This paper calibrates a class of jump-diffusion long-run risks (LRR) models to quantify how well they can jointly explain the equity risk premium and the variance risk premium in the U.S. financial markets, and whether they can generate realistic dynamics of risk-neutral and realized volatilities.
Topics: Asset Pricing; Economic modelsThis paper proposes a novel regression-based approach to the estimation of Gaussian dynamic term structure models that avoids numerical optimization.
Topics: Asset Pricing; Econometric and statistical methods; Interest ratesThis paper examines the contributions of population aging, mortgage innovation and historically low interest rates to the sharp rise in U.S. house prices and mortgage debt between 1994 and 2005.
Topics: Asset Pricing; Credit and credit aggregates; Economic modelsMost central banks effect changes to their target or policy rate in discrete increments (e.g., multiples of 0.25%) following public announcements on scheduled dates. Still, for most applications, researchers rely on the assumption that the policy rate changes linearly with economic conditions and they do not distinguish between dates with and without scheduled announcements.
Topics: Asset Pricing; Financial markets; Interest ratesWe provide a decomposition of nominal yields into real yields, expectations of future inflation and inflation risk premiums when real bonds or inflation swaps are unavailable or unreliable due to their relative illiquidity.
Topics: Asset Pricing; Econometric and statistical methods; Inflation and prices; Interest ratesMany studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added.
Topics: Asset Pricing; Econometric and statistical methodsWe build a dynamic capital structure model to study the link between systematic risk exposure and debt maturity, as well as their joint impact on the term structure of credit spreads. Our model allows for time variation and lumpiness in the maturity structure. Relative to short-term debt, long-term debt is less prone to rollover risks, but its illiquidity raises the costs of financing.
Topics: Asset Pricing; Debt ManagementAn important channel in the transmission of monetary policy is the relationship between the short-term policy rate and long-term interest rates. Using a new term-structure model, the authors show that the variation in long-term interest rates over time consists of two components: one representing investor expectations of future policy rates, and another reflecting a term-structure risk premium that compensates investors for holding a risky asset. The time variation in the term-structure risk premium is countercyclical and largely determined by global macroeconomic conditions. As a result, long-term rates are pushed up during recessions and down during times of expansion. This is an important phenomenon that central banks need to take into account when using short-term rates as a policy tool.
Topics: Asset Pricing; Financial markets; Transmission of monetary policyThe author describes the construction of the U.S.-dollar-denominated zero-coupon curve for the supranational asset class from 1995 to 2010. He uses yield data from a crosssection of bonds issued by AAA-rated supranational entities to fit the Svensson (1995) term-structure model.
Topics: Asset Pricing; Financial marketsWe investigate whether expectations that are not fully rational have the potential to explain the evolution of house prices and the price-to-rent ratio in the United States.
Topics: Asset Pricing; Domestic demand and components; Economic modelsExpected returns vary when investors face time-varying investment opportunities. Long-run risk models (Bansal and Yaron 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton 2000) emphasize sources of risk that are not observable to the econometrician.
Topics: Asset Pricing; Financial servicesThe goal of this paper is to investigate what type of information from Bank of Canada communication statements or the market commentary based on these statements has a significant effect on the volatility or level of returns in a short-term interest rate market.
Topics: Asset Pricing; Financial marketsThis article draws on theory and empirical evidence to examine a number of factors behind movements in Canadian house prices. It begins with an overview of the movements in house prices in Canada, using regional data to highlight factors that influence prices over the long run. It then turns to the central theme, that there are medium-run movements in prices not accounted for by long-run factors. Drawing on recent Bank of Canada research, the article discusses several factors behind these medium-run movements, including interest rates, expected price appreciation and market liquidity. The article concludes by identifying areas for future research that would further our understanding of fluctuations in house prices.
Topics: Asset Pricing; Econometric and statistical methods; Market structure and pricingWe construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate.
Topics: Asset Pricing; Exchange rates; Interest rateshis paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’
Topics: Asset Pricing; Business fluctuations and cyclesWe develop a discrete-time affine stochastic volatility model with time-varying conditional skewness (SVS). Importantly, we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way.
Topics: Asset Pricing; Econometric and statistical methodsThe swap market has enjoyed tremendous growth in the last decade. With government issues shrinking in supply and increased price volatilities, the swap term structure has emerged as an alternative pricing, benchmark, and hedging mechanism to the government term structure.
Topics: Asset Pricing; International financial markets
