Search Results
Working Paper
Does Smooth Ambiguity Matter for Asset Pricing?
We use the Bayesian method introduced by Gallant and McCulloch (2009) to estimate consumption-based asset pricing models featuring smooth ambiguity preferences. We rely on semi-nonparametric estimation of a flexible auxiliary model in our structural estimation. Based on the market and aggregate consumption data, our estimation provides statistical support for asset pricing models with smooth ambiguity. Statistical model comparison shows that models with ambiguity, learning and time-varying volatility are preferred to the long-run risk model. We analyze asset pricing implications of the ...
Working Paper
Interregional Migration and Housing Vacancy: Theory and Empirics
We examine homeowner vacancy rate interdependencies over time and space through the channel of migration. Our theoretical analysis extends the Wheaton (1990) search and matching model for housing by incorporating interregional spillovers due to some households’ desires to migrate between regions and by allowing for regime-switching behavior. Our empirical analysis of vacancy rates for the entire U.S. and for Census regions provides visual evidence for the possibility of regime-switching behavior. We explicitly test our model by estimating basic Vector Autoregression (VAR) and ...
Working Paper
Nonlinearities, Smoothing and Countercyclical Monetary Policy
Empirical analysis of the Fed?s monetary policy behavior suggests that the Fed smooths interest rates? that is, the Fed moves the federal funds rate target in several small steps instead of one large step with the same magnitude. We evaluate the effect of countercyclical policy by estimating a Vector Autoregression (VAR) with regime switching. Because the size of the policy shock is important in our model, we can evaluate the effect of smoothing the interest rate on the path of macro variables. Our model also allows for variation in transition probabilities across regimes, depending on the ...
Working Paper
Industrial Connectedness and Business Cycle Comovements
While aggregate shocks account for most business cycle fluctuations, sectoral shocks have become relatively more important since the 1980s. Previous studies show that sectoral shocks propagate through industry supply chains. Typically, sectors are defined by similarities in function and/or market. While some industries have supply chains within their own sector (vertical), others have supply chains across a number of sectors (horizontal). Similarity in these supply chain characteristics appear to be a determining factor in how industries comove. Using industrial production data of 82 ...
Working Paper
Business Cycles Across Space and Time
We study the comovement of international business cycles in a time series clustering model with regime-switching. We extend the framework of Hamilton and Owyang (2012) to include time-varying transition probabilities to determine what drives similarities in business cycle turning points. We find four groups, or "clusters", of countries which experience idiosyncratic recessions relative to the global cycle. Additionally, we find the primary indicators of international recessions to be fluctuations in equity markets and geopolitical uncertainty. In out-of-sample forecasting exercises, we find ...
Working Paper
House Price Growth Interdependencies and Comovement
This paper examines house price comovement across U.S. metropolitan areas (MSAs). We develop a Markov-switching framework that includes a spatial similarity element based on distances between MSAs. Our approach allows for house price comovements that occur due to similar timing of downturns across groups or clusters of MSAs. The inclusion of the spatial element improves the model fit compared to a standard endogenous clustering model. We find seven clusters of MSAs, where each cluster experiences idiosyncratic house price downturns, plus one distinct national house price cycle. Notably, only ...
Working Paper
Regime-Switching Models for Estimating Inflation Uncertainty
This paper constructs regime-switching models for estimating the probability of inflation returning to its relatively high levels of variability and persistence in the 1970s and 1980s. Forecasts and probabilities of extreme events from the models are evaluated against comparable estimates from other statistical models, from surveys, and from financial markets. The paper then uses the models to construct prediction intervals around Federal Reserve Board staff forecasts of PCE price inflation, combining the recent non-parametric forecast error distribution with parametric information from the ...
Working Paper
Business Cycles Across Space and Time
We study the comovement of international business cycles in a time series clustering model with regime-switching. We extend the framework of Hamilton and Owyang (2012) to include time-varying transition probabilities to determine what drives similarities in business cycle turning points. We find four groups, or "clusters", of countries which experience idiosyncratic recessions relative to the global cycle. Additionally, we find the primary indicators of international recessions to be fluctuations in equity markets and geopolitical uncertainty. In out-of-sample forecasting exercises, we find ...
Working Paper
Industrial Connectedness and Business Cycle Comovements
The effect of economic shocks on business cycles fluctuations may vary across industries. For example, shocks that originate in a single industry may propagate elsewhere, either up or down stream in the production chain. Thus, industries that are more connected may be more vulnerable to industry-specific economic shocks. However, any model of industrial connectedness must account for the fact that much of the inter-industry correlation will be driven by national shocks. In light of this, we develop a panel Markov-switching model for industry-level data that incorporates a number of features ...
Working Paper
Interregional Migration and Housing Vacancy: Theory and Empirics
We examine homeowner vacancy rate interdependencies over time and space through the channel of migration. Our theoretical analysis extends the Wheaton (1990) search and matching model for housing by incorporating interregional spillovers due to some households’ desires to migrate between regions and by allowing for regime-switching behavior. Our empirical analysis of vacancy rates for the entire U.S. and for Census regions provides visual evidence for the possibility of regime-switching behavior. We explicitly test our model by estimating basic Vector Autoregression (VAR) and ...