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Working Paper
One Month Longer, One Month Later? Prepayments in the Auto Loan Market
We document a secular trend of increasing auto loan maturity from 30 months to over 70 months during the past 50 years, partly reflecting improved vehicle durability. Analyzing over half of the auto loans originated during the past 16 years, we find that longer-maturity new car loans have significantly higher interest rates with a yield curve much steeper than comparable-maturity Treasury securities. In addition, we show that the majority of auto loans were prepaid, including loans of zero-interest, and that many prepaying borrowers could have paid less interest by choosing loans of a shorter ...
Working Paper
No-Arbitrage Priors, Drifting Volatilities, and the Term Structure of Interest Rates
We derive a Bayesian prior from a no-arbitrage affine term structure model and use it to estimate the coefficients of a vector autoregression of a panel of government bond yields, specifying a common time-varying volatility for the disturbances. Results based on US data show that this method improves the precision of both point and density forecasts of the term structure of government bond yields, compared to a fully fledged term structure model with time-varying volatility and to a no-change random walk forecast. Further analysis reveals that the approach might work better than an exact term ...
Working Paper
Information in Yield Spread Trades
Using positions data on bond futures, I document that speculators' spread trades contain private information about future economic activities and asset prices. Strong steepening trades are associated with negative payroll surprises in subsequent months and can predict asset markets' reaction to future payroll releases, suggesting that speculators hold superior information about future payrolls. Steepening trades can also predict the rise of stock prices within a few hours before subsequent FOMC announcements, implying that the pre-FOMC stock drift is driven by informed speculation. Overall, ...
Working Paper
The Equilibrium Term Structure of Equity and Interest Rates
We develop an equilibrium asset pricing model with Epstein-Zin recursive preferences that accounts for major stylized facts of the term structure of bond and equity risk premia. While the term structure of bond risk premia tends to be upward-sloping on average, the term structure of equity risk premia is known to be downward-sloping. {{p}} The equilibrium asset pricing model with long-run consumption risks has difficulty matching these stylized facts simultaneously. The standard calibration of these models follows Bansal and Yaron (2004), in which agents prefer the early resolution of ...