The economic outlook and the Fed's balance sheet: the issue of \\"how\\" versus \\"when\\"
Remarks at the Association for a Better New York Breakfast Meeting, Grand Hyatt, New York.
Asset market hangovers and economic growth
During the early 1990s, asset prices and investment were unusually weak throughout the industrial world. This paper highlights this stylized fact, and connects it with another: in most of the industrial world, asset markets boomed for several years before collapsing around 1989. The paper suggests that the sluggish asset markets and investment growth of the early 1990s may represent, in part, symptoms of an "asset market hangover," that is, the lingering effects on real activity of collapsing speculative bubbles. The analysis relies on cross-country data for equity and real estate markets ...
Duality and arbitrage with transactions costs: theory and applications
Recent advances in duality theory have made it easier to discover relationships between asset prices and the portfolio choices based on them. But this approach to arbitrage-free securities markets has yet to be extended and applied to economies with transactions costs. This paper does so, within the context of a general state-preference model of securities markets. Several applications are developed to illustrate the nature of the theory and its potential to resolve a host of issues surrounding the effects of transactions costs on securities markets.
Asset mispricing, arbitrage, and volatility
Market efficiency remains a contentious topic among financial economists. The theoretical case for efficient markets rests on the notion of risk-free, cost-free arbitrage. In real markets, however, arbitrage is not risk-free or cost-free. In addition, the number of informed arbitrageurs and the supply of financial resources they have to invest in arbitrage strategies is limited. This article builds on an important recent model of arbitrage by professional traders who need?but lack?wealth of their own to trade. Professional abitrageurs must convince wealthy but uninformed investors to entrust ...
On asset-liability matching and federal deposit and pension insurance
Asset-liability mismatch was a principal cause of the Savings and Loan Crisis of the 1980s. The federal government's failure to recognize the mismatch risk early on and manage it properly led to huge losses by the Federal Savings and Loan Insurance Corporation, which had to be covered by taxpayers. In dealing with the problems now facing the defined-benefit pension system and the Pension Benefit Guaranty Corporation (PBGC), the government seems to be making some of the same mistakes it made then. Among the causes is the fallacious belief that because pension funds have a long time horizon the ...
Macroeconomic state variables as determinants of asset price covariances
This paper explores the possible advantages of introducing observable state variables into risk management models as a strategy for modeling the evolution of second moments. A simulation exercise demonstrates that if asset returns depend upon a set of underlying state variables that are autoregressively conditionally heteroskedastic (ARCH), then a risk management model that fails to take account of this dependence can badly mismeasure a portfolio's "Value-at-Risk" (VaR), even if the model allows for conditional heteroskedasticity in asset returns. Variables measuring macroeconomic news ...
Economic theory and asset bubbles
The author summarizes what economic theory tells us about when asset price bubbles can occur and what the welfare implications are from bursting them. In some cases, bursting a bubble may make society worse off by exacerbating the market distortions that give rise to the bubble in the first place.
The relationship between returns to risky lending and Gap management
Inducing agents to report hidden trades: a theory of an intermediary
When contracts are unobserved, agents may have the incentive to promise the same asset to multiple counterparties and subsequently default. The author constructs an optimal mechanism that induces agents to reveal all their trades voluntarily. The mechanism allows agents to report every contract they enter, and it makes public the names of agents who have reached some prespecified position limit. In some cases, an agent's position limit must be higher than the number of contracts he enters in equilibrium. The mechanism has some features of a clearinghouse. ; Supersedes Working Paper 09-10
Recourse risk in asset sales