timing of surveys taken before and after this statement’s release to investigate how professional forecasters changed their expectations of growth, inflation, and monetary policy. We find that the average forecast of the federal funds rate shifts considerably and closely aligns with the new language in the statement, while the average ...
Discussion Paper
Connecting “The Dots”: Disagreement in the Federal Open Market Committee
People disagree, and so do the members of the Federal Open Market Committee (FOMC). How much do they disagree? Why do they disagree? We look at the FOMC’s projections of the federal funds rate (FFR) and other variables and compare them with those in the New York Fed’s Survey of Primary Dealers (SPD). We show that the members of the FOMC tend to disagree more than the primary dealers and offer some potential explanations.
Discussion Paper
A Look at the Accuracy of Policy Expectations
Since the 1980s, the primary policy tool of the Federal Reserve has been the federal funds rate. Because expectations of the future path of the funds rate play a central role in the term structure of interest rates and thus the monetary transmission mechanism, it is important to know how accurate these expectations are in predicting the funds rate. In this post, we investigate this issue using a well-known survey of private sector forecasters. We find that forecasts tend to over-predict the funds rate in easing cycles and under-predict it in tightening cycles. In addition, while forecasts ...
Report
Financial intermediation, asset prices, and macroeconomic dynamics
Fluctuations in the aggregate balance sheets of financial intermediaries provide a window on the joint determination of asset prices and macroeconomic aggregates. We document that financial intermediary balance sheets contain strong predictive power for future excess returns on a broad set of equity, corporate, and Treasury bond portfolios. We also show that the same intermediary variables that predict excess returns forecast real economic activity and various measures of inflation. Our findings point to the importance of financing frictions in macroeconomic dynamics and provide quantitative ...
Report
Forecasting through the rear-view mirror: data revisions and bond return predictability
Real-time macroeconomic data reflect the information available to market participants, whereas final data?containing revisions and released with a delay?overstate the information set available to them. We document that the in-sample and out-of-sample Treasury return predictability is significantly diminished when real-time as opposed to revised macroeconomic data are used. In fact, much of the predictive information in macroeconomic time series is due to the data revision and publication lag components.
Report
Dynamic Leverage Asset Pricing
We empirically investigate predictions from alternative intermediary asset pricing theories. The theories distinguish themselves in their use of intermediary equity or leverage as pricing factors or forecasting variables. We find strong support for a parsimonious dynamic pricing model based on broker-dealer leverage as the return forecasting variable and shocks to broker-dealer leverage as a cross-sectional pricing factor. The model performs well in comparison to other intermediary asset pricing models as well as benchmark pricing models, and extends the cross-sectional results by Adrian, ...
Report
Pricing the term structure with linear regressions
We estimate the time series and cross section of bond returns by way of three-stage ordinary least squares, which we label dynamic Fama-MacBeth regressions. Our approach allows for estimation of models with a large number of pricing factors. Even though we do not impose yield cross-equation restrictions in the estimation, we show that our bond return regressions generate a term structure of interest rates with small yield errors when compared with commonly reported specifications. We uncover specifications that give rise to lower pricing errors than do commonly advocated specifications, both ...
Report
Fundamental disagreement
We use the term structure of disagreement of professional forecasters to document a novel set of facts: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement differs markedly across variables: it is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time-varying at all horizons, including the long run. These new facts present a challenge to benchmark models of expectation formation based on informational frictions. We show that these models require two ...
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 ...
Report
What predicts U.S. recessions?
We reassess the predictability of U.S. recessions at horizons from three months to two years ahead for a large number of previously proposed leading-indicator variables. We employ an efficient probit estimator for partially missing data and assess relative model performance based on the receiver operating characteristic (ROC) curve. While the Treasury term spread has the highest predictive power at horizons four to six quarters ahead, adding lagged observations of the term spread significantly improves the predictability of recessions at shorter horizons. Moreover, balances in broker-dealer ...