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Journal Article
Downside Risk to the Stock Market and Consumption
Mitra, Indrajit; Rapach, David E. (2026-09-02)
We investigate downside risk to the stock market and, in turn, downside risk to consumption via the equity wealth effect. The AI boom has seen stock market valuations rise sharply, led by the so-called Magnificent 7, raising concerns of a stock market "bubble." We analyze potential factors contributing to downside risk to the stock market if investor sentiment turns decidedly more negative, thereby driving down equity prices. Downside risk to the stock market in turn poses downside risk to consumption spending via the equity wealth effect. We measure the equity wealth effect using data on ...
Policy Hub , Volume 2026 , Issue 6 , Pages 30

Journal Article
Downside Risk to the Stock Market and Consumption
Mitra, Indrajit; Rapach, David E. (2026-09-02)
We investigate downside risk to the stock market and, in turn, downside risk to consumption via the equity wealth effect. The AI boom has seen stock market valuations rise sharply, led by the so-called Magnificent 7, raising concerns of a stock market “bubble.” We analyze potential factors contributing to downside risk to the stock market if investor sentiment turns decidedly more negative, thereby driving down equity prices. Downside risk to the stock market in turn poses downside risk to consumption spending via the equity wealth effect. We measure the equity wealth effect using data on ...
Policy Hub , Volume 2026 , Issue 6 , Pages 30

Journal Article
Considerations on ESG Investment Implementation
Starks, Laura (2022-06-21)
Although interest in investing according to environmental, social, and corporate governance (ESG) standards is widespread, investment managers face a number of basic considerations with their portfolio choices. In this article, I give a high-level overview of these considerations within the context of the investor motivation: ESG values, ESG value, or both. These considerations include whether investors should exclude certain firms or use a positive tilt; how they could integrate ESG into an investment approach; the role of third-party ESG ratings; how they should measure and report their ...
Policy Hub , Volume 2022 , Issue 7

Journal Article
An Introduction to Web3 with Implications for Financial Services
Parlour, Christine (2023-05-15)
Web3 is used to describe the next iteration of the internet in which decentralized services are automated on blockchains. This paper describes the elements of Web3 including blockchains and tokens. It describes the largest decentralized finance protocols and some specific services where blockchain and tokens can be used. The paper concludes with a brief discussion of some regulatory challenges.
Policy Hub , Volume 2023 , Issue 3

Working Paper
On Model Aggregation and Forecast Combination
Massoumi, Esfandiar; Gospodinov, Nikolay (2025-10-09)
Policy makers express their views and decisions via the lens of a particular model or theory. But since any model is a highly stylized representation of the unknowable object of interest, all these models are inherently misspecified, and the resulting ambiguity injects uncertainty in the decision-making process. We argue that entropy-based aggregation is a convenient device to confront this uncertainty and summarize relevant information from a set of candidate models and forecasts. The proposed aggregation tends to robustify the decision-making process to various sources of risks and ...
FRB Atlanta Working Paper , Paper 2025-12

Working Paper
What we learn from China's rising shadow banking: exploring the nexus of monetary tightening and banks' role in entrusted lending
Ren, Jue; Zha, Tao; Chen, Kaiji (2016-01-01)
We argue that China's rising shadow banking was inextricably linked to potential balance-sheet risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance ...
FRB Atlanta Working Paper , Paper 2016-1

Working Paper
Hedging and Pricing in Imperfect Markets under Non-Convexity
Gospodinov, Nikolay; Assa, Hirbod (2014-08-01)
This paper proposes a robust approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions. The generality of this framework allows us to conduct an in-depth theoretical analysis of hedging strategies for a wide family of risk measures and pricing rules, which are possibly non-convex. The practical implications of our proposed theoretical approach are illustrated with an application on hedging economic risk.
FRB Atlanta Working Paper , Paper 2014-13

Working Paper
Bayesian Inference and Prediction of a Multiple-Change-Point Panel Model with Nonparametric Priors
Jensen, Mark J.; Fisher, Mark (2018-02-01)
Change point models using hierarchical priors share in the information of each regime when estimating the parameter values of a regime. Because of this sharing, hierarchical priors have been very successful when estimating the parameter values of short-lived regimes and predicting the out-of-sample behavior of the regime parameters. However, the hierarchical priors have been parametric. Their parametric nature leads to global shrinkage that biases the estimates of the parameter coefficient of extraordinary regimes toward the value of the average regime. To overcome this shrinkage, we model ...
FRB Atlanta Working Paper , Paper 2018-2

Working Paper
Bayesian Nonparametric Learning of How Skill Is Distributed across the Mutual Fund Industry
Jensen, Mark J.; Fisher, Mark; Tkac, Paula A. (2019-03-01)
In this paper, we use Bayesian nonparametric learning to estimate the skill of actively managed mutual funds and also to estimate the population distribution for this skill. A nonparametric hierarchical prior, where the hyperprior distribution is unknown and modeled with a Dirichlet process prior, is used for the skill parameter, with its posterior predictive distribution being an estimate of the population distribution. Our nonparametric approach is equivalent to an infinitely ordered mixture of normals where we resolve the uncertainty in the mixture order by partitioning the funds into ...
FRB Atlanta Working Paper , Paper 2019-3

Working Paper
Dividend Momentum and Stock Return Predictability: A Bayesian Approach
Rubio-Ramirez, Juan F.; Petrella, Ivan; Antolin-Diaz, Juan (2021-11-10)
A long tradition in macro finance studies the joint dynamics of aggregate stock returns and dividends using vector autoregressions (VARs), imposing the cross-equation restrictions implied by the Campbell-Shiller (CS) identity to sharpen inference. We take a Bayesian perspective and develop methods to draw from any posterior distribution of a VAR that encodes a priori skepticism about large amounts of return predictability while imposing the CS restrictions. In doing so, we show how a common empirical practice of omitting dividend growth from the system amounts to imposing the extra ...
FRB Atlanta Working Paper , Paper 2021-25

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