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Working Paper Archives

Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.


What Do We Know about the Relationship between Access to Finance and International Trade?

The recent financial crisis has focused attention on the relationship between access to finance and international trade, triggering a burgeoning segment of the literature evaluating this link empirically.

Asymptotic Inference for Performance Fees and the Predictability of Asset Returns

In this paper we provide analytical, simulation, and empirical evidence on a test of equal economic value from competing predictive models of asset returns.

Endogenous Credit Limits with Small Default Costs

We analyze an exchange economy of unsecured credit where borrowers have the option to declare bankruptcy in which case they are temporarily excluded from financial markets.

Self-Fulfilling Credit Cycles

This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks.

Bankruptcy and Delinquency in a Model of Unsecured Debt

This paper documents and interprets a fact central to the dynamics of informal consumer debt default: delinquency does not mean a persistent cessation of payment.

Why Doesn’t Technology Flow from Rich to Poor Countries?

What is the role of a country’s financial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation.

International Channels of the Fed’s Unconventional Monetary Policy

Previous research has established that the Federal Reserve’s large scale asset purchases (LSAPs) significantly influenced international bond yields.

Econometric Modeling of Exchange Rate Volatility and Jumps

This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades.

Federal Reserve Lending to Troubled Banks During the Financial Crisis, 2007-10

Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis.

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

We use a regression discontinuity approach and present new institutional evidence to investigate whether affordable housing policies influenced the market for securitized subprime mortgages.

Credit Scoring and Loan Default

This paper introduces a measure of credit score performance that abstracts from the influence of "situational factors." Using this measure, we study the role and effectiveness of credit scoring that underlied subprime securities during the mortgage boom of 2000-2006.

What do happiness and health satisfaction data tell us about relative risk aversion?

In this paper we provide estimates of the coefficient of relative risk aversion using information on self-reports of subjective personal well-being from multiple datasets.

The (Non-)Resiliency of Foreign Direct Investment in the United States during the 2007-2009 Financial Crisis

We study the contraction of foreign direct investment (FDI) flows in the United States during the recent financial crisis and show their unusual non-resiliency, which depends in part on the global nature of the economic recession, but also on the increases in the cost of financing FDI in the economies in which the flows originate.

The Effect of Neighborhood Spillovers on Mortgage Selection

In this paper we analyze how spillovers in mortgage adoption affect mortgage product choice across neighborhoods and across borrowers of different racial or ethnic groups.

Capital Flows and Japanese Asset Volatility

Characterizing asset price volatility is an important goal for financial economists. The literature has shown that variables that proxy for the information arrival process can help explain and/or forecast volatility.

Should Easier Access to International Credit Replace Foreign Aid?

We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.

Lessons from the Evolution of Foreign Exchange Trading Strategies

The adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances.

Mortgage Defaults

We present a model in which households facing income and housing-price shocks use long-term mortgages to purchase houses.

Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?

The negative correlation between equity and commodity futures returns is widely perceived by investors as an unexploited hedging opportunity.

A Bayesian Multi-Factor Model of Instability in Prices and Quantities of Risk in U.S. Financial Markets

This paper analyzes the empirical performance of two alternative ways in which multi-factor models with time-varying risk exposures and premia may be estimated. The first method echoes the seminal two-pass approach advocated by Fama and MacBeth (1973).

Did Doubling Reserve Requirements Cause the Recession of 1937-1938? A Microeconomic Approach

In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy.

Technical Analysis in the Foreign Exchange Market

This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. “Technicians” view their craft, the study of price patterns, as exploiting traders’ psychological regularities.

Regime Shifts in Mean-Variance Efficient Frontiers: Some International Evidence

Regime switching models have been assuming a central role in financial applications because of their well-known ability to capture the presence of rich non-linear patterns in the joint distribution of asset returns.

Does the Macroeconomy Predict U.K. Asset Returns in a Nonlinear Fashion? Comprehensive Out-of-Sample Evidence

We perform a comprehensive examination of the recursive, comparative predictive performance of a number of linear and non-linear models for UK stock and bond returns.

Out-of-Sample Predictions of Bond Excess Returns with Forward Rates: An Asset-Allocation Perspective

This paper investigates the out-of-sample predictability of bond excess returns.

Ambiguity in Asset Pricing and Portfolio Choice: A Review of the Literature

A growing body of empirical evidence suggests that investors’ behavior is not well described by the traditional paradigm of (subjective) expected utility maximization under rational expectations.

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.

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