Macroeconomic News and Asset Prices Before and After the Zero Lower Bound PDF Download
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Author: Christoffer Koch
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Languages : en
Pages :
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Author: Christoffer Koch
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Category :
Languages : en
Pages :
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Author: John Cong Zhou
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Category :
Languages : en
Pages :
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My dissertation is composed of three chapters that are unified by their exploration of asset prices and macroeconomic news announcements. With respect to asset prices, my main focus is on the price discovery process: how do asset prices reveal information relevant for asset fundamentals? Through my research, I provide new answers to this question. My work gets at core issues in asset pricing: whether financial markets are informationally efficient; why some assets earn unconditionally high premia; and how the sensitivity of prices to information varies over time and across assets. Specifically, chapter one shows evidence that sophisticated traders with an informational advantage inefficiently impound their edge into the aggregate U.S. stock market and U.S. Treasury bonds. In chapter two, I explore a model in which investors are averse to ambiguity (Knightian uncertainty) to explain why the equity premium is concentrated around specific events. Finally, chapter three investigates how the Federal Reserve's zero lower bound affects the response of asset prices, in particular interest rates, to information. Each of the three chapters explores the price discovery process using the unique setting of U.S. macroeconomic news announcements, which are made by government agencies and private-sector organizations and cover macroeconomic data on inflation, output, and unemployment. Analyzing financial markets in this setting deepens our understanding of how asset prices reflect information about macroeconomic fundamentals. At the same time, the results have macroeconomic implications; for example, the assumptions of monetary policy models in theory and the effectiveness of unconventional monetary policy in practice.
Author: John Zhou
Publisher:
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Category :
Languages : en
Pages : 46
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This paper analyzes the reaction of interest rates and the stock market to macroeconomic news announcements (MNAs) at the zero lower bound (ZLB). I start by using a shadow rate term structure model to formulate three predictions for the sensitivity of interest rates to MNAs. First, “better”-than-expected macroeconomic data increases interest rates. Second, as the expected duration of the ZLB increases, whether because economic conditions are worse or because monetary policy changes, interest rates become less sensitive to macroeconomic data. Third, this attenuation in the sensitivity of interest rates is largest for intermediate-maturity rates. I verify these predictions by using a broad sample of MNAs and high-frequency intraday futures data on interest rates. Turning to stocks, I show that the stock market's reaction to MNAs can be decomposed into an interest rate news term that is directly related to interest rates' reaction to MNAs and a cash flow plus risk premium news term. Using the same sample of MNAs and high-frequency intraday futures data on the stock market, I empirically estimate the stock market's sensitivity to macroeconomic data as well as that of the constituent news terms. Based on the interest rate news term alone, the expected duration of the ZLB should increase the sensitivity of stocks to macroeconomic news. The data furthermore suggests that the expected duration of the ZLB decreases the magnitude of the cash flow plus risk premium news term.
Author: Eric T. Swanson
Publisher:
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Category : Interest rates
Languages : en
Pages : 38
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The federal funds rate has been at the zero lower bound for over four years, since December 2008. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the overnight rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we measure the effects of the zero lower bound on interest rates of any maturity by comparing the sensitivity of those interest rates to macroeconomic news when short-term interest rates were very low to that during normal times. We find that yields on Treasury securities with a year or more to maturity were surprisingly responsive to news throughout 2008-10, suggesting that monetary and fiscal policy were likely to have been about as effective as usual during this period. Only beginning in late 2011 does the sensitivity of these yields to news fall closer to zero. We offer two explanations for our findings: First, until late 2011, market participants expected the funds rate to lift off from zero within about four quarters, minimizing the effects of the zero bound on medium- and longer-term yields. Second, the Fed's unconventional policy actions seem to have helped offset the effects of the zero bound on medium- and longer-term rates.
Author: William Curt Hunter
Publisher: MIT Press
ISBN: 9780262582537
Category : Business & Economics
Languages : en
Pages : 650
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A study of asset price bubbles and the implications for preventing financial instability.
Author: Ricardo J. Caballero
Publisher:
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Category :
Languages : en
Pages :
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We analyze optimal monetary policy and its implications for asset prices, when aggregate demand has inertia and responds to asset prices with a lag. If there is a negative output gap, the central bank optimally overshoots aggregate asset prices (asset prices are initially pushed above their steady-state levels consistent with current potential output). Overshooting leads to a temporary disconnect between the performance of financial markets and the real economy, but it accelerates the recovery. When there is a lower-bound constraint on the discount rate, overshooting becomes a concave and non-monotonic function of the output gap: the asset price boost is low for a deeply negative initial output gap, grows as the output gap improves over a range, and shrinks toward zero as the output gap improves further. This pattern also implies that good macroeconomic news is better news for asset prices when the output gap is more negative. Finally, we document that during the Covid-19 recovery, the policy-induced overshooting was large-sufficient to explain the high levels of stock and house prices in 2021.
Author: Mr.Pau Rabanal
Publisher: International Monetary Fund
ISBN: 1451873999
Category : Business & Economics
Languages : en
Pages : 41
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We find that inflation, output and the stance of monetary policy do not typically display unusual behavior ahead of asset price busts. By contrast, credit, shares of investment in GDP, current account deficits, and asset prices typically rise, providing useful, if not perfect, leading indicators of asset price busts. These patterns could also be observed in the build-up to the current crisis. Monetary policy was not the main, systematic cause of the current crisis. But, with inflation typically under control, central banks effectively accommodated these growing imbalances, raising the risk of damaging busts.
Author: John Y. Campbell
Publisher: University of Chicago Press
ISBN: 0226092127
Category : Business & Economics
Languages : en
Pages : 444
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Book Description
Economic growth, low inflation, and financial stability are among the most important goals of policy makers, and central banks such as the Federal Reserve are key institutions for achieving these goals. In Asset Prices and Monetary Policy, leading scholars and practitioners probe the interaction of central banks, asset markets, and the general economy to forge a new understanding of the challenges facing policy makers as they manage an increasingly complex economic system. The contributors examine how central bankers determine their policy prescriptions with reference to the fluctuating housing market, the balance of debt and credit, changing beliefs of investors, the level of commodity prices, and other factors. At a time when the public has never been more involved in stocks, retirement funds, and real estate investment, this insightful book will be useful to all those concerned with the current state of the economy.
Author: Mohsan Bilal
Publisher:
ISBN:
Category :
Languages : en
Pages : 62
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Over the past decade, many central banks reduced interest rates to near-zero levels. I show that this has important implications for the dynamics of asset prices. In both the US and Japan, one such effect was that the correlation of stock and nominal bond returns decreased sharply as the short rate approached zero. To explain this fact, alongside the changing dynamics of stock and bond risks near the Zero Lower Bound (ZLB), I propose a New Keynesian framework with nominal rigidities. Specifically, I find that the probability that the ZLB binds in the near future represents a new source of macroeconomic risk. As this probability of hitting the ZLB increases, expected dividends drop and equity risk premia increase. This combination causes stock prices to fall. In contrast, long-term bond prices increase as investors expect future short rates and bond risk premia to drop. These opposite exposures to the risk of a binding ZLB constraint sharply lower the stock-bond return correlation and turn it negative. I develop and calibrate a model that endogenously generates these observed changes while respecting unconditional macroeconomic and asset pricing moments.
Author: Ben Bernanke
Publisher:
ISBN:
Category : Deflation (Finance)
Languages : en
Pages : 134
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"The success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely on "non-standard" policy alternatives. To assess the potential effectiveness of such policies, we analyze the behavior of selected asset prices over short periods surrounding central bank statements or other types of financial or economic news and estimate "noarbitrage" models of the term structure for the United States and Japan. There is some evidence that central bank communications can help to shape public expectations of future policy actions and that asset purchases in large volume by a central bank would be able to affect the price or yield of the targeted asset"--Abstract.
