Wednesday, August 12
Optimal Policies with Robust Concerns
Jaroslav Borovička examines whether belief distortions can be rationalized by uncertainty aversion or robustness, and asks if survey data can be used to guide modeling and estimation.
Sets of Models and Prices of Uncertainty
Lars Hansen runs down families of models in order to pinpoint the ones that are tractable, discussing how concerns about misspecification can alter market prices of uncertainty.
Financial Industry Dynamics
University of Texas at Austin, McCombs School of Business
Tim Landvoigt developed a dynamic model of entry, exit, and firm quality in the market for issuance and trading of complex financial securities, finding that markets that have a greater scope for investment in trading expertise also exhibit greater concentration, firm heterogeneity, fragility, and price dispersion.
Thursday, August 13
Leverage and Disagreement
University of California, Los Angeles
François Geerolf builds a model of the cross section of leverage ratios for borrowers based on heterogenous beliefs about future asset returns and endogenous collateral constraints.
Payments, Credit and Asset Prices
Martin Schneider presents a model that links the payments system and securities markets so that beliefs about asset payoffs matter for the money supply and the price level, and monetary policy matters for real asset values.
Climbing and Falling Off the Ladder: Asset Pricing Implications of Labor Market Event Risk
Lawrence Schmidt proposes state-dependent, idiosyncratic tail risk as a key driver of asset prices, which he argues explain the shape of the idiosyncratic distribution of income growth rates and its evolution over time.
Excess Volatility: Beyond Discount Rates
Yale School of Management
Stefano Giglio documented a form of excess volatility that is irreconcilable with standard models of prices, and in particular cannot be explained by variation in the discount rates of rational agents. Presenting joint work with Bryan Kelly, he compared the behavior of prices to claims on the same stream of cash flows but with different maturities. Prices of long-maturity claims are dramatically more variable than justified by the behavior of short maturity claims. His analysis suggests that investors pervasively violate the “law of iterated values.”
Spurious Factors in Linear Asset Pricing Models
London School of Economics and Political Science
Svetlana Bryzgalova developed a new approach to the estimation of cross-sectional asset pricing models that : a) provides simultaneous model diagnostics and parameter estimates; b) automatically removes the effect of spurious factors; c) restores consistency and asymptotic normality of the parameter estimates, as well as the accuracy of standard measures of fit; d) performs well in both small and large samples.
Credit Risk and Interdealer Networks
Federal Reserve Bank of New York
Three markets represent different ways to trade credit risk: corporate bonds, syndicated loans, and credit default swaps. Nina Boyarchenko links participants in each to create a more complete picture of how intermediaries assume and distribute credit risk.
Friday, August 14
Financial Regulation in a Quantitative Model of the Modern Banking System
The Banking View of Bond Risk Premia
Banks’ exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with a bank-centric view of the market for interest rate risk. Banks’ activities — accepting deposits and making loans — naturally exposes their balance sheets to changes in interest rates. In equilibrium, the bond risk premium compensates banks for bearing these fluctuations: for instance, when consumers demand for fixed rate mortgages increases, banks have to scale up their exposure to interest rate risk and are compensated by an increase in bond risk premium. A key insight is that the net exposure of banks, rather than quantities of particular types of loans or deposits, reveals the risk premium.
The Deposits Channel of Monetary Policy
Itamar Drechsler proposed a new channel for the transmission of monetary policy. When the Fed funds rate increases, banks widen the interest spreads they charge on deposits, and deposits flow out of the banking system. Drechsler and his coauthors developed a model in which imperfect competition among banks gives rise to these relationships.
Volatility Expectations and the Macroeconomy
Northwestern University Kellogg School of Management
Inflation Expectations and Consumption Expenditure
University of Chicago Booth School of Business
Anticipating an inflation increase boosts household spending on durables by 8% compared to other households, an effect stronger for more educated, working-age, high-income, and urban households. Michael Weber documents these novel facts using German micro data for the period 2000-2013.
Intermediary Asset Pricing: a Cross-Asset Analysis
University of Chicago Booth School of Business