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Keywords:Asset pricing 

Report
How do treasury dealers manage their positions?

Using data on U.S. Treasury dealer positions from 1990 to 2006, we find evidence of a significant role for dealers in the intertemporal intermediation of new Treasury security supply. Dealers regularly take into inventory a large share of Treasury issuance so that dealer positions increase during auction weeks. These inventory increases are only partially offset in adjacent weeks and are not significantly hedged with futures. Dealers seem to be compensated for the risk associated with these inventory changes by means of price appreciation in the subsequent week.
Staff Reports , Paper 299

Report
Empirical evaluation of asset pricing models: arbitrage and pricing errors over contingent claims

In a 1997 paper, Hansen and Jagannathan develop two pricing error measures for asset pricing models. The first measure is the maximum pricing error on given test assets, and the second measure is the maximum pricing error over all possible contingent claims. We develop a simulation-based Bayesian inference of the pricing error measures. Although linear time-varying and multifactor models are widely reported to have small pricing errors on standard test assets, we demonstrate that these models can have large pricing errors over contingent claims because their stochastic discount factors are ...
Staff Reports , Paper 265

Report
No good deals—no bad models

Faced with the problem of pricing complex contingent claims, investors seek to make their valuations robust to model uncertainty. We construct a notion of a model-uncertainty-induced utility function and show that model uncertainty increases investors? effective risk aversion. Using this utility function, we extend the ?no good deals? methodology of Cochrane and Sa-Requejo (2000) to compute lower and upper good-deal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples.
Staff Reports , Paper 589

Report
Leverage and asset prices: an experiment

This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: When an asset can be used as collateral (that is, when the asset can be bought on margin), its price goes up. This increase is significant, and quantitatively close to what theory predicts. However, important deviations from the theory arise in the laboratory. First, the demand for the asset shifts when it can be used as a collateral, even though agents do not exhaust their purchasing power when collateralized borrowing is not allowed. ...
Staff Reports , Paper 548

Report
Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying

This paper explores the ability of theoretically based asset pricing models such as the CAPM and the consumption CAPM-referred to jointly as the (C)CAPM - to explain the cross-section of average stock returns. Unlike many previous empirical tests of the (C)CAPM, we specify the pricing kernel as a conditional linear factor model, as would be expected if risk premia vary over time. Central to our approach is the use of a conditioning variable which proxies for fluctuations in the log consumption-aggregate wealth ratio and is likely to be important for summarizing conditional expectations of ...
Staff Reports , Paper 93

Report
The term structure of inflation expectations

We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model not only to yields, but also to the yields' variance-covariance matrix, thus increasing identification power. We find that model-implied inflation expectations can differ substantially from break-even inflation rates when market volatility is high. Our model's ability to be updated weekly makes it ...
Staff Reports , Paper 362

Report
Do stock price bubbles influence corporate investment?

Building on recent developments in behavioral asset pricing, we develop a model in which an increase in the dispersion of investor beliefs under short-selling constraints predicts a "bubble," or a rise in a stock's price above its fundamental value. Our model predicts that managers respond to bubbles by issuing new equity and increasing capital expenditures. We test these predictions, as well as others, using the variance of analysts' earnings forecasts-a proxy for the dispersion of investor beliefs-to identify the bubble component in Tobin's Q. ; When comparing firms traded on the New York ...
Staff Reports , Paper 177

Working Paper
On the real-time forecasting ability of the consumption-wealth ratio

Lettau and Ludvigson (2001a) show that the consumption-wealth ratio-the error term from the cointegration relation among consumption, net worth, and labor income-forecasts stock market returns out of sample. In this paper, we reexamine their evidence using real-time data. Consistent with the early authors, we find that consumption and labor income data are subject to substantial revisions, which reflect (1) incorporating new information or methodologies and (2) reducing noise. Consequently, in contrast with the results obtained from the current vintage, the out-of-sample forecasting power of ...
Working Papers , Paper 2003-007

Working Paper
Are the dynamic linkages between the macroeconomy and asset prices time-varying?

We estimate a number of multivariate regime switching VAR models on a long monthly data set for eight variables that include excess stock and bond returns, the real T-bill yield, predictors used in the finance literature (default spread and the dividend yield), and three macroeconomic variables (inflation, real industrial production growth, and a measure of real money growth). Heteroskedasticity may be accounted for by making the covariance matrix a function of the regime. We find evidence of four regimes and of time-varying covariances. We provide evidence that the best in-sample fit is ...
Working Papers , Paper 2005-056

Working Paper
What happened to the US stock market? Accounting for the last 50 years

The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that, in the long run, the market reverts to well understood fundamentals. Our work suggests this belief should be questioned as well. First, we show actual dividends cannot account for the secular trends of stock market values. We then consider a more comprehensive measure of capital income. This measure displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, ...
Working Papers , Paper 2009-042

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