We propose a criterion for determining whether a local policy analysis can be made in a given equilibrium in an overlapping generations model. The criterion can be applied to models with infinite past and future as well as those with a truncated past. The equilibrium is not necessarily a steady state; for example, demographic and type composition of the population or individuals’ endowments can change over time. However, asymptotically, the equilibrium should be stationary. The two limiting stationary paths at either end of the timeline do not have to be the same. If they are, conditions for local uniqueness are far more stringent for an economy with a truncated past as compared to its counterpart with an infinite past. In addition, we illustrate our main result using a textbook model with a single physical good, a two-period life-cycle and a single type of consumer. In this model we show how to calculate a response to a policy change using the implicit function theorem.
{"title":"Necessary and Sufficient Conditions for Determinacy of Asymptotically Stationary Equilibria in OLG Models","authors":"A. Gorokhovsky, A. Rubinchik","doi":"10.2139/ssrn.3397100","DOIUrl":"https://doi.org/10.2139/ssrn.3397100","url":null,"abstract":"We propose a criterion for determining whether a local policy analysis can be made in a given equilibrium in an overlapping generations model. The criterion can be applied to models with infinite past and future as well as those with a truncated past. The equilibrium is not necessarily a steady state; for example, demographic and type composition of the population or individuals’ endowments can change over time. However, asymptotically, the equilibrium should be stationary. The two limiting stationary paths at either end of the timeline do not have to be the same. If they are, conditions for local uniqueness are far more stringent for an economy with a truncated past as compared to its counterpart with an infinite past. In addition, we illustrate our main result using a textbook model with a single physical good, a two-period life-cycle and a single type of consumer. In this model we show how to calculate a response to a policy change using the implicit function theorem.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85494120","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 how profitability of long–short arbitrage strategies based on anomalies is affected after adjustment for two shorting costs: implicit cost due to unavailability of stocks in the short-leg to sell short and loan fee actually paid to stock lenders. The combined shorting cost amounts to almost 40 percent of gross long–short arbitrage raw returns over the sample period from January 2006 to December 2017. After adjustment for these shorting costs, long–short arbitrage profits are thus reduced by almost 40 percent. Even after adjustment for risk, the proportion of shorting costs is also substantial. If other trade-related transaction costs are considered, long–short arbitrage profits would be reduced further. Our results provide explicit evidence that casts doubt on the profitability of long-short arbitrage strategies based on anomalies.
{"title":"Shorting Costs and Profitability of Long–Short Strategies","authors":"Dongcheol Kim, Byeung-Joo Lee","doi":"10.2139/ssrn.3519706","DOIUrl":"https://doi.org/10.2139/ssrn.3519706","url":null,"abstract":"We examine how profitability of long–short arbitrage strategies based on anomalies is affected after adjustment for two shorting costs: implicit cost due to unavailability of stocks in the short-leg to sell short and loan fee actually paid to stock lenders. The combined shorting cost amounts to almost 40 percent of gross long–short arbitrage raw returns over the sample period from January 2006 to December 2017. After adjustment for these shorting costs, long–short arbitrage profits are thus reduced by almost 40 percent. Even after adjustment for risk, the proportion of shorting costs is also substantial. If other trade-related transaction costs are considered, long–short arbitrage profits would be reduced further. Our results provide explicit evidence that casts doubt on the profitability of long-short arbitrage strategies based on anomalies.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79300942","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}
Jesús Fernández-Villaverde, Federico S. Mandelman, Yang Yu, Francesco Zanetti
We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.
{"title":"Search Complementarities, Aggregate Fluctuations, and Fiscal Policy","authors":"Jesús Fernández-Villaverde, Federico S. Mandelman, Yang Yu, Francesco Zanetti","doi":"10.29338/wp2019-09","DOIUrl":"https://doi.org/10.29338/wp2019-09","url":null,"abstract":"We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87503932","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}
Russian Abstract: Для поиска наилучших для России путей либерализации торговли между ЕАЭС и другими странами мира с учётом враждебных действий третьих сторон (санкционное противостояние с ЕС и США и др.) мы использовали вычислимую модель общего равновесия GLOBE v1. Мы ограничились рассмотрением пяти площадок для интеграции, образование которых, на наш взгляд, наиболее вероятно с учётом стадий переговоров их потенциальных участников: ТТП без США, ШОС, АСЕАН, ВРЭП и ТТИП. Предполагалось что с каждой из этих площадок ЕАЭС может создать или не создавать ЗСТ, что привело нас к рассмотрению 243 различных сценариев. Как показали расчёты, бездействие ЕАЭС имеет, как правило, слабое положительное влияние на страны ЕАЭС как на уровне отраслей, так и на уровне экономики в целом. В тоже время участие стран ЕАЭС в перечисленных интеграционных процессах может давать заметные выигрыши в терминах ВВП (до 1,2% у России) и торговли. Тем не менее, участие в этих процессах создаёт заметные отраслевые риски (спад выпуска до 1,9%) в ряде секторов. English Abstract: Assessment of risks and benefits for the Russian economy from various integration strategies in modern conditions To find the best ways for Russia to liberalize trade between EAEU and other countries of the world, taking into account the hostile actions of third parties (the sanctions confrontation with the EU and the USA, etc.), we used the GLOBE v1 computable general equilibrium model. We have limited ourselves to considering five integration sites, the formation of which, in our opinion, is most likely due to the current state of their negotiation progress: TPP without the USA, SCO, ASEAN, RCEP and TTIP. It was assumed that with each of these sites the EAEU may or may not create an FTA, which led us to consider 243 different scenarios. As shown by the calculations, the inaction of the EAEU has, as a rule, a weak positive effect on the countries of the EAEU both at the level of industries and at the level of the economy as a whole. At the same time, the participation of the EAEU countries in the integration processes can give noticeable gains in terms of GDP (up to 1.2% from Russia) and trade. Nevertheless, participation in these processes creates noticeable industry risks (decline in output to 1.9%) in some sectors.
俄罗斯Abstract:考虑到与欧盟、美国和其他国家的敌对行动(制裁对抗欧盟和美国等)，为俄罗斯找到最佳的贸易自由化途径，我们使用了全球v1平衡的计算模型。我们限制了五个一体化领域，我们认为，这些领域的教育最有可能考虑到它们的潜在参与者的谈判阶段:没有美国、上海合作组织、东盟、说唱音乐等。在这些地点中，eac被认为可以创建或不创建pca，这导致了243种不同的场景。据估计，e核不作为对e核国家在行业和整体经济中的积极影响一般较弱。与此同时，从gdp(俄罗斯为1.2%)和贸易方面，e核国家参与上述一体化进程可能会带来显著的好处。然而，参与这些进程会在一些行业造成显著的行业风险(产出下降到1.9%)。抽象:评估of risks and benefits for the English俄罗斯经济from《integration战略in modern条件To find the best To liberalize trade between EAEU and other ways for俄罗斯国家of the world, tiber into the hostile帐户actions of the third party (divestment《对峙with the EU and the USA, etc) we used the GLOBE v1 computable general equilibrium model。我们有有限的5个座位，在我们的桌子上，这是我们最接近美国的地方:TPP没有美国，SCO, ASEAN, RCEP和TTIP。这是一个受欢迎的场景，要么是她的声音，要么是她的声音。在召唤中，在召唤中，在召唤中，在召唤中，在召唤中，在召唤中，在召唤中，在召唤中，在召唤中。At the same time, the participation of the EAEU国家in the integration processes can give noticeable gains in条款of GDP (up to from Russia and trade)增长1.2%。在某些sectors中，非vertheless是专业知识创造的一部分。
{"title":"Оценка рисков и выгод для российской экономики от проведения различных интеграционных стратегий в современных условиях (Assessment of Risks and Benefits for the Russian Economy from the Conduct of Various Integration Strategies in Modern Conditions)","authors":"Alexander Knobel, D. Kuznetsov","doi":"10.2139/ssrn.3392230","DOIUrl":"https://doi.org/10.2139/ssrn.3392230","url":null,"abstract":"Russian Abstract: Для поиска наилучших для России путей либерализации торговли между ЕАЭС и другими странами мира с учётом враждебных действий третьих сторон (санкционное противостояние с ЕС и США и др.) мы использовали вычислимую модель общего равновесия GLOBE v1. Мы ограничились рассмотрением пяти площадок для интеграции, образование которых, на наш взгляд, наиболее вероятно с учётом стадий переговоров их потенциальных участников: ТТП без США, ШОС, АСЕАН, ВРЭП и ТТИП. Предполагалось что с каждой из этих площадок ЕАЭС может создать или не создавать ЗСТ, что привело нас к рассмотрению 243 различных сценариев. Как показали расчёты, бездействие ЕАЭС имеет, как правило, слабое положительное влияние на страны ЕАЭС как на уровне отраслей, так и на уровне экономики в целом. В тоже время участие стран ЕАЭС в перечисленных интеграционных процессах может давать заметные выигрыши в терминах ВВП (до 1,2% у России) и торговли. Тем не менее, участие в этих процессах создаёт заметные отраслевые риски (спад выпуска до 1,9%) в ряде секторов. \u0000 \u0000English Abstract: Assessment of risks and benefits for the Russian economy from various integration strategies in modern conditions To find the best ways for Russia to liberalize trade between EAEU and other countries of the world, taking into account the hostile actions of third parties (the sanctions confrontation with the EU and the USA, etc.), we used the GLOBE v1 computable general equilibrium model. We have limited ourselves to considering five integration sites, the formation of which, in our opinion, is most likely due to the current state of their negotiation progress: TPP without the USA, SCO, ASEAN, RCEP and TTIP. It was assumed that with each of these sites the EAEU may or may not create an FTA, which led us to consider 243 different scenarios. As shown by the calculations, the inaction of the EAEU has, as a rule, a weak positive effect on the countries of the EAEU both at the level of industries and at the level of the economy as a whole. At the same time, the participation of the EAEU countries in the integration processes can give noticeable gains in terms of GDP (up to 1.2% from Russia) and trade. Nevertheless, participation in these processes creates noticeable industry risks (decline in output to 1.9%) in some sectors.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83350498","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}
Abstract I analyze the survival probabilities of different types of agents in a general equilibrium model with disagreement over idiosyncratic uncertainties. I find that such biases create a separation between individual and group level survival: even when the survival probability of a single irrational agent tends to zero, these agents may still succeed as a whole. Effectively the irrational agent population can survive due to a vanishingly small group of increasingly rich agents. Disagreement over idiosyncratic uncertainties distorts savings decisions and interest rates, but idiosyncratic risks are not priced. Simulations confirm that the limiting results are relevant when the population of irrational agents is large.
{"title":"Market Selection with Idiosyncratic Uncertainty","authors":"M. Sihvonen","doi":"10.2139/ssrn.3170862","DOIUrl":"https://doi.org/10.2139/ssrn.3170862","url":null,"abstract":"Abstract I analyze the survival probabilities of different types of agents in a general equilibrium model with disagreement over idiosyncratic uncertainties. I find that such biases create a separation between individual and group level survival: even when the survival probability of a single irrational agent tends to zero, these agents may still succeed as a whole. Effectively the irrational agent population can survive due to a vanishingly small group of increasingly rich agents. Disagreement over idiosyncratic uncertainties distorts savings decisions and interest rates, but idiosyncratic risks are not priced. Simulations confirm that the limiting results are relevant when the population of irrational agents is large.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80897222","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 develop a multi-sector DSGE model to calculate upstream and downstream industry exposure networks from U.S. input-output tables and test the relative importance of shocks from each direction by comparing these with estimated networks of firms’ equity return responses to one another. The correlations between the upstream exposure and equity return networks are large and statistically significant, while the downstream exposure networks have lower — but still positive — correlations that are not statistically significant. These results suggest a low short-term elasticity of substitution across inputs transmitting shocks from suppliers, but more flexible ties with downstream firms. Additionally, both the DSGE model and simulations of our empirical approach highlight the importance of accounting for common factors in network estimation, which become more important over our 1989-2017 sample period, explaining 11.7% of equity return variation over the first ten years and 35.0% over the final ten.
{"title":"Upstream, Downstream & Common Firm Shocks","authors":"E. Grant, Julieta Yung","doi":"10.24149/gwp360","DOIUrl":"https://doi.org/10.24149/gwp360","url":null,"abstract":"We develop a multi-sector DSGE model to calculate upstream and downstream industry exposure networks from U.S. input-output tables and test the relative importance of shocks from each direction by comparing these with estimated networks of firms’ equity return responses to one another. The correlations between the upstream exposure and equity return networks are large and statistically significant, while the downstream exposure networks have lower — but still positive — correlations that are not statistically significant. These results suggest a low short-term elasticity of substitution across inputs transmitting shocks from suppliers, but more flexible ties with downstream firms. Additionally, both the DSGE model and simulations of our empirical approach highlight the importance of accounting for common factors in network estimation, which become more important over our 1989-2017 sample period, explaining 11.7% of equity return variation over the first ten years and 35.0% over the final ten.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77427928","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 many over-the-counter asset markets, prices are negotiated bilaterally and bargaining over prices takes time. We show that bargaining delays arise when investors have precise private information about the asset quality, but the public information (e.g. credit ratings, benchmarks, past quotes) is coarse. We incorporate this type of bargaining delays into the standard dynamic equilibrium model of over-the-counter markets with search delays a la Duffie, Garleanu and Pedersen (2005) and derive implications of both delays for prices and liquidity. Search and bargaining delays have opposite effects on the range of traded assets showing that the current approach that views search delays as a proxy for all types of delays is with a loss. Conditional on the public information, the liquidity is U-shaped in the quality and assets in the middle of the quality range may not be traded, which contrasts with the descreasing liquidity in asymmetric-information models.
{"title":"Bargaining over a Non-Standardized Asset","authors":"A. Tsoy","doi":"10.2139/ssrn.2694954","DOIUrl":"https://doi.org/10.2139/ssrn.2694954","url":null,"abstract":"In many over-the-counter asset markets, prices are negotiated bilaterally and bargaining over prices takes time. We show that bargaining delays arise when investors have precise private information about the asset quality, but the public information (e.g. credit ratings, benchmarks, past quotes) is coarse. We incorporate this type of bargaining delays into the standard dynamic equilibrium model of over-the-counter markets with search delays a la Duffie, Garleanu and Pedersen (2005) and derive implications of both delays for prices and liquidity. Search and bargaining delays have opposite effects on the range of traded assets showing that the current approach that views search delays as a proxy for all types of delays is with a loss. Conditional on the public information, the liquidity is U-shaped in the quality and assets in the middle of the quality range may not be traded, which contrasts with the descreasing liquidity in asymmetric-information models.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74041851","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}
Pablo Cuba-Borda, L. Guerrieri, Matteo Iacoviello, M. Zhong
Applied researchers interested in estimating key parameters of DSGE models face an array of choices regarding numerical solution and estimation methods. We focus on the likelihood evaluation of models with occasionally binding constraints. We document how solution approximation errors and likelihood misspecification, related to the treatment of measurement errors, can interact and compound each other.
{"title":"Likelihood Evaluation of Models with Occasionally Binding Constraints","authors":"Pablo Cuba-Borda, L. Guerrieri, Matteo Iacoviello, M. Zhong","doi":"10.17016/FEDS.2019.028","DOIUrl":"https://doi.org/10.17016/FEDS.2019.028","url":null,"abstract":"Applied researchers interested in estimating key parameters of DSGE models face an array of choices regarding numerical solution and estimation methods. We focus on the likelihood evaluation of models with occasionally binding constraints. We document how solution approximation errors and likelihood misspecification, related to the treatment of measurement errors, can interact and compound each other.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76922831","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}
Carbon budgets are a useful way to frame the climate mitigation challenge and much easier to agree upon than the allocation of emissions. We propose a mechanism with countries agreeing on the global carbon budget, while the decision to emit is decentralized at the country level. The revenue is collected in a global fund and allocated according to endogenously defined weights proportional to the marginal cost of climate change. The proposal features a unanimous agreement of the national citizenries of the world and global Pareto efficiency. We run a simulation in the spirit of the Paris Agreement, with zero emissions after 2055. At the Global Unanimity Equilibrium, permits are priced at 90$/tC, yielding 1.3 trillion dollars annually. Africa, India and the less developed countries in Asia are the only net recipients, while the US and China are the largest net contributors.
{"title":"Global Unanimity Equilibrium on the Carbon Budget","authors":"Humberto Llavador, J. Roemer","doi":"10.2139/ssrn.3362590","DOIUrl":"https://doi.org/10.2139/ssrn.3362590","url":null,"abstract":"Carbon budgets are a useful way to frame the climate mitigation challenge and much easier to agree upon than the allocation of emissions. We propose a mechanism with countries agreeing on the global carbon budget, while the decision to emit is decentralized at the country level. The revenue is collected in a global fund and allocated according to endogenously defined weights proportional to the marginal cost of climate change. The proposal features a unanimous agreement of the national citizenries of the world and global Pareto efficiency. We run a simulation in the spirit of the Paris Agreement, with zero emissions after 2055. At the Global Unanimity Equilibrium, permits are priced at 90$/tC, yielding 1.3 trillion dollars annually. Africa, India and the less developed countries in Asia are the only net recipients, while the US and China are the largest net contributors.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84367192","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}
Uncertainty shocks are also risk premium shocks. With countercyclical risk aversion (RA), a positive shock to uncertainty increases risk and elevates RA as consumption growth falls. The combination of high RA and high uncertainty produces significant equity risk premia in bad times, which in turn, exacerbate the decline of macroeconomic aggregates and equity prices. Moreover, in the cross-section of equity returns, investors demand a risk premium for stocks that perform poorly in times of high uncertainty and elevated risk aversion. In a model with endogenously time-varying RA, uncertainty shocks lead to large falls in investment and equity prices that closely match state-dependent data responses. This paper was accepted by Tomasz Piskorski, finance.
{"title":"The Real Response to Uncertainty Shocks: the Risk Premium Channel","authors":"Lorenzo Bretscher, Alex Hsu, A. Tamoni","doi":"10.2139/ssrn.2938361","DOIUrl":"https://doi.org/10.2139/ssrn.2938361","url":null,"abstract":"Uncertainty shocks are also risk premium shocks. With countercyclical risk aversion (RA), a positive shock to uncertainty increases risk and elevates RA as consumption growth falls. The combination of high RA and high uncertainty produces significant equity risk premia in bad times, which in turn, exacerbate the decline of macroeconomic aggregates and equity prices. Moreover, in the cross-section of equity returns, investors demand a risk premium for stocks that perform poorly in times of high uncertainty and elevated risk aversion. In a model with endogenously time-varying RA, uncertainty shocks lead to large falls in investment and equity prices that closely match state-dependent data responses. This paper was accepted by Tomasz Piskorski, finance.","PeriodicalId":11757,"journal":{"name":"ERN: Other Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73601308","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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