Essays on Macro-finance: Identification, Estimation and Forecasting of Term Structure Models with Macro Factors and Default Risk PDF Download

Author: Marco S. Matsumura
Publisher:
ISBN:
Category :
Languages : en
Pages : 94

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Author: Biancen Xie
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 111

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In my dissertation, I focus on theoretical affine term structure models and the development of Bayesian econometric methods to estimate them.In the first Chapter, we address the question of which unspanned macroeconomic factors are the best in the class of macro-finance Gaussian affine term structure models. To answer this question, we extend Joslin, Priebsch, and Singleton (2014) in two dimensions. First, following Ang and Piazzesi (2003) and Chib and Ergashev (2009), three latent factors, instead of the first three principal components of the yield curve, are used to represent the level, slope and curvature of the yield curve. Second we postulate a grand affine model that includes all the macro-variables in contention. Specific models are then derived from this grand model by letting each of the macro-variables play the role of a relevant macro factor (i.e. by affecting the time-varying market price of factor risks), or the role of an irrelevant macro factor (having no effect on the market price of factor risks). The Bayesian marginal likelihoods of the resulting models are computed by an efficient Markov chain Monte Carlo algorithm and the method of Chib (1995) and Chib and Jeliazkov (2001). Given eight common macro factors, our comparison of 28=256 affine models shows that the most relevant macro factors for the U.S. yield curve are the federal funds rate, industrial production, total capacity utilization, and housing sales. We also show that the best supported model substantially improves out-of-sample yield curve forecasting and the understanding of term-premium.The second Chapter considers the question of which unspanned macro factors can improve prediction in arbitrage-free affine term structure models and convert return forecasts into economic gains. To achieve this, we develop a Bayesian framework for incorporating different combinations of macro variables within an affine term structure framework. Then each specific model within the framework is evaluated statistically and economically. For the statistical evaluation, we examine its out-of-sample yield density forecasting. The economic value of each model is compared in terms of the bond portfolio choice of a Bayesian risk- averse investor. We consider two main kinds of macro factors: representative macro factors in Chib et al. (2019) and principal component macro factors in Ludvigson and Ng (2009b). Our empirical results show that regardless of macro dataset we use(either Chib et al. (2019) or Ludvigson and Ng (2009b)), macro factor in real economic activity, financial sector and price index will help generate notable gains in out-of-sample forecast. Such gains in predictive accuracy translate into higher portfolio returns after accounting for estimation error and model uncertainty. In contrast, incorporating redundant macro variables into the affine term structure models can even decrease utility and prediction accuracy for investors. In addition, given the data sample we consider in the Chapter, we also find that principle component factors can perform relatively better than representative macro factors in terms of certainty equivalence return (CER).The third Chapter compares the posterior sampling performance of No-U-Turn sam- pler(NUTS) algorithm and tailored randomized-blocking Metropolis-Hastings (TaRB-MH) for macro-finance affine Term structure models. We conduct empirical experiments on 3 affine term structure models with the U.S. yield curve data. For each experiment, we examine the sampling efficiency of model parameters, factors, term premium, predictive yields,etc. Our emprical results indicate that the TaRB-MH substantially outperforms the NUTS methodin terms of the convergence and efficiency in posterior sampling. Furthermore, we show that NUTS' inefficiency in simulating the affine term structure models will be robust given different initial values for the algorithm.

Author: Xu Tian
Publisher:
ISBN:
Category : Finance
Languages : en
Pages : 109

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"This dissertation studies the macroeconomic consequences of financial frictions via their roles in determining the capital structures of firms and financial institutions. It consists of two papers in this particular field. The first paper focuses on the capital structure decisions of financial intermediaries and their macroeconomic implications. In this paper, titled "Uncertainty and the Shadow Banking Crisis: A Structural Estimation", I examine the impact of asset return uncertainty on the financing and leverage decisions of shadow banks. Shadow banks play an important role in the modern financial system and are arguably the source of key vulnerabilities leading to the 2007-2009 financial crisis. In this paper, I develop a quantitative framework with endogenous bank default and aggregate uncertainty fluctuation to study the dynamics of shadow banking. I argue that the increase in asset return uncertainty during the crisis results in the spread spike, making it more costly for shadow banks to roll over their debt in the short-term debt market. As a result, these banks are forced to deleverage, leading to a decrease in the credit supply. The model is estimated using a bank-level dataset of shadow banks in the United States. The findings show that uncertainty shocks are able to generate statistics and pathways of leverage, spread, and assets which closely match those observed in the data. Maturity mismatch and asset firesales amplify the impact of the uncertainty shocks. First moment shocks alone can not reproduce the large interbank spread spike, dramatic deleveraging and contraction of the US shadow banking sector during the crisis. The model also allows for policy experiments. I analyze how unconventional monetary policies can help to counter the rise in the interbank spread, thus stabilizing the credit supply. Taking into consideration of bank moral hazard, I find that government bailout might be counterproductive as it might result in more aggressive risk-taking of shadow banks. The contribution of this paper is twofold. On the empirical front, I contribute to the literature by being the first in documenting several stylized facts of the U.S. shadow banking industry using a detailed micro-level dataset. On the theoretical front, I contribute to the literature by being the first in building a quantitative model with heterogeneous banks, endogenous bank default, aggregate uncertainty fluctuation and maturity mismatch to characterize the shadow banking dynamics in a full nonlinear manner and quantifying the impact of uncertainty shocks on the shadow banking industry. In the second paper with Yan Bai and Dan Lu, "Do Financial Frictions Explain Chinese Firms' Saving and Misallocation?", we use Chinese firm-level data to quantify financial frictions in China and ask to what extent they can explain firms' saving and capital misallocation. The literature on the effect of financial frictions on capital outflow and misallocation is large, however, it either uses aggregate data or it ignores firms' financing patterns. Few works use micro-level Chinese data to quantify these frictions. This paper fills this gap. We first document features of the data, in terms of firm dynamics and financing. We find that relatively smaller firms have lower leverage, face higher interest rates and operate with a higher marginal product of capital. We then develop a heterogeneous-firm model with two types of financial frictions, default risk and a fixed cost of issuing loans. We estimate the model using evidence on the firm size distribution and financing patterns and find that financial frictions can explain aggregate firm saving, the co-movement between saving and investment across firms, and around 60 percent of the dispersion in the marginal product of capital (MPK). The endogenous financial frictions, however, generate an opposite MPK-size relationship, which has important implications for total factor productivity losses."--Pages iv-v.

Author: Dale Gray
Publisher: John Wiley & Sons
ISBN: 9780470756324
Category : Business & Economics
Languages : en
Pages : 362

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Macrofinancial risk analysis Dale Gray and Samuel Malone Macrofinancial Risk Analysis provides a new and powerful framework with which policymakers and investors can analyze risk and vulnerability in economies, both emerging market and industrial. Using modern risk management and financial engineering techniques applied to the macroeconomy, an economic value can be placed on the risks posed by inter-linkages between sectors, the risk of default of different sectors on their outstanding debt obligations quantified, and the value ex-ante of guarantees to private sector entities by the government calculated. This book guides the reader through the basic macroeconomic and financial models necessary to understand the framework, the core analytical tools, and more advanced contributions that will be of interest to researchers. This unique synthesis of ideas from finance and macroeconomics offers several original contributions to the theory of financial crises, as well as a range of new policy options for governments interested in achieving a better tradeoff between economic growth and macro risk.

Author: Azamat Abdymomunov
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 109

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In my dissertation, I study relationships between macroeconomics and financial markets. In particular, I empirically investigate the links between key macroeconomic indicators, such as output, inflation, and the business cycle, and the pricing of financial assets. The dissertation comprises three essays. The first essay investigates how the entire term structure of interest rates is influenced by regime-shifts in monetary policy. To do so, we develop and estimate an arbitrage-free dynamic term-structure model which accounts for regime shifts in monetary policy, volatility, and the price of risk. Our results for U.S. data from 1985-2008 indicate that (i) the Fed's reaction to inflation has changed over time, switching between "more active" and "less active" monetary policy regimes, (ii) the yield curve in the "more active" regime was considerably more volatile than in the "less active" regime, and (iii) on average, the slope of the yield curve in the "more active" regime was steeper than in the "less active" regime. The steeper yield curve in the "more active" regime reflects higher term premia that result from the risk associated with a more volatile future short-term rate given a more sensitive response to inflation. The second essay examines the predictive power of the entire yield curve for aggregate output. Many studies find that yields for government bonds predict real economic activity. Most of these studies use the yield spread, defined as the difference between two yields of specific maturities, to predict output. In this paper, I propose a different approach that makes use of information contained in the entire term structure of U.S. Treasury yields to predict U.S. real GDP growth. My proposed dynamic yield curve model produces better out-of-sample forecasts of real GDP than those produced by the traditional yield spread model. The main source of this improvement is in the dynamic approach to constructing forecasts versus the direct forecasting approach used in the traditional yield spread model. Although the predictive power of yield curve for output is concentrated in the yield spread, there is also a gain from using information in the curvature factor for the real GDP growth prediction. The third essay investigates time variation in CAPM betas for book-to-market and momentum portfolios across stock market volatility regimes. For our analysis, we jointly model market and portfolio returns using a two-state Markov-switching process, with beta and the market risk premium allowed to vary between "low" and "high" volatility regimes. Our empirical findings suggest strong time variation in betas across volatility regimes in most of the cases for which the unconditional CAPM can be rejected. Although the regime-switching conditional CAPM can still be rejected in many cases, the time-varying betas help explain portfolio returns much better than the unconditional CAPM, especially when market volatility is high.

Author: Wentao Zhou (Ph.D.)
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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This dissertation consists of three chapters investigating the role of financial frictions in transmitting macroeconomic shocks and its implications for stabilization policies. The first chapter studies both empirically and theoretically how macro uncertainty shocks affect the real economy via a firm balance sheet channel and highlights its novel policy implications. I document that following an increase in macro uncertainty, firm-level capital stock and outstanding debt fall while cash holdings increase, and such capital drop and cash buildup is more pronounced among ex-ante more indebted firms. I develop a quantitative heterogeneous firm model with financial frictions to illustrate the mechanism. In the model, firms fear liquidity shortages for debt repayments, thereby trading off capital investment for less debt burden and more cash holdings as heightened uncertainty creates greater downside risk. Cash buildup is strong, especially among more indebted firms, as cash preserves internal funds for both future debt repayment and growth opportunities triggered by increased uncertainty. A calibrated model featuring the transmission mechanism reproduces the observed impacts of macro uncertainty shocks at both micro and macro levels. Quantitative experiments suggest that conventional stimulus policies, like investment tax credits, yield only modest effects in counteracting the adverse impact of uncertainty shocks. In contrast, credit interventions, such as debt relief, can strongly and effectively stabilize uncertainty-driven recessions. The second chapter studies the macroeconomic implications of debt covenants in a dynamic general equilibrium model that features long-term defaultable debt. In our model, the ex-post penalty associated with covenant violations aligns shareholders' incentives with lenders' interests in the face of default risk, thereby mitigating ex-ante debt dilution and debt overhang. We show that this mechanism has significant macroeconomic effects: (1). it reduces the counter-cyclical variation in firm leverage, default risk, and credit spreads, substantially lowering aggregate volatility; (2). it alleviates the debt overhang problem and thus boosts capital accumulation, resulting in higher wages, output, and consumption. Our results, therefore, challenge the existing literature where debt covenants, modeled as distortionary borrowing constraints in models without default risk, amplify volatility and distort output. Moreover, we show that the calibrated economy with the level of covenant tightness observed in the U.S. approximates the constrained efficient allocation in which a social planner maximizes the values of both equity and debt claims. The third chapter studies how financial frictions influence the transmission of monetary policy. Contrary to the financial accelerator effects on fixed capital investment in the literature, this chapter shows both empirically and theoretically that financial frictions dampen the effects of monetary policy shocks on inventory investment. Using firm-level data combined with externally identified monetary policy shocks, I first show that following contractionary monetary policy shocks, more financially constrained firms cut much fewer inventories than their less financially constrained counterparts despite similar effects of monetary policy shocks on their sales. To explain the empirical patterns, I build a dynamic New Keynesian general equilibrium model in which firms face demand uncertainty and financial frictions and thus manage inventory to avoid stock-outs and cash flow shortfalls. When contractionary monetary policy shocks lower households' demand for goods and thus firms' expected sales and revenues, more financially constrained firms slash their goods' prices and put more inventories on the shelves to increase operating cash flows, thereby avoiding costly external financing. My calibrated model successfully replicates a wide set of data features: pro-cyclical inventories and sales, counter-cyclical inventory-to-sales ratio and markups, and heterogeneous responses across differently financially constrained firms. Counterfactual exercises show that the aggregate effect of monetary policy is smaller in a more financially constrained economy through the inventory channel.

Author: Andres Schneider
Publisher:
ISBN:
Category :
Languages : en
Pages : 310

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Chapter one---Risk Sharing and the Term Structure of Interest Rates I propose a general equilibrium model with heterogeneous investors to explain the key properties of the U.S. real and nominal term structure of interest rates. I find that differences in investors' willingness to substitute consumption across time are critical to account for nominal and real yields dynamics. When the endogenous amount of credit supplied by risk-tolerant investors is low, the aggregate price of risk and the real interest rate are high. Thus, real bonds are risky. I study nominal bonds under both exogenous and endogenous (Taylor rule) inflation. I find that when the Taylor loading on inflation is greater than one, the nominal term structure is upward sloping regardless of the correlation between nominal and real shocks. I use the model to shed light on two salient interest rate puzzles: (1) the secular decline of long-term real and nominal rates since the 1980s, and (2) the sudden spike in real yields at the height of the Great Recession. Chapter 2---Endogenous and Exogenous Risk Premia In this second chapter, I investigate how levered balance sheets amplify the effects of exogenous aggregate volatility shocks on asset prices. Risk premia are determined by the interaction of exogenous time-varying fundamentals with the endogenously determined levered balance sheets. When macro-volatility shocks hit the economy, asset prices decline, levered agent loses relatively more net worth and aggregate risk aversion rises endogenously. I find that this feedback between balance sheets and macro-volatility produces six times more volatile premiums than an economy with only cash flow shocks, thus improving the model's ability to match the data. However, the effects on investment and growth are mild. Chapter 3---Liquidity Shocks, Business Cycles and Asset Prices The third chapter is joint work with Saki Bigio. In the aftermath of the Great Recession, macro models that feature financing constraints have attracted increasing attention. Among these, Kiyotaki and Moore 2008 is a prominent example. In this paper, we investigate whether the liquidity shocks and financial frictions proposed by Kiyotaki and Moore 2008 can improve the asset pricing predictions of the frictionless RBC model. We study the quantitative business cycle and asset pricing properties in an economy in which agents feature recursive preferences, are subject to a liquidity constraint, and suffer liquidity shocks. We find that the model predicts highly nonlinear time variation and levels of risk premia, which are driven by endogenous fluctuations in equity prices. However, the model fails to account for a basic fact: Periods of scarce liquidity are associated with high asset prices and low expected returns. Chapter 4---A Macrofinance View of U.S. Sovereign CDS Premiums The forth and last chapter of the dissertation is joint work with Mikhail Chernov and Lukas Schmid. Premiums on U.S. sovereign CDS have risen to persistently elevated levels since the financial crisis. We ask whether these premiums reflect the probability of a fiscal default a state in which budget balance can no longer be restored by raising taxes or eroding the real value of debt by raising inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stance jointly endogenously determine nominal debt, taxes, inflation and growth. We show how CDS premiums reflect endogenous risk-adjusted fiscal default probabilities. A calibrated version of the model is quantitatively consistent with the observed CDS premiums.

Author: Chamadanai Marknual
Publisher:
ISBN:
Category : Economic forecasting
Languages : en
Pages : 260

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This thesis examines the macro-finance-fiscal term structure model to incorporate fiscal instability variables and the term spread to understand the impact of the sovereign debt crisis on the evolution of the yield curve. My findings reveal financial instability increases the term spread associated with the expectation of higher sovereign default risk and consequently signals economic agents to reduce their spending, and thus worsens economic activity. Secondly, I also investigate whether the dynamic factor model with nonparametric factor loadings is more accurate relative to other term structure models by employing the dynamic semi-parametric factor model (DSFM). The empirical results indicate that a better in-sample fit is provided by the dynamic semiparametric factor model. However, the overall forecasting results are not encouraging. The dynamic semiparametric factor model provides accurate results in forecasting a persistent trend while the dynamic Nelson-Siegel model is more suitable to fit more volatile series. Thirdly,I use a Sheen-Trueck-Wang business conditions index for term structure modeling and forecasting. I find the cross-sectional yield provides guidance to anchor the yield in the next period. The prediction performance of the model is enhancedby using the index since it includes information on frequently released or more recent available data. The index is significantly related to the slope factor, which suggests the forward-looking information from the index inuences the adjustmentthe in the yield slope. Lastly, I examine the effectiveness of the US quantitative easing (QE) policy with a Bayesian structural vector auto regressive (B-SVAR)model with sign restrictions. I find the transmission mechanism of the Federal Reserve asset purchase effectively expands output and avert deflation through a compression in the yield spread.

Author:
Publisher:
ISBN:
Category : Banks and banking, Central
Languages : en
Pages : 142

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The first chapter, joint with Dominik Thaler, is a New Keynesian model of how monetary policy can influence the risk-taking behaviour of banks. Lower interest rates change bank incentives, making them prefer riskier investments. This mechanism alters the tradeoff faced by the monetary authority, affecting optimal policy conduct. After estimating the model, we find that the monetary authority should react less aggressively to inflation, trading off more inflation volatility in exchange for less financial market distortions. The second chapter, written with Prof. Massimiliano Marcellino, investigates whether modelling parameter time variation and stochastic volatility improves the forecasts of three major exchange rates vis-a-vis the US dollar. We find that modelling time-varying volatility significantly refines the estimation of forecast uncertainty through an accurate calibration of the entire forecast distribution at all forecast horizons. Similar empirical tools are employed in the third chapter, where I show that the inclusion of default risk and risk aversion measures improves the forecasts of key activity and banking indicators. The bulk of forecast improvement takes place during the 2001 and 2008 recessions, when credit constraints were arguably binding. A structural VAR further reveals that an unexpected credit spread increase in 2010 causes an output contraction that lasts for about two years, and explains up to 35% percent of output variation. The final project, joint with Sandra Eickmeier, Prof. Massimiliano Marcellino and Wolfgang Lemke, investigates the changing international transmission of financial shocks over 1971-2012. A time-varying parameter FAVAR shows that global financial shocks, measured as unexpected changes in a US financial condition index, strongly impact growth in the nine countries considered. In addition, financial shocks in 2008 explain approximately 20% of the GDP growth variation in the 9 countries, as opposed to an average of 5% percent before the crisis.

Author: Michiel De Pooter
Publisher:
ISBN:
Category :
Languages : en
Pages : 49

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