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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.


Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets

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.

Can VAR Models Capture Regime Shifts in Asset Returns? A Long-Horizon Strategic Asset Allocation Perspective

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.

Subprime Mortgage Design

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.

Subprime Loan Quality

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.

Inflation, Monetary Policy and Stock Market Conditions: Quantitative Evidence from a Hybrid Latent-Variable VAR

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.

The Dynamic Interaction of Trading Flows, Macroeconomic Announcements and the CAD/USD Exchange Rate: Evidence from Disaggregated Data

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="">Data Appendix</a>.

Equity Portfolio Diversification under Time-Varying Predictability and Comovements: Evidence from Ireland, the US, and the UK

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.

Multivariate Contemporaneous Threshold Autoregressive Models

In this paper we propose a contemporaneous threshold multivariate smooth transition autoregressive (C-MSTAR) model in which the regime weights depend on the ex ante probabilities that latent regime-specific variables exceed certain threshold values.

Affiliated Mutual Funds and Analyst Optimism

Prior studies have shown that investment banking affiliations place pressure on analysts to produce optimistic recommendations on the investment bank’s stock-clients.

Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK

Portfolio choice by full-scale optimization applies the empirical return distribution to a parameterized utility function, and the maximum is found through numerical optimization.

The Expectation Hypothesis of the Term Structure of Very Short-Term Rates: Statistical Tests and Economic Value

This paper re-examines the validity of the Expectation Hypothesis (EH) of the term structure of US repo rates ranging in maturity from overnight to three months.

The Economic and Statistical Value of Forecast Combinations under Regime Switching: An Application to Predictable US Returns

We address one interesting case — the predictability of excess US asset returns from macroeconomic factors within a flexible regime switching VAR framework — in which the presence of regimes may lead to superior forecasting performance from forecast combinations.

When Do Stock Market Booms Occur? The Macroeconomic and Policy Environments of 20th Century Booms

This paper studies the macroeconomic conditions and policy environments under which stock market booms occurred among ten developed countries during the 20th Century.

Does Aggregate Relative Risk Aversion Change Countercyclically over Time? Evidence from the Stock Market

Using a semiparametric estimation technique, we show that the risk-return tradeoff and the Sharpe ratio of the stock market increases monotonically with the consumption wealth ratio (CAY) across time.

The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market

We analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously studied rules.

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