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Working Paper
Generalized spectral estimation
This paper provides a framework for estimating parameters in a wide class of dynamic rational expectations models. The framework recognizes that RE models are often meant to match the data only in limited ways. In particular, interest may focus on a subset of frequencies. This paper designs a frequency domain version of GMM. The estimator has several advantages over traditional GMM. Aside from allowing band-restricted estimation, it does not require making arbitrary instrument or weighting matrix choices. The framework also includes least squares, maximum likelihood, and band restricted ...
Working Paper
On identification of continuous time stochastic processes
In this note we delineate conditions under which continuous time stochastic processes can be identified from discrete data. The identification problem is approached in a novel way. The distribution of the observed stochastic process is expressed as the underlying true distribution, f, transformed by some operator, T. Using a generalization of the Taylor series expansion, the transformed function T f can often be expressed as a linear combination of the original function f. By combining the information across a large number of such transformations, the original measurable function of interest ...
Working Paper
A coherent framework for stress-testing
In recent months and years both practitioners and regulators have embraced the ideal of supplementing VaR estimates with "stress-testing". Risk managers are beginning to place an emphasis and expend resources on developing more and better stress-tests. In the present paper, we hold the standard approach to stress-testing up to a critical light. The current practice is to stress-test outside the basic risk model. Such an approach yields two sets of forecasts -- one from the stress-tests and one from the basic model. The stress scenarios, conducted outside the model, are never explicitly ...
Working Paper
Recent developments in bootstrapping time series
In recent years, several new parametric and nonparametric bootstrap methods have been proposed for time series data. Which of these methods should applied researchers use? We provide evidence that for many applications in time series econometrics parametric methods are more accurate, and we identify directions for future research on improving nonparametric methods. We explicitly address the important, but often neglected issue of model selection in bootstrapping. In particular, we emphasize the advantages of the AIC over other lag order selection criteria and the need to account for lag order ...
Working Paper
Long-horizon exchange rate predictability?
Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. We show that such a procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates and diagnostic statistics suggest a high degree of predictability of the dependent variable. We apply a simple modification of the long-horizon regression due to Jegadeesh (1991), which may provide more accurate inferences for researchers interested in comparing ...
Working Paper
How accurate are Value-at-Risk models at commercial banks?
In recent years, the trading accounts at large commercial banks have grown substantially and become progressively more diverse and complex. We provide descriptive statistics on the trading revenues from such activities and on the associated Value-at-Risk forecasts internally estimated by banks. For a sample of large bank holding companies, we evaluate the performance of banks' trading risk models by examining the statistical accuracy of the VaR forecasts. Although a substantial literature has examined the statistical and economic meaning of Value-at-Risk models, this article is the first to ...
Working Paper
Bankruptcy exemptions and the market for mortgage loans
The recent explosion in personal bankruptcy filings has motivated research into whether credit markets are being adversely affected by generous legal provisions. Empirically, this question is examined by comparing credit conditions and bankruptcy exemptions across states. We note that the literature has focused on aggregate household credit, making no distinction between secured and unsecured credit. We argue that such aggregation obscures important differences in forms of credit. Most significantly, property exemptions do not prevent the home mortgage lender from foreclosing on the home if ...