In the financial crisis and recession induced by the Covid-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned bonds of corporations rated as investment grade before the Covid pandemic at spreads roughly 1 percentage point above non-recession averages. A careful splicing of different unemployment rate series enables us to assess the effectiveness of recent Fed interventions in these long-term debt markets over long sample periods, spanning the Great Depression, Great Recession and the Covid Recession. Findings indicate that the announcement of forthcoming corporate bond backstop facilities have capped risk premia at levels 100 basis points above non-recession averages, akin to a “penalty rate” for lender of last resort interventions during financial crises. In doing so, these Fed facilities have limited the role of external finance premia in amplifying the macroeconomic impact of the Covid pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort, and pursuing credit policies.
{"title":"How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the Covid-19 Recession","authors":"Michael D. Bordo, John V. Duca","doi":"10.24149/wp2029","DOIUrl":"https://doi.org/10.24149/wp2029","url":null,"abstract":"In the financial crisis and recession induced by the Covid-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned bonds of corporations rated as investment grade before the Covid pandemic at spreads roughly 1 percentage point above non-recession averages. A careful splicing of different unemployment rate series enables us to assess the effectiveness of recent Fed interventions in these long-term debt markets over long sample periods, spanning the Great Depression, Great Recession and the Covid Recession. Findings indicate that the announcement of forthcoming corporate bond backstop facilities have capped risk premia at levels 100 basis points above non-recession averages, akin to a “penalty rate” for lender of last resort interventions during financial crises. In doing so, these Fed facilities have limited the role of external finance premia in amplifying the macroeconomic impact of the Covid pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort, and pursuing credit policies.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"17 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86051910","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union.
{"title":"Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-country Monetary Union Model","authors":"Christian R. Proaño, Benjamin Lojak","doi":"10.2139/ssrn.3711114","DOIUrl":"https://doi.org/10.2139/ssrn.3711114","url":null,"abstract":"In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82573138","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We construct a new dataset on the presence of women on central bank monetary policy committees for a set of 103 countries, over the period 2002-2016. We document an increasing share of women in monetary policy committees, which is mainly associated with a higher overall presence of women in central banks and less so with other institutional factors or country characteristics. We then investigate the impact of this trend on monetary policymaking by estimating Taylor rules augmented to include the share of women on monetary policy committees. We show that central bank boards with a higher proportion of women set higher interest rates for the same level of inflation. This suggests that women board members have a more hawkish approach to monetary policy. We confirm this result by analysing the voting behaviour of members of the executive board of the Swedish Central Bank during the period 2000-2017.
{"title":"Do Women Matter in Monetary Policy Boards?","authors":"D. Masciandaro, P. Profeta, Davide Romelli","doi":"10.2139/ssrn.3703641","DOIUrl":"https://doi.org/10.2139/ssrn.3703641","url":null,"abstract":"We construct a new dataset on the presence of women on central bank monetary policy committees for a set of 103 countries, over the period 2002-2016. We document an increasing share of women in monetary policy committees, which is mainly associated with a higher overall presence of women in central banks and less so with other institutional factors or country characteristics. We then investigate the impact of this trend on monetary policymaking by estimating Taylor rules augmented to include the share of women on monetary policy committees. We show that central bank boards with a higher proportion of women set higher interest rates for the same level of inflation. This suggests that women board members have a more hawkish approach to monetary policy. We confirm this result by analysing the voting behaviour of members of the executive board of the Swedish Central Bank during the period 2000-2017.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"2 1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84246300","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the open-economy implications of the introduction of a central bank digital currency (CBDC). We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies.
{"title":"Central Bank Digital Currency in an Open Economy","authors":"M. Ferrari, Arnaud Mehl, Livio Stracca","doi":"10.2866/389734","DOIUrl":"https://doi.org/10.2866/389734","url":null,"abstract":"We examine the open-economy implications of the introduction of a central bank digital currency (CBDC). We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"42 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77627212","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper is one of the first to study the present-day properties of the gold standard in a quantitative model commonly used in central banks. We incorporate gold into an otherwise standard estimated New Keynesian model and compare the positive and normative implications of adopting a gold standard to other more commonly advocated policies. We show that under certain conditions, the gold standard is akin to a nominal GDP targeting framework and can at times be considered an improvement. However, unlike more conventional policies, the gold standard must react to shocks to the supply and demand for gold. We estimate the model for the post-2000 period using a novel dataset on the supply of gold and find that following a gold standard would result in dramatic increases in the volatilities of macroeconomic aggregates and a significant deterioration in household welfare. This is because the estimated shocks to gold supply and demand are significantly larger than for other more conventional aggregate shocks. In the end, what buries the gold standard turns out to be instability in the dynamics of gold itself.
{"title":"Bury the Gold Standard? A Quantitative Exploration","authors":"Anthony M. Diercks, J. Rawls, Eric R. Sims","doi":"10.3386/w28015","DOIUrl":"https://doi.org/10.3386/w28015","url":null,"abstract":"This paper is one of the first to study the present-day properties of the gold standard in a quantitative model commonly used in central banks. We incorporate gold into an otherwise standard estimated New Keynesian model and compare the positive and normative implications of adopting a gold standard to other more commonly advocated policies. We show that under certain conditions, the gold standard is akin to a nominal GDP targeting framework and can at times be considered an improvement. However, unlike more conventional policies, the gold standard must react to shocks to the supply and demand for gold. We estimate the model for the post-2000 period using a novel dataset on the supply of gold and find that following a gold standard would result in dramatic increases in the volatilities of macroeconomic aggregates and a significant deterioration in household welfare. This is because the estimated shocks to gold supply and demand are significantly larger than for other more conventional aggregate shocks. In the end, what buries the gold standard turns out to be instability in the dynamics of gold itself.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74310262","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Central bank independence (CBI) has been understood to originate in domestic political commitments to tackle inflation and government profligacy. But recent studies demonstrate that international financial institutions (IFIs) and capital markets also play a role in influencing states to delegate their powers to independent monetary authorities, i.e. to central banks. Further, it is apparent that central banks have powers that extend beyond maintaining price stability and reining in government spending. But scholars have yet to develop a theoretical framework that satisfactorily explains the origins of CBI — still less reversions therefrom. Drawing on the theories of institutional design, we hypothesize that domestic and international creditors use CBI to resolve the problems of control and information that are inherent to sovereign lending. Specifically, we argue that CBI is used to split central banks off from sovereign states, and to establish shared liabilities between the governments (still sovereign but diminished in power) and their central banks. This separation — often buttressed by elaborate structures of international surveillance and control — creates incentives for the paired agents to monitor and discipline each other, thereby curtailing the political hazard of sovereign lending. We also hypothesize that reductions in the power of lenders precipitate corresponding reductions in CBI. Using an in-depth historical survey of the German central bank in the interwar period to test our argument, we reveal dramatic variation in CBI attributable to the capacity of lenders to split sovereigns.
{"title":"The Political Economy of Independent Central Banks","authors":"Andreas Kern, J. Seddon","doi":"10.2139/ssrn.3687144","DOIUrl":"https://doi.org/10.2139/ssrn.3687144","url":null,"abstract":"Central bank independence (CBI) has been understood to originate in domestic political commitments to tackle inflation and government profligacy. But recent studies demonstrate that international financial institutions (IFIs) and capital markets also play a role in influencing states to delegate their powers to independent monetary authorities, i.e. to central banks. Further, it is apparent that central banks have powers that extend beyond maintaining price stability and reining in government spending. But scholars have yet to develop a theoretical framework that satisfactorily explains the origins of CBI — still less reversions therefrom. Drawing on the theories of institutional design, we hypothesize that domestic and international creditors use CBI to resolve the problems of control and information that are inherent to sovereign lending. Specifically, we argue that CBI is used to split central banks off from sovereign states, and to establish shared liabilities between the governments (still sovereign but diminished in power) and their central banks. This separation — often buttressed by elaborate structures of international surveillance and control — creates incentives for the paired agents to monitor and discipline each other, thereby curtailing the political hazard of sovereign lending. We also hypothesize that reductions in the power of lenders precipitate corresponding reductions in CBI. Using an in-depth historical survey of the German central bank in the interwar period to test our argument, we reveal dramatic variation in CBI attributable to the capacity of lenders to split sovereigns.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84055850","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This essay is part of a larger work on the history of Federal Reserve policymaking entitled Banking on Bull. The study seeks to explain why the instruments of central banking inevitably break down over time. A big part of the explanation is that policymakers want accounting measures of bank net worth to be flexible enough to allow bankers and regulators to slow the release of adverse information about distressed banks, particularly very large ones. Modern regulatory frameworks focus on maintaining what can be described as the adequacy of accounting capital. But this framework is bull, because in tough times, bank accountants know how to make losses disappear.
{"title":"Masters of Illusion: Bank and Regulatory Accounting for Losses in Distressed Banks","authors":"E. Kane","doi":"10.36687/inetwp136","DOIUrl":"https://doi.org/10.36687/inetwp136","url":null,"abstract":"This essay is part of a larger work on the history of Federal Reserve policymaking entitled Banking on Bull. The study seeks to explain why the instruments of central banking inevitably break down over time. A big part of the explanation is that policymakers want accounting measures of bank net worth to be flexible enough to allow bankers and regulators to slow the release of adverse information about distressed banks, particularly very large ones. Modern regulatory frameworks focus on maintaining what can be described as the adequacy of accounting capital. But this framework is bull, because in tough times, bank accountants know how to make losses disappear.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"50 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73988631","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Federal Reserve interventions in private securities markets in the spring of 2020 extended its 2008 playbook from buying high quality short-term paper to bonds, and departed from it by buying junk bonds. In March 2020, the Fed reprised its last-resort lending to primary dealers, accepting private securities as collateral, and its last-resort underwriting and buying of commercial paper. Given the reliance of non-financial firms on corporate bonds, some were not surprised when the Fed then extended last-resort underwriting and buying to corporate bonds. In April, however, the Fed departed from its playbook with its announcement that it would buy junk bond exchange-traded funds (ETFs): it set no minimum quality criterion for its credit extension.
The Fed’s announced intervention in corporate bond markets succeeded before the buying even started. It raised prices of corporate bonds, narrowed both trading and fund valuation spreads, reversed investor runs and encouraged record-setting corporate bond issuance. ETF prices jumped on announcement, flipping a flashing market “billboard” from sell to buy, and underlying bond prices, spreads and flows subsequently improved across a broad range of dollar credit markets.
This paper raises two policy questions. First, could the Fed have reduced the conflict between buying junk bonds and its previous efforts to reduce supervised banks’ involvement in leveraged loans? The Fed could have bought only junk bond funds holding a smaller weight of the lowest quality bonds issued by firms that private equity deals had leveraged up. Second, should the Congress authorize the Fed to do open market operations in corporate bonds? Such authority could avoid the legal awkwardness of using emergency lending powers to buy corporate bonds and could allow the Fed to develop operational capacity in this important market. Similar issues of role conflict and legal powers arise in any market, including emerging markets, when the central bank buys private securities.
{"title":"The Fed in the Corporate Bond Market in 2020","authors":"Robert N. McCauley","doi":"10.2139/ssrn.3676193","DOIUrl":"https://doi.org/10.2139/ssrn.3676193","url":null,"abstract":"The Federal Reserve interventions in private securities markets in the spring of 2020 extended its 2008 playbook from buying high quality short-term paper to bonds, and departed from it by buying junk bonds. In March 2020, the Fed reprised its last-resort lending to primary dealers, accepting private securities as collateral, and its last-resort underwriting and buying of commercial paper. Given the reliance of non-financial firms on corporate bonds, some were not surprised when the Fed then extended last-resort underwriting and buying to corporate bonds. In April, however, the Fed departed from its playbook with its announcement that it would buy junk bond exchange-traded funds (ETFs): it set no minimum quality criterion for its credit extension. <br><br>The Fed’s announced intervention in corporate bond markets succeeded before the buying even started. It raised prices of corporate bonds, narrowed both trading and fund valuation spreads, reversed investor runs and encouraged record-setting corporate bond issuance. ETF prices jumped on announcement, flipping a flashing market “billboard” from sell to buy, and underlying bond prices, spreads and flows subsequently improved across a broad range of dollar credit markets.<br><br>This paper raises two policy questions. First, could the Fed have reduced the conflict between buying junk bonds and its previous efforts to reduce supervised banks’ involvement in leveraged loans? The Fed could have bought only junk bond funds holding a smaller weight of the lowest quality bonds issued by firms that private equity deals had leveraged up. Second, should the Congress authorize the Fed to do open market operations in corporate bonds? Such authority could avoid the legal awkwardness of using emergency lending powers to buy corporate bonds and could allow the Fed to develop operational capacity in this important market. Similar issues of role conflict and legal powers arise in any market, including emerging markets, when the central bank buys private securities.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75996356","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the role of the International Monetary Fund (IMF) in promoting central bank independence (CBI). While anecdotal evidence suggests that the IMF has been playing a vital role for CBI, the underlying mechanisms of this influence are not well understood. We argue that the IMF has ulterior motives when pressing countries for increased CBI. First, IMF loans are primarily transferred to local monetary authorities. Thus, enhancing CBI aims to insulate central banks from political interference to shield loan disbursements from government abuse. Second, several loan conditionality clauses imply a substantial transfer of political leverage over economic policy making to monetary authorities. As a result, the IMF through pushing for CBI seeks to establish a politically insulated veto player to promote its economic policy reform agenda. We argue that the IMF achieves these aims through targeted lending conditions. We hypothesize that the inclusion of these loan conditions leads to greater CBI. To test our hypothesis, we compile a unique dataset that includes detailed information on CBI reforms and IMF conditionality for up to 124 countries between 1980 and 2014. Our findings indicate that targeted loan conditionality plays a critical role in promoting CBI. These results are robust towards varying modeling assumptions and withstand a battery of robustness checks. JEL Classification: E52, E58, F5
{"title":"The Role of IMF Conditionality for Central Bank Independence","authors":"Andreas Kern, B. Reinsberg, Matthias Rau-Goehring","doi":"10.2139/ssrn.3683781","DOIUrl":"https://doi.org/10.2139/ssrn.3683781","url":null,"abstract":"This paper studies the role of the International Monetary Fund (IMF) in promoting central bank independence (CBI). While anecdotal evidence suggests that the IMF has been playing a vital role for CBI, the underlying mechanisms of this influence are not well understood. We argue that the IMF has ulterior motives when pressing countries for increased CBI. First, IMF loans are primarily transferred to local monetary authorities. Thus, enhancing CBI aims to insulate central banks from political interference to shield loan disbursements from government abuse. Second, several loan conditionality clauses imply a substantial transfer of political leverage over economic policy making to monetary authorities. As a result, the IMF through pushing for CBI seeks to establish a politically insulated veto player to promote its economic policy reform agenda. We argue that the IMF achieves these aims through targeted lending conditions. We hypothesize that the inclusion of these loan conditions leads to greater CBI. To test our hypothesis, we compile a unique dataset that includes detailed information on CBI reforms and IMF conditionality for up to 124 countries between 1980 and 2014. Our findings indicate that targeted loan conditionality plays a critical role in promoting CBI. These results are robust towards varying modeling assumptions and withstand a battery of robustness checks. JEL Classification: E52, E58, F5","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"4 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79786890","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Motivated by the category-learning behavior, we propose to use Topic Appearance Probability (TAP) in the financial news as an alternative measure of investor attention. We then investigate the relationship between the investor attention, measured by the widely used the Google Search Volume Index and our proposed TAP, and the short-term 3-month and long-term 10-year Treasury yields using daily and weekly data. Our empirical findings are:
(1) there exists a contemporaneous relationship between investor attention and the return of the Treasury yields for daily data, but not weekly data;
(2) The investor attention has a more pronounced predictive power on the return of the 3-month Treasury yield than that of 10-year, which is in terms of adjusted R2 and the number of significant terms.
(3) Investor attention has certain predictive power over the volatility.
{"title":"Investor Attention and Topic Appearance Probabilities: Evidence from Treasury Bond Market","authors":"Hao Lei, Ying Chen, C. Chen","doi":"10.2139/ssrn.3646257","DOIUrl":"https://doi.org/10.2139/ssrn.3646257","url":null,"abstract":"Motivated by the category-learning behavior, we propose to use Topic Appearance Probability (TAP) in the financial news as an alternative measure of investor attention. We then investigate the relationship between the investor attention, measured by the widely used the Google Search Volume Index and our proposed TAP, and the short-term 3-month and long-term 10-year Treasury yields using daily and weekly data. Our empirical findings are: <br><br>(1) there exists a contemporaneous relationship between investor attention and the return of the Treasury yields for daily data, but not weekly data; <br><br>(2) The investor attention has a more pronounced predictive power on the return of the 3-month Treasury yield than that of 10-year, which is in terms of adjusted R2 and the number of significant terms. <br><br>(3) Investor attention has certain predictive power over the volatility.","PeriodicalId":10548,"journal":{"name":"Comparative Political Economy: Monetary Policy eJournal","volume":"25 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72766875","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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