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Working Paper
Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock
Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major ...
Working Paper
High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations
Ljungqvist and Sargent (2017) (LS) show that unemployment fluctuations can be understoodin terms of a quantity they call the “fundamental surplus.” However, their analysis ignores riskpremia, a force that Hall (2017) shows is important in understanding unemployment fluctuations. Weshow how the LS framework can be adapted to incorporate risk premia. We derive an equivalenceresult that relates parameters in economies with risk premia to those of an artificial economy withoutrisk premia. We show how to use properties of the artificial economy to deduce how risk premia affectunemployment ...
Report
Uncertainty Shocks, Capital Flows, and International Risk Spillovers
Foreign investors’ changing appetite for risk-taking has been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of uncovered interest parity (UIP) premia, capital flows, and exchange rates. To understand how these risk sentiment changes transmit across borders, we propose a two-country macroeconomic framework. Our model features cross-border holdings of risky assets by U.S. financial intermediaries that operate under financial frictions and act as global intermediaries in that they take on foreign asset risk. In ...
Working Paper
Special Repo Rates and the Cross-Section of Bond Prices: the Role of the Special Collateral Risk Premium
We estimate the joint term-structure of U.S. Treasury cash and repo rates using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a risk premium associated to the SC value of Treasuries and quantitatively link this premium to various price anomalies, such as the on-the-run premium. We show that a time-varying SC risk premium can explain between 74%?90% of the on-the-run premium, and is highly correlated with a number of other Treasury market anomalies. This suggests a commonality across these price anomalies, ...
Working Paper
Wealth in the Utility Function and Consumption Inequality
Wealth in the utility function (WIU) has been increasingly used in macroeconomic modelsand this specification can be justified by a few theories such as Max Weber’s (1904-05, German; 1958) theory on “spirit of capitalism.” We incorporate the WIU into a general equilibriumconsumption-portfolio choice model to study the implications of the WIU for consumption inequality, equilibrium interest rate, and equity premium—an unexplored area in the literature.Our general equilibrium framework features recursive exponential utility, uninsurable labor risks,and multiple assets and can deliver ...
Report
Uncertainty Shocks, Capital Flows, and International Risk Spillovers
Foreign investors’ changing appetite for risk-taking has been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of uncovered interest parity (UIP) premia, capital flows, and exchange rates. To understand how these risk sentiment changes transmit across borders, we propose a two-country macroeconomic framework. Our model features cross-border holdings of risky assets by U.S. financial intermediaries that operate under financial frictions and act as global intermediaries in that they take on foreign asset risk. In ...
Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...
Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...