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Working Paper
End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
Smolyansky, Michael (2023-06-26)
I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly ...
Finance and Economics Discussion Series , Paper 2023-041

Working Paper
Systemic Credit Risk Premium: Insights from Credit Derivatives Markets
Byun, Kiwoong; Kim, Baeho; Oh, Dong Hwan (2025-08-04)
This study examines the market-implied premiums for bearing systemic credit risk by analyzing credit derivatives on the CDX North American Investment Grade portfolio from September 2005 to March 2021. We construct systemic credit risk premium (SCRP) as the difference between the observed prices of multi-name super-senior tranches and their synthetic counterparts valued from historical asset correlations implied by single-name CDS spreads. Our findings show that the fitted SCRP surged during the 2007-2009 financial crisis, remained stable for a period, declined gradually after 2016, and spiked ...
Finance and Economics Discussion Series , Paper 2023-055r1

Working Paper
Mandatory Disclosure and Financial Contagion
Alvarez, Fernando; Barlevy, Gadi (2014-04-28)
This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when ...
Working Paper Series , Paper WP-2014-4

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

Report
Bank Economic Capital
Hirtle, Beverly; Plosser, Matthew (2025-03-01)
Conventional measures of bank solvency fail to account for the unique liquidity risks posed by deposits. Using public regulatory data, we develop a novel measure, economic capital, that jointly quantifies the impact of credit, liquidity, and market risk. We validate that economic capital is a more timely and accurate indicator of bank health than standard solvency measures. Using our framework, we examine the evolution of banking sector solvency and find that following the GFC low interest rates depressed economic capital even as liquidity and market risks grew. We conclude with several ...
Staff Reports , Paper 1144

Report
Intraday market making with overnight inventory costs
Vogt, Erik; Fleming, Michael J.; Zhang, Hongzhong; Capponi, Agostino; Adrian, Tobias (2016-10-01)
The U.S. Treasury market is highly intermediated by nonbank principal trading ﬁrms (PTFs). Limited capital forces PTFs to end the trading day roughly ﬂat. We construct a continuous time market making model to analyze the trade-oﬀ faced by a proﬁt-maximizing ﬁrm with overnight inventory costs, and develop closed-form representations of the optimal price policy functions. Our model reveals that bid-ask spreads widen as the end of the trading day approaches, and that increases in order arrival rates do not always lead to higher price volatility. Our empirical analysis shows that ...
Staff Reports , Paper 799

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

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
Big Data Meets the Turbulent Oil Market
Calomiris, Charles W.; Çakır Melek, Nida; Mamaysky, Harry (2022-11)
This paper introduces novel news-based measures for tracking global energy markets. These measures compress thousands of news articles into a parsimonious set of real-time indicators and are successful in-sample forecasters of oil spot, futures, and energy company stock returns, and of changes in oil volatility, production, and inventories, complementing and extending traditional (non-text) predictors. In out-of-sample tests, text-based measures predict oil futures returns and changes in oil spot prices better than traditional predictors, although the latter are more useful for forecasting ...
Research Working Paper , Paper RWP 20-20

Working Paper
Nothing is Certain Except Death and Taxes : The Lack of Policy Uncertainty from Expiring \"Temporary\" Taxes
Chang, Andrew C. (2018-06-22)
What is the policy uncertainty surrounding expiring taxes? How uncertain are the approvals of routine extensions of temporary tax policies? To answer these questions, I use event studies to measure cumulative abnormal returns (CARs) for firms that claimed the U.S. research and development (R&D) tax credit from 1996-2015. In 1996, the U.S. R&D tax credit was statutorily temporary but was routinely extended ten times until 2015, when it was made permanent. I take the event dates as both when these ten extensions of the R&D tax credit were introduced into committee and when the extensions were ...
Finance and Economics Discussion Series , Paper 2018-041

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