Search Results
Working Paper
Mildly Explosive Dynamics in U.S. Fixed Income Markets
We use a recently developed right-tail variation of the Augmented Dickey-Fuller unit root test to identify and date-stamp periods of mildly explosive behavior in the weekly time series of seven U.S. fixed income yield spreads between September 2002 and January 2015. We find statistically significant evidence of such behavior in six of these spreads. Mild explosivity migrates from short-term funding markets to more volatile medium- and long-term markets during the Great Financial Crisis. For some markets, we statistically validate the conjecture, originally suggested by Gorton (2009a,b), that ...
Journal Article
No volatility, no forecasting power for the term spread
Journal Article
Is the bond market irrational?
Journal Article
The dollar U-turn
Journal Article
The decline in the U.S. personal saving rate: is it real and is it a puzzle?
Since the mid-1990s, the national income and product accounts personal saving rate for the United States has been trending down, dropping into negative territory for three months during the past two years. This paper examines measurement problems surrounding two of the standard definitions of the personal saving rate. The authors conclude that, despite these measurement problems, the recent decline of the U.S. personal saving rate to low levels seems to be a real economic phenomenon and may be a cause for concern for several reasons. After examining several possible explanations for the trend ...
Working Paper
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. Besides Markov switching, threshold autoregressive (TAR), and smooth transition autoregressive (STAR) regime switching (predictive) regression models, we also estimate univariate models in which conditional heteroskedasticity is captured through GARCH, TARCH and EGARCH models and ARCH-in mean effects appear in the conditional mean. Although we fail to find a consistent winner/out-performer across all countries and asset ...
Working Paper
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. We find that two regimes, characterized as bear and bull states, are required to characterize the dynamics of returns and short-term rates. This implies that we cannot reject the hypothesis that the regimes driving the markets in the small open economy are largely synchronous with those typical of the major markets. We compute time-varying Sharpe ratios and recursive mean-variance ...
Working Paper
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. On the contrary small caps command large optimal weights when the investor ignores variance risk, by incorrectly assuming joint normality of returns. The dominant factor in inducing ...
Working Paper
Small caps in international equity portfolios: the effects of variance risk
We show that predictable covariances between means and variances of stock returns may have a first order effect on portfolio composition. In an international asset menu that includes both European and North American small capitalization equity indices, we find that a three-state, heteroskedastic regime switching VAR model is required to provide a good fit to weekly return data and to accurately predict the dynamics in the joint density of returns. As a result of the non-linear dynamic features revealed by the data, small cap portfolios become riskier in bear markets, i.e. display negative ...
Working Paper
The economic effects of violent conflict: evidence from asset market reactions
This paper studies the effects of conflict onset on asset markets applying the event study methodology. We consider a sample of 112 conflicts during the period 1974-2004 and find that a sizeable fraction of them had a significant impact on stock market indices and on major commodity prices. Furthermore, our results suggest that we are more likely to see investor reactions in response to conflicts that occur in highly polarized settings, possibly because the expected duration and intensity of the conflict is higher.