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Series:FRB Atlanta Working Paper  Bank:Federal Reserve Bank of Atlanta 

Working Paper
Financial crises in emerging markets: a canonical model
We present a simple model that can account for the main features of recent financial crises in emerging markets. The international illiquidity of the domestic financial system is at the center of the problem. Illiquid banks are a necessary and a sufficient condition for financial crises to occur. Domestic financial liberalization and capital flows from abroad (especially if short-term) can aggravate the illiquidity of banks and increase their vulnerability to exogenous shocks and shifts in expectations. A bank collapse multiplies the harmful effects of an initial shock, as a credit squeeze and costly liquidation of investment projects cause real output drops and collapses in asset prices. Under fixed exchange rates, a run on banks becomes a run on the currency if the central bank attempts to act as a lender of last resort.
AUTHORS: Chang, Roberto; Velasco, Andres
DATE: 1998

Working Paper
Specifying a consistent joint maximum-likelihood (JMLE) approach to testing bond models
In this paper we extend the results derived in our earlier work to develop a methodology to employ the maximum-likelihood estimation technique for the pricing of interest rate instruments. In order to price bonds and their derivative assets, researchers must identify a preference parameter in addition to the dynamics for the interest rate process. There are two approaches to obtaining estimators for both preference and dynamics parameters: (1) a two-stage approach and (2) a single-stage joint maximum-likelihood (JMLE) approach. The first approach, while tractable, suffers from serious drawbacks, primarily those relating to the use of the estimates from the first stage in estimating parameters in the second stage. In this paper, we develop the theory necessary for joint maximum-likelihood (JMLE) over the set of bond prices and the interest rate. We operationalize the theory by assuming that the error processes for all coupon bonds are mutually independent and uniformly distributed with a mean of zero. This specification is at least partially justifiable by the observation that since market prices are quoted in 1/32 of a dollar, theoretical prices must always be rounded either up or down. JML estimators can be obtained from the joint log-likelihood function by the methods of sequential quadratic programming.
AUTHORS: Ramamurtie, Buddhavarapu Sailesh; Ulman, Scott
DATE: 1996

Working Paper
Expected stock returns and volatility in a production economy: a theory and some evidence
The sign of the relationship between expected stock market returns and volatility appears to vary over time, a result that seems at odds with basic notions of risk and return. In this paper we construct an economy where production involves the use of both labor and capital as inputs. We show that when capital investment is "sticky," the sign of the relation between stock market risk and return varies in accordance with the supply of labor but requires no time variation in preferences. In particular, we show that for asset market equilibria where firms face an elastic supply of labor, the traditional positive risk-return relation obtains. Conversely, a negative relation obtains for asset market equilibria where there is positive probability that labor supply will be highly inelastic. A nice feature of our model is that, unlike earlier work, the sign of the stock market risk-return relation can be associated with observable features of the business cycle. Post?World War II macroeconomic and stock return data are used to test the predictions from the model. Using standard measures of stock market volatility, our results provide support for a stock market risk-return relation that is negative at the peaks of business cycles and positive at the troughs.
AUTHORS: Singal, Padamja; Smith, Stephen D.
DATE: 1999

Working Paper
Does it take two? the effect of partners' characteristics on teenage pregnancy
Although the determinants of whether a teenage woman has a nonmarital pregnancy and how such a pregnancy is resolved have been widely investigated, little is known about the joint influence of both partners' characteristics on nonmarital teenage pregnancy. This paper uses data from the 1995 National Survey of Family Growth to examine whether the characteristics of teenage women and their partners affect the likelihood of a nonmarital pregnancy and whether a pregnancy ends in abortion, marriage, or a nonmarital birth. The results indicate that several attributes of both men and women appear to play a role in nonmarital teenage pregnancy and its outcome. The estimated relationships between one partner's attributes and the probability of a nonmarital pregnancy and its resolution are generally little affected by whether the other partner's characteristics are also taken into account.
AUTHORS: Zavodny, Madeline
DATE: 2000

Working Paper
The information content of financial aggregates in Australia
This paper examines whether financial aggregates provide information useful for predicting the subsequent behavior of real output and inflation. We employ vector autoregression (VAR) techniques to summarize the information in the data, providing evidence on the incremental forecasting value of financial aggregates for forecasting real output and inflation. The in-sample results suggest that there are only a few situations in which knowledge of the aggregates helps forecast real output and inflation. We then test the forecast performance of the VAR systems for two years out-of-sample in order to mimic more closely the real-time forecasting problem faced by policymakers. We compare the out-of-sample forecast accuracy of VAR systems including a financial aggregate with the corresponding system excluding the financial aggregate. Overall, both in-sample and out-of-sample results suggest no robust finding of exploitable information that is useful for policymakers in any of the financial aggregates under examination.
AUTHORS: Tallman, Ellis W.; Chandra, Naveen
DATE: 1996

Working Paper
The Asian liquidity crisis
A country's financial system is internationally illiquid if its potential short-term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition may be necessary and sufficient for financial crises and/or exchange rate collapses (Chang and Velasco 1998a, b). In this paper we argue that the 1997-98 crises in Asia were in fact a consequence of international illiquidity. This follows from an analysis of empirical indicators of illiquidity as well as other macroeconomic statistics. We trace the emergence of illiquidity to financial liberalization, the shortening of the foreign debt structure, and the currency denomination of assets versus liabilities. We explain how financial crises became exchange rate collapses due to a government policy of both fixing exchange rates and acting as lender of last resort. Finally, we outline the policy implications of our view for preventing crises and for dealing with them.
AUTHORS: Chang, Roberto; Velasco, Andres
DATE: 1998

Working Paper
Technology shocks, employment, and labor market frictions
Recent empirical evidence suggests that a positive technology shock leads to a decline in labor inputs. However, the standard real business cycle model fails to account for this empirical regularity. Can the presence of labor market frictions address this problem without otherwise altering the functioning of the model? We develop and estimate a real business cycle model using Bayesian techniques that allows but does not require labor market frictions to generate a negative response of employment to a technology shock. The results of the estimation support the hypothesis that labor market frictions are responsible for the negative response of employment.
AUTHORS: Mandelman, Federico S.; Zanetti, Francesco
DATE: 2008

Working Paper
Why do borrowers pledge collateral? new empirical evidence on the role of asymmetric information
An important theoretical literature motivates collateral as a mechanism that mitigates adverse selection, credit rationing, and other inefficiencies that arise when borrowers hold ex ante private information. There is no clear empirical evidence regarding the central implication of this literature?that a reduction in asymmetric information reduces the incidence of collateral. We exploit exogenous variation in lender information related to the adoption of an information technology that reduces ex ante private information, and compare collateral outcomes before and after adoption. Our results are consistent with this central implication of the private-information models and support the empirical importance of this theory.
AUTHORS: Berger, Allen N.; Espinosa-Vega, Marco A.; Frame, W. Scott; Miller, Nathan H.
DATE: 2007

Working Paper
Comments on Piazzesi and Schneider's "Bond positions, expectations, and the yield curve"
This working paper comments on Monika Piazzesi and Martin Schneider's "Bond Positions, Expectations, and the Yield Curve," delivered at the Fiscal Policy and Monetary/Fiscal Policy Interactions conference held at the Atlanta Fed on April 19?20, 2007.
AUTHORS: Faust, Jon
DATE: 2008

Working Paper
Interest rate swaps and economic exposure
The interest rate swap market has grown rapidly. Since the inception of the swap market in 1981, the outstanding notional principal of interest rate swaps has reached a level of $12.81 trillion in 1995. Recent surveys indicate that interest rate swaps are the most commonly used interest rate derivative by nonfinancial firms and that nonfinancial firms are major users of interest rate swaps. In this paper, we provide an economic rationale for the use of interest rate swaps by such nonfinancial firms. In a global economy, given the floating exchange rate regime, nonfinancial firms face economic exposure in the presence of foreign competition. Asymmetric information about economic exposure leads to mispricing of the firms' debt, and the firm chooses either short-term or long-term debt to minimize the cost of debt. We show that when there is a favorable (unfavorable) exchange rate shock, an exposed firm chooses short-term (long-term) debt together with fixed-for-floating (floating-for-fixed) interest rate swaps. Given interest rate expectations, interest rate swaps enable the firm to minimize the cost of fixed or floating rate debt.
AUTHORS: Goswami, Gautam; Shrikhande, Milind M.
DATE: 1997




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