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Buyout activity: the impact of aggregate discount rates
Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the ...
Working Paper
Foreign economic policy uncertainty and U.S. equity returns
We document that foreign economic policy uncertainty (EPUF) has significant incremental predictive power for excess U.S. stock returns in the presence of domestic EPU, both in aggregate and for returns of portfolios constructed on firm characteristics, for 6 to 12-months-ahead horizons. We find that EPUF shocks primarily transmit to equity prices through cash flow news rather than the discount rate news channel. We examine whether responses of select macro-financial variables to an adverse EPUF shock are consistent with this transmission mechanism. Corporate investment outlays, payouts, and ...
Working Paper
Estimating the Effects of Demographics on Interest Rates: A Robust Bayesian Perspective
There are a vast range of estimates for the effect of demographics on interest rates. I show that these magnitudes are not well-identified without data on capital and life-cycle consumption. However, these data are often omitted. Using nonparametric prior sensitivity analysis for an overlapping generations model estimated through Bayesian methods, I show that without these data, small changes in the prior for the discount rate, intertemporal elasticity of substitution, and capital depreciation rate can shift the posterior quantiles for the effects of demographics by up to 1.5 percentage ...
Journal Article
Climate Change Costs Rise as Interest Rates Fall
Climate change—including higher temperatures and more extreme weather—is already causing economic damage and is projected to have further long-lasting effects. To properly assess the potential future economic losses from climate change, they must be discounted to produce comparable values in today’s dollars. The discount rates required for this assessment are influenced by the long-run equilibrium real interest rate, which has declined notably since the 1990s. Accounting for a persistently lower real rate increases the present discounted future costs of climate change, which is relevant ...