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Working Paper
Explaining asset pricing puzzles associated with the 1987 market crash

The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic uncertainty are subject to rare jumps. The arrival of a jump triggers the updating of agents' beliefs about the likelihood of future jumps, which produces a market crash and a permanent shift in option prices. Consumption and dividends remain smooth, and the model is consistent with salient features ...
Working Paper Series , Paper WP-2010-10

Working Paper
Bubbles and Leverage: A Simple and Unified Approach

In this paper, we lay out a simple framework that captures much of what the theoretical literature has to say about the role of credit in systemically important asset booms and busts. In addition, we suggest ways in which to incorporate physical investment in the bubble asset as well as monetary policy.
Working Paper Series , Paper WP-2013-21

Working Paper
Are covered bonds a substitute for mortgage-backed securities?

Covered bonds and mortgage-backed securities both allow mortgages to be financed with duration-matched bonds. Given the problems in the MBS market during the financial crisis, some suggest that covered bonds might be a substitute for MBS. We examine the use of covered bonds and MBS in the U.S. and Europe, finding that the two are used for different purposes. Covered bonds are used more to increase liquidity than are MBS. MBS are more often used in ways consistent with exploiting some kinds of agency problems.
Working Paper Series , Paper WP-2011-14

Working Paper
Benefits of relationship banking: evidence from consumer credit markets

This paper empirically examines the benefits of relationship banking to banks, in the context of consumer credit markets. Using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers, we estimate the effects of relationship banking on the customers' default, attrition, and utilization behavior. We find that relationship accounts exhibit lower probabilities of default and attrition, and have higher utilization rates, compared to non-relationship accounts, ceteris paribus. Such effects become more pronounced with ...
Working Paper Series , Paper WP-2010-05

Working Paper
Plant level irreversible investment and equilibrium business cycles

This paper evaluates the importance of microeconomic irreversibilities for aggregate dynamics using a general equilibrium approach. To this end a real business cycle model of establishment level dynamics is formulated and analyzed. Investments decisions are subject to irreversibility constraints and consequently, are of the (S,s) variety. This complicates the analysis since the state of the economy is described by an endogenous distribution of agents. The paper develops a computational strategy that makes this class of (S,s) economies fully tractable. Contrary to what the previous literature ...
Working Paper Series , Paper WP-98-1

Working Paper
The limits of forward guidance

The viability of forward guidance as a monetary policy tool depends on the horizon over which it can be communicated and its influence on expectations over that horizon. We develop and estimate a model of imperfect central bank communications and use it to measure how effectively the Fed has managed expectations about future interest rates and the influence of its communications on macroeconomic outcomes. Standard models assume central banks have perfect control over expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called ?forward guidance ...
Working Paper Series , Paper WP-2019-3

Working Paper
Stochastic volatility

Given the importance of return volatility on a number of practical financial management decisions, the efforts to provide good real- time estimates and forecasts of current and future volatility have been extensive. The main framework used in this context involves stochastic volatility models. In a broad sense, this model class includes GARCH, but we focus on a narrower set of specifications in which volatility follows its own random process, as is common in models originating within financial economics. The distinguishing feature of these specifications is that volatility, being inherently ...
Working Paper Series , Paper WP-09-04

Working Paper
Deregulation and the relationship between bank CEO compensation and risk taking

The deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity- based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after ...
Working Paper Series , Paper WP-03-32

Working Paper
An Interview with Neil Wallace

A few years ago we sat down with Neil Wallace and had two lengthy, free-ranging conversations about his career and, generally speaking, his views on economics. What follows is a distillation of these conversations.
Working Paper Series , Paper WP-2013-25

Working Paper
The effects of health, wealth, and wages on labor supply and retirement behavior

This paper analyzes the effects of wages and the Social Security System on labor supply over the life cycle. I present a model of labor supply and retirement behavior that includes a saving decision, uncertainty, and a non-negativity constraint on assets. Using data from the Panel Study of Income Dynamics, I estimate life cycle profiles for labor force participation rates, hours worked, and assets. Using the Method of Simulated Moments, I match the estimated profiles to profiles simulated by a dynamic structural model. Estimated parameters produce simulated profiles that match many aspects of ...
Working Paper Series , Paper WP-00-2

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