Search Results
Discussion Paper
What’s News?
Economic news moves markets. Most analyses find that economic news is incorporated quickly (within minutes) into asset prices, with some measurable persistence of these effects, and with some spillovers across national borders. Some types of announcements—for example, U.S. nonfarm payrolls announcements—generate much larger asset price responses than others. Generally, news that is more timely, is more precise (being subject to smaller revisions on average), and contains more information (being better able to better forecast GDP growth, inflation, or central bank policy decisions) has a ...
Working Paper
Asset Prices and Credit with Diagnostic Expectations
Using long-run cross-country panel data, we document that (i) contemporaneous credit growth strongly predicts contemporaneous equity returns with positive sign, and (ii) lagged credit growth strongly predicts contemporaneous equity returns with negative sign. This correlation reversal is robust to added controls for contemporaneous and lagged consumption growth and these credit factors have greater explanatory power than the consumption factors. We find that a general equilibrium model with financial frictions and rational expectations fails to match the empirically estimated sign on ...
Working Paper
Uncertainty, Stock Prices and Debt Structure: Evidence from the U.S.-China Trade War
Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times.
Working Paper
The economic effects of a potential armed conflict over Taiwan
This article examines the likely economic effects of a Chinese invasion or blockade of Taiwan for the U.S. and the world by considering historical precedents. Such a conflict would likely produce a flight-to-safety in the asset market, huge disruptions in international trade, and banking problems, and it would greatly exacerbate existing fiscal pressures. The authorities of the People’s Republic of China would probably try to sell U.S. and other western securities prior to a conflict to avoid sanctions on those assets. Such sales would be temporarily disruptive but would likely have only ...
Journal Article
The Economic Effects of a Potential Armed Conflict Over Taiwan
This article examines the likely economic effects of a Chinese invasion or blockade of Taiwan for the U.S. and the world by considering historical precedents. Such a conflict would likely produce a flight-to-safety in the asset market, huge disruptions in international trade, and banking problems, and it would greatly exacerbate existing fiscal pressures. The authorities of the People’s Republic of China would probably try to sell U.S. and other western securities prior to a conflict to avoid sanctions on those assets. Such sales would be temporarily disruptive but would likely have only ...
Working Paper
Risk Management in Monetary Policy: A Review with Asset Pricing Implications
We review recent research on how the Fed's risk-management approach shapes the overall policy stance and how it affects financial market conditions. The evidence shows that the policy stance contains a forward-looking, conditional component that has long been an integral part of the Fed's policymaking toolkit. Asymmetric forward-looking policy tilts—motivated by risk-management considerations and revealed via the Fed’s communication—complement and extend beyond the effects of direct policy actions. Drawing on the transcripts of FOMC meetings between 1976 and 2019, we provide an ...
Report
Asset price effects of peer benchmarking: evidence from a natural experiment
We estimate the effects of peer benchmarking by institutional investors on asset prices. To identify trades purely due to peer benchmarking as separate from those based on fundamentals or private information, we exploit a natural experiment involving a change in a government-imposed underperformance penalty applicable to Colombian pension funds. This change in regulation is orthogonal to stock fundamentals and only affects incentives to track peer portfolios, allowing us to identify the component of demand that is caused by peer benchmarking. We find that these peer effects generate excess ...
Report
Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms
This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit ...
Working Paper
The economic effects of a potential armed conflict over Taiwan
This article examines the likely economic effects of a Chinese invasion or blockade of Taiwan for the U.S. and the world by considering historical precedents. Such a conflict would likely produce a flight-to-safety in the asset market, huge disruptions in international trade, banking problems, and would greatly exacerbate existing fiscal pressures. The authorities of the People’s Republic of China would probably try to sell U.S. and other western securities prior to a conflict to avoid sanctions on those assets. Such sales would be temporarily disruptive but would likely have only marginal ...
Report
Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy
We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns of fifty-four sectors in twenty-six countries. We first present a conceptual framework based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We then use the SAR model to decompose the overall impact of U.S. monetary policy on stock returns into a direct and a network effect. We find that up to 80 percent of the total impact of U.S. monetary policy shocks on average ...