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Macro Finance

Paper Session

Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, Grand Ballroom A
Hosted By: American Finance Association
  • Chair: Stijn Van Nieuwerburgh, Columbia University

The Economics of the Fed Put

Anna Cieslak
,
Duke University
Annette Vissing-Jorgensen
,
University of California-Berkeley

Abstract

We document the tendency for low stock returns to predict accommodating monetary policy in the U.S. Negative stock returns realized between FOMC meetings are a more powerful predictor of subsequent federal funds target changes than standard macroeconomic news releases. Using textual analysis of FOMC minutes and transcripts, we argue that stock returns {\it cause} Fed policy. FOMC participants are more likely to pay attention to the stock market after market declines---a pattern that arises from mid-1990s. The frequency of negative stock market mentions in FOMC documents predicts target rate cuts. The FOMC discusses the stock market mostly as a driver of consumption and, albeit to a lesser extent, investment and broader financial conditions. Less attention is placed on the stock market simply predicting (as opposed to driving) the economy. About 80\% of the Fed's reaction to the stock market can be explained by the Fed revising its expectations of economic activity down following stock market declines.

Risk-Adjusted Capital Allocation and Misallocation

Joel David
,
University of Southern California
Lukas Schmid
,
Duke University
David Zeke
,
University of Southern California

Abstract

We develop a theory linking "misallocation," i.e., dispersion in static marginal products of capital (MPK), to systematic investment risks. In our setup, firms differ in their exposure to these risks, which we show leads naturally to heterogeneity in firm-level risk premia and, more importantly, MPK. The theory predicts that cross-sectional dispersion in MPK (i) depends on cross-sectional dispersion in risk exposures and (ii) fluctuates with the price of risk, and thus is countercyclical. We document strong empirical support for these predictions. We devise a strategy to quantify variation in firm-level risk exposures using data on the dispersion of expected stock market returns. Our estimates imply that risk considerations explain almost 40% of observed MPK dispersion among US firms and in particular, can rationalize a large persistent component in firm-level MPK deviations. Our framework provides a sharp link between aggregate volatility, cross-sectional asset pricing and long-run economic performance -- MPK dispersion induced by risk premium effects, although not prima facie inefficient, lowers the average level of aggregate TFP by as much as 7%, suggesting large "productivity costs" of business cycles.

Term Structure of Risk in Expected Returns

Irina Zviadadze
,
Stockholm School of Economics

Abstract

This article develops an empirical methodology to determine which economic shocks span risk in asset returns and fluctuations in discount rate news and cash flow news. The methodology identifies orthogonal structural sources of aggregate risk from a present-value model augmented with a theoretically motivated shock identification scheme. The choice of the shock identification scheme is based on the properties of the term structure of risk in expected returns in the data and in equilibrium models. In an empirical application, I find that (i) shocks in the variance of consumption growth account for 94% of risk in the one-quarter stock returns; (ii) a shock in the long-run mean of the variance of consumption growth spans discount rate news and contributes 47% to the aggregate market risk, (iii) a jump and a regular shock in the variance of consumption growth, together with the direct dividend shock span cash flow news and contribute 53% to the aggregate market risk.

Mortgage Design and Slow Recoveries: The Role of Recourse and Default

Pedro Gete
,
IE Business School
Franco Zecchetto
,
Autonomous Technological University of Mexico (ITAM)

Abstract

We show that mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities and cause deeper and more persistent recessions. This mechanism can account for up to 40% of the recovery gap during the Great Recession between the U.S. (mostly a non-recourse economy) and European economies with recourse mortgage systems. Recourse mortgages also generate larger welfare inequality following credit shocks. General equilibrium effects cause most of the differences across mortgage systems. Liquid assets play a larger role in explaining default with recourse mortgages.
Discussant(s)
Alexi Savov
,
New York University
Dimitris Papanikolaou
,
Northwestern University
Ralph Koijen
,
University of Chicago
Tomasz Piskorski
,
Columbia University
JEL Classifications
  • G0 - General