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Jel Classification:C13 

Working Paper
Too Good to Be True? Fallacies in Evaluating Risk Factor Models

This paper is concerned with statistical inference and model evaluation in possibly misspecified and unidentified linear asset-pricing models estimated by maximum likelihood and one-step generalized method of moments. Strikingly, when spurious factors (that is, factors that are uncorrelated with the returns on the test assets) are present, the models exhibit perfect fit, as measured by the squared correlation between the model's fitted expected returns and the average realized returns. Furthermore, factors that are spurious are selected with high probability, while factors that are useful are ...
FRB Atlanta Working Paper , Paper 2017-9

A Bayesian Approach to Inference on Probabilistic Surveys

We propose a nonparametric Bayesian approach for conducting inference on probabilistic surveys. We use this approach to study whether U.S. Survey of Professional Forecasters density projections for output growth and inflation are consistent with the noisy rational expectations hypothesis. We find that in contrast to theory, for horizons close to two years, there is no relationship whatsoever between subjective uncertainty and forecast accuracy for output growth density projections, both across forecasters and over time, and only a mild relationship for inflation projections. As the horizon ...
Staff Reports , Paper 1025

Working Paper
Simultaneous Spatial Panel Data Models with Common Shocks

I consider a simultaneous spatial panel data model, jointly modeling three effects: simultaneous effects, spatial effects and common shock effects. This joint modeling and consideration of cross-sectional heteroskedasticity result in a large number of incidental parameters. I propose two estimation approaches, a quasi-maximum likelihood (QML) method and an iterative generalized principal components (IGPC) method. I develop full inferential theories for the estimation approaches and study the trade-off between the model specifications and their respective asymptotic properties. I further ...
Supervisory Research and Analysis Working Papers , Paper RPA 17-3

Working Paper
Options on Interbank Rates and Implied Disaster Risk

The identification of disaster risk has remained a significant challenge due to the rarity of macroeconomic disasters. We show that the interbank market can help characterize the time variation in disaster risk. We propose a risk-based model in which macroeconomic disasters are likely to coincide with interbank market failure. Using interbank rates and their options, we estimate our model via MLE and filter out the short-run and long-run components of disaster risk. Our estimation results are independent of the stock market and serve as an external validity test of rare disaster models, which ...
Finance and Economics Discussion Series , Paper 2023-054

Working Paper
Shrinkage estimation of high-dimensional factor models with structural instabilities

In high-dimensional factor models, both the factor loadings and the number of factors may change over time. This paper proposes a shrinkage estimator that detects and disentangles these instabilities. The new method simultaneously and consistently estimates the number of pre- and post-break factors, which liberates researchers from sequential testing and achieves uniform control of the family-wise model selection errors over an increasing number of variables. The shrinkage estimator only requires the calculation of principal components and the solution of a convex optimization problem, which ...
Working Papers , Paper 14-4

Working Paper
Backtesting Systemic Risk Measures During Historical Bank Runs

The measurement of systemic risk is at the forefront of economists and policymakers concerns in the wake of the 2008 financial crisis. What exactly are we measuring and do any of the proposed measures perform well outside the context of the recent financial crisis? One way to address these questions is to take backtesting seriously and evaluate how useful the recently proposed measures are when applied to historical crises. Ideally, one would like to look at the pre-FDIC era for a broad enough sample of financial panics to confidently assess the robustness of systemic risk measures but ...
Working Paper Series , Paper WP-2015-9

Working Paper
Decomposing the Monetary Policy Multiplier

Financial markets play an important role in generating monetary policy transmission asymmetries in the US. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a monetary tightening than to an expansion. At a one year horizon, the ‘financial multiplier’ of monetary policy—defined as the ratio between the cumulative responses of employment and credit spreads—is zero for a monetary expansion, -2 for a monetary tightening, and -4 for a monetary tightening that takes place under strained credit market conditions. These results ...
Working Paper Series , Paper 2023-14

Online Appendix: Star Wars at Central Banks

Staff Report , Paper 621

Working Paper
Pooled Bewley Estimator of Long-Run Relationships in Dynamic Heterogenous Panels

This paper, using the Bewley (1979) transformation of the autoregressive distributed lag model, proposes a pooled Bewley (PB) estimator of long-run coefficients for dynamic panels with heterogeneous short-run dynamics, in the same setting as the widely used Pooled Mean Group (PMG) estimator. The Bewley transform enables us to obtain an analytical closed form expression for the PB, which is not available when using the maximum likelihood approach. This lets us establish asymptotic normality of PB as n,T→∞ jointly, allowing for applications with n and T large and of the same order of ...
Globalization Institute Working Papers , Paper 409

Working Paper
Spurious Inference in Unidentified Asset-Pricing Models

This paper studies some seemingly anomalous results that arise in possibly misspecified and unidentified linear asset-pricing models estimated by maximum likelihood and one-step generalized method of moments (GMM). Strikingly, when useless factors (that is, factors that are independent of the returns on the test assets) are present, the models exhibit perfect fit, as measured by the squared correlation between the model's fitted expected returns and the average realized returns, and the tests for correct model specification have asymptotic power that is equal to the nominal size. In other ...
FRB Atlanta Working Paper , Paper 2014-12


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