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Working Paper
Should central banks lean against changes in asset prices?
Leduc, Sylvain; Natal, Jean-Marc (2011)
How should monetary policy be conducted in the presence of endogenous feedback loops between asset prices, firms? financial health, and economic activity? We reconsider this question in the context of the financial accelerator model and show that, when the level of natural output is inefficient, the optimal monetary policy under commitment leans considerably against movements in asset prices and risk premia. We demonstrate that an endogenous feedback loop is crucial for this result and that price stability is otherwise quasi-optimal absent this feature. We also show that the optimal policy ...
Working Paper Series , Paper 2011-15

Conference Paper
Expected returns, yield spreads, and asset pricing tests
Campello, Murillo; Zhang, Lu; Chen, Long (2005)
Proceedings

Working Paper
Search in asset markets
Rocheteau, Guillaume; Lagos, Ricardo (2006)
We investigate how trading frictions in asset markets affect portfolio choices, asset prices and efficiency. We generalize the search-theoretic model of financial intermediation of Duffie, Grleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty and entry of dealers. With a fixed measure of dealers, we show that a steady-state equilibrium exists and is unique, and provide a condition on preferences under which a reduction in trading frictions leads to an increase in the price of the asset. We ...
Working Papers (Old Series) , Paper 0607

Working Paper
1/N and long run optimal portfolios: results for mixed asset menus
Nicodano, Giovanna; Guidolin, Massimo; Fugazza, Carolina (2010)
Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009), Rev. Fin. Studies] has cast doubts on the out-of-sample performance of optimizing portfolio strategies relative to naive, equally weighted ones. However, existing results concern the simple case in which an investor has a one-month horizon and meanvariance preferences. In this paper, we examine whether their result holds for longer investment horizons, when the asset menu includes bonds and real estate beyond stocks and cash, and when the investor is characterized by constant relative risk aversion preferences which are not locally ...
Working Papers , Paper 2010-003

Report
The Risk of Becoming Risk Averse: A Model of Asset Pricing and Trade Volumes
Atkeson, Andrew; Alvarez, Fernando (2018-12-31)
We develop a new general equilibrium model of asset pricing and asset trading volume in which agents? motivations to trade arise due to uninsurable idiosyncratic shocks to agents? risk tolerance. In response to these shocks, agents trade to rebalance their portfolios between risky and riskless assets. We study a positive question ? When does trade volume become a pricing factor? ? and a normative question ? What is the impact of Tobin taxes on asset trading on welfare? In our model, economies in which marketwide risk tolerance is negatively correlated with trade volume have a higher risk ...
Staff Report , Paper 577

Working Paper
Idiosyncratic volatility, stock market volatility, and expected stock returns
Savickas, Robert; Guo, Hui (2005)
We find that the value-weighted idiosyncratic stock volatility and aggregate stock market volatility jointly exhibit strong predictive power for excess stock market returns. The stock market risk-return relation is found to be positive, as stipulated by the CAPM; however, idiosyncratic volatility is negatively related to future stock market returns. Also, idiosyncratic volatility appears to be a pervasive macrovariable, and its forecasting abilities are very similar to those of the consumption-wealth ratio proposed by Lettau and Ludvigson (2001).
Working Papers , Paper 2003-028

Journal Article
Asset price bubbles
Lansing, Kevin J. (2007)
Economists use the term "bubble" to describe an asset price that has risen above the level justified by economic fundamentals, as measured by the discounted stream of expected future cash flows that will accrue to the owner of the asset. The dramatic rise in U.S. stock prices during the late 1990s, followed similarly by U.S. house prices during the early 2000s, are episodes that have both been described as "bubbles." This Economic Letter describes some research that attempts to account for the behavior of asset price bubbles.
FRBSF Economic Letter

Working Paper
Asset prices, exchange rates and the current account
Sarno, Lucio; Fratzscher, Marcel; Juvenal, Luciana (2008)
This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 32% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been much less relevant, explaining less than 7% and ...
Working Papers , Paper 2008-031

Journal Article
Asset prices, exchange rates, and monetary policy
Rudebusch, Glenn D. (2001)
This Economic Letter summarizes the papers presented at the conference "Asset Prices, Exchange Rates, and Monetary Policy" held at Stanford University on March 2-3, 2001, under the joint sponsorship of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research
FRBSF Economic Letter

Working Paper
The baby boom: predictability in house prices and interest rates
Martin, Robert F. (2005)
This paper explores the baby boom's impact on U.S. house prices and interest rates in the post-war 20th century and beyond. Using a simple Lucas asset pricing model, I quantitatively account for the increase in real house prices, the path of real interest rates, and the timing of low-frequency fluctuations in real house prices. The model predicts that the primary force underlying the evolution of real house prices is the systematic and predictable changes in the working age population driven by the baby boom. The model is calibrated to U.S. data and tested on international data. One ...
International Finance Discussion Papers , Paper 847

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