Working Paper Archives
Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.
Finance
A Yield Spread Perspective on the Great Financial Crisis: Break-Point Test Evidence
We use a simple partial adjustment econometric framework to investigate the effects of the crisis on the dynamic properties of a number of yield spreads. We find that the crisis has caused substantial disruptions revealed by changes in the persistence of the shocks to spreads as much as by in their unconditional mean levels.
Financing Development: The Role of Information Costs
To address how technological progress in financial intermediation affects the economy, a costly state verification framework is embedded into the standard growth model. The framework has two novel ingredients.
Quantifying the Impact of Financial Development on Economic Development
How important is financial development for economic development? A costly state verification model of financial intermediation is presented to address this question.
The IT Revolution and the Unsecured Credit Market
The information technology (IT) revolution coincided with the transformation of the U.S. unsecured credit market.
The Large-Scale Asset Purchases Had Large International Effects
This paper evaluates the effect of the Federal Reserve’s large scale asset purchases (LSAP) on international long bond yields and exchange rates and then considers whether the observed behavior is consistent with a simple portfolio balance model and previous estimates of the impact of equivalent federal funds stimulus on exchange rates.
Predictions of Short-Term Rates and the Expectations Hypothesis
Despite its role in monetary policy and finance, the expectations hypothesis (EH) of the term structure of interest rates has received virtually no empirical support.
Financial Integration, Globalization, Growth and Systemic Real Risk
Using data for a large number of advanced and emerging market economies during 1985-2009, this paper documents the dynamics of financial integration and assesses whether advances in financial integration and globalization yield the beneficial real effects resulting from a more efficient resource allocation predicted by theory.
Forecasting the Equity Risk Premium: The Role of Technical Indicators
Academic research relies extensively on macroeconomic variables to forecast the U.S. equity risk premium, with relatively little attention paid to the technical indicators widely employed by practitioners.
This paper examines the impacts of banking market structure and regulation on economic growth using new data on banking market concentration and manufacturing industry-level growth rates for U.S. states during 1899-1929—a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically.
1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus
Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009), Rev. Fin. Studies] has cast doubts on the out-of-sample performance of optimizing portfolio strategies relative to naive, equally weighted ones. However, existing results concern the simple case in which an investor has a one-month horizon and meanvariance preferences.
We examine whether simple VARs can produce empirical portfolio rules similar to those obtained under a range of multivariate Markov switching models, by studying the effects of expanding both the order of the VAR and the number/selection of predictor variables included.
Financial Development and Economic Volatility: A Unified Explanation
Empirical studies showed that firm-level volatility has been increasing but the aggregate volatility has been decreasing in the US for the post-war period. This paper proposes a unified explanation for these diverging trends.
A Simple Model of Trading and Pricing Risky Assets Under Ambiguity: Any Lessons for Policy-Makers?
The 2007-2008 financial crises has made it painfully obvious that markets may quickly turn illiquid. Moreover, recent experience has taught us that distress and lack of active trading can jump “around” between seemingly unconnected parts of the financial system contributing to transforming isolated shocks into systemic panic attacks.
Revisiting the Predictability of Bond Risk Premia
This paper investigates the source of predictability of bond risk premia by means of long-term forward interest rates. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices.
Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value
Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated.
This paper offers evidence on the design of subprime mortgages as bridge-financing products. We show that the viability of subprime mortgages was uniquely predicated on the appreciation of house prices over short-horizons.
Government Response to Home Mortgage Distress: Lessons from the Great Depression
The Great Depression was the worst macroeconomic collapse in U.S. history. Sharp declines in household income and real estate values resulted in soaring mortgage delinquency rates.
This paper is an exploration of subprime mortgages over the cohorts from 2000 through 2006, especially those prior to 2004. In particular, this study contrasts subprime originations during the “boom years” of 2004-2006 with originations during an “early period” of 2000-2002.
Asset Prices, Exchange Rates and the Current Account
This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance.
The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice
The objective of this paper is to understand how loan structure affects (i) the borrower’s selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans.
This paper examines the association between inflation, monetary policy and U.S. stock market conditions during the second half of the 20th century.
Non-Linear Predictability in Stock and Bond Returns: When and Where Is It Exploitable?
We systematically examine the comparative predictive performance of a number of alternative linear and non-linear models for stock and bond returns in the G7 countries.
We explore the relationship between disaggregated trading flows, the Canada/U.S. dollar (CAD/USD) market and U.S. macroeconomic announcements with a novel data set of unprecedented breadth and length. <a href="http://research.stlouisfed.org/econ/cneely/Data_Appendix_The_Dynamic_Interaction.pdf">Data Appendix</a>.
We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among short-term interest rates (monetary policy) and stock returns in the Irish, the US and UK markets.
The Microstructure of the U.S. Treasury Market
This article discusses the microstructure of the U.S. Treasury securities market. Treasury securities are nominally riskless debt instruments issued by the U.S. government.
Lending to Uncreditworthy Borrowers
We study optimal lending behavior under adverse selection in environments with hetero- geneous borrowers specifically, where the borrower’s reservation payoffs (outside options) increase with quality (creditworthiness).
Accounting for Changes in the Homeownership Rate
After three decades of being relatively constant, the homeownership rate increased over the period 1994 to 2005 to attain record highs.
Jumps, Cojumps and Macro Announcements
We use recently proposed tests to extract jumps and cojumps from three types of assets: stock index futures, bond futures, and exchange rates. We then characterize the dynamics of these discontinuities and informally relate them to U.S. macroeconomic releases before using limited dependent variable models to formally model how news surprises explain (co)jumps.
Managing International Portfolios with Small Capitalization Stocks
In the context of an international portfolio diversification problem, we find that small capitalization equity portfolios become riskier in bear markets, i.e. display negative co-skewness with other stock indices and high co-kurtosis. Because of this feature, a power utility investor ought to hold a well-diversified portfolio, despite the high risk premium and Sharpe ratios offered by small capitalization stocks.
Monetary Policy and Stock Market Booms and Busts in the 20th Century
This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century.
