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.
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.
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.
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.
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.
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 by Geetesh Bhardwaj and Rajdeep Sengupta
Working Paper 2008-039E posted October 2008, updated October 2011
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.
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 by Geetesh Bhardwaj and Rajdeep Sengupta
Working Paper 2008-036E posted October 2008, updated September 2011
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.
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.
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.
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).
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.
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.
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.
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.