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Working Paper
A Coherent Framework for Predicting Emerging Market Credit Spreads with Support Vector Regression
Anderson, Gary S.; Audzeyeva, Alena (2019-10-17)
We propose a coherent framework using support vector regression (SRV) for generating and ranking a set of high quality models for predicting emerging market sovereign credit spreads. Our framework adapts a global optimization algorithm employing an hv-block cross-validation metric, pertinent for models with serially correlated economic variables, to produce robust sets of tuning parameters for SRV kernel functions. In contrast to previous approaches identifying a single "best" tuning parameter setting, a task that is pragmatically improbable to achieve in many applications, we proceed with ...
Finance and Economics Discussion Series , Paper 2019-074

Report
Global price of risk and stabilization policies
Vogt, Erik; Adrian, Tobias; Stackman, Daniel (2016-08-01)
We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the CBOE Volatility Index (VIX). We show that countries? exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by ...
Staff Reports , Paper 786

Report
Simple and reliable way to compute option-based risk-neutral distributions
Malz, Allan M. (2014-06-01)
This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage restrictions that can lead to negative probabilities and other implausible results. I give examples for equities, foreign exchange, and long-term interest rates.
Staff Reports , Paper 677

Working Paper
The Anatomy of Out-of-Sample Forecasting Accuracy
Rapach, David E.; Borup, Daniel; Goulet Coulombe, Philippe; Montes Schütte, Erik Christian; Schwenk-Nebbe, Sander (2022-11-07)
We develop metrics based on Shapley values for interpreting time-series forecasting models, including“black-box” models from machine learning. Our metrics are model agnostic, so that they are applicable to any model (linear or nonlinear, parametric or nonparametric). Two of the metrics, iShapley-VI and oShapley-VI, measure the importance of individual predictors in fitted models for explaining the in-sample and out-of-sample predicted target values, respectively. The third metric is the performance-based Shapley value (PBSV), our main methodological contribution. PBSV measures the ...
FRB Atlanta Working Paper , Paper 2022-16

Working Paper
Are Lemons Sold First? Dynamic Signaling in the Mortgage Market
Gerardi, Kristopher S.; Hartman-Glaser, Barney; Adelino, Manuel (2016-07-01)
A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through trade delays using the residential mortgage market as a laboratory. We find a strong relationship between mortgage performance and time to sale for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the "Alt-A" segment of the market, where mortgages are often sold ...
FRB Atlanta Working Paper , Paper 2016-8

Report
Changing Risk-Return Profiles
Hundtofte , Sean; Giannone, Domenico; Crump, Richard K.; Everaert, Miro (2018-06-01)
We show that realized volatility in market returns and financial sector stock returns have strong predictive content for the future distribution of market returns. This is a robust feature of the last century of U.S. data and, most importantly, can be exploited in real time. Current realized volatility has the most information content on the uncertainty of future returns, whereas it has only limited content about the location of the future return distribution. When volatility is low, the predicted distribution of returns is less dispersed and probabilistic forecasts are sharper.
Staff Reports , Paper 850

Working Paper
Mining for Oil Forecasts
Calomiris, Charles W.; Cakir Melek, Nida; Mamaysky, Harry (2020-12-23)
In this paper, we study the usefulness of a large number of traditional determinants and novel text-based variables for in-sample and out-of-sample forecasting of oil spot and futures returns, energy company stock returns, oil price volatility, oil production, and oil inventories. After carefully controlling for small-sample biases, we find compelling evidence of in-sample predictability. Our text measures hold their own against traditional variables for oil forecasting. However, none of this translates to out-of-sample predictability until we data mine our set of predictive variables. Our ...
Research Working Paper , Paper RWP 20-20

Working Paper
Accounting for Low Long-Term Interest Rates: Evidence from Canada
Christensen, Jens H. E.; Rudebusch, Glenn D.; Shultz, Patrick (2020-11-19)
In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term ...
Working Paper Series , Paper 2020-35

Working Paper
Inflation Expectations, Liquidity Premia and Global Spillovers in Japanese Bond Markets
Christensen, Jens H. E.; Spiegel, Mark M. (2024-04-08)
We provide market-based estimates of Japanese inflation expectations using an arbitrage-free dynamic term structure model of nominal and real yields that accounts for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. We find that JGBi liquidity premia exhibit significant variation, and even switch sign. Properly accounting for them significantly lowers the estimated value of the indexed bonds’ deflation protection and affects inflation risk premium estimates. After liquidity adjustment, long-term Japanese inflation expectations ...
Working Paper Series , Paper 2024-12

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