Pub Date : 2025-11-15DOI: 10.1016/j.jedc.2025.105207
Thomas Conlon , John Cotter , Ioannis Ropotos
The paper studies the determinants of firm-level tail dependence of companies with respect to foreign markets using machine learning. We measure dependence for a comprehensive international set of firms using copulas and we find that left tail dependence is consistently stronger than right tail dependence with their gap widening in recessionary periods. We then apply random forest regressions to identify and characterize the factors that account for the total panel variation of tail risk. The World Uncertainty Index, the R2 integration measure and coskewness with respect to foreign markets are the most important determinants. For US firms individual ownership variables such as the number of total or foreign investors dominate the remaining firm-level characteristics in explaining tail dependence. Our results contribute to the understanding of crash risk in the modern global financial landscape with implications for asset managers.
{"title":"Drivers of firm-level tail dependence: A machine learning approach","authors":"Thomas Conlon , John Cotter , Ioannis Ropotos","doi":"10.1016/j.jedc.2025.105207","DOIUrl":"10.1016/j.jedc.2025.105207","url":null,"abstract":"<div><div>The paper studies the determinants of firm-level tail dependence of companies with respect to foreign markets using machine learning. We measure dependence for a comprehensive international set of firms using copulas and we find that left tail dependence is consistently stronger than right tail dependence with their gap widening in recessionary periods. We then apply random forest regressions to identify and characterize the factors that account for the total panel variation of tail risk. The World Uncertainty Index, the R2 integration measure and coskewness with respect to foreign markets are the most important determinants. For US firms individual ownership variables such as the number of total or foreign investors dominate the remaining firm-level characteristics in explaining tail dependence. Our results contribute to the understanding of crash risk in the modern global financial landscape with implications for asset managers.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105207"},"PeriodicalIF":2.3,"publicationDate":"2025-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145694258","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-13DOI: 10.1016/j.jedc.2025.105216
Jaevin Park
I study the efficiency of issuing inside money under the risk of fraud in a competitive equilibrium. In the model, bankers can issue money with their franchise values and/or by holding real assets, but they can also fake the quality of the asset at a proportional cost. When the supply of assets is scarce and the counterfeiting cost is intermediate, multiple equilibria can arise with a self-fulfilling liquidity dry-up, where the haircut in the collateral transaction increases and aggregate liquidity shrinks simultaneously. This equilibrium allocation is suboptimal because the individual bankers cannot internalize the effect of issuing money on the prices and the pledgeability of the assets in general equilibrium. We find that imposing an entry cost is more effective in correcting pecuniary externality because the counterfeiting incentive can be discouraged by a positive franchise value. Maximum haircut requirements have an advantage of eliminating a self-fulfilling liquidity dry-up.
{"title":"Inside money, fraud and self-fulfilling liquidity dry-up","authors":"Jaevin Park","doi":"10.1016/j.jedc.2025.105216","DOIUrl":"10.1016/j.jedc.2025.105216","url":null,"abstract":"<div><div>I study the efficiency of issuing inside money under the risk of fraud in a competitive equilibrium. In the model, bankers can issue money with their franchise values and/or by holding real assets, but they can also fake the quality of the asset at a proportional cost. When the supply of assets is scarce and the counterfeiting cost is intermediate, multiple equilibria can arise with a self-fulfilling liquidity dry-up, where the haircut in the collateral transaction increases and aggregate liquidity shrinks simultaneously. This equilibrium allocation is suboptimal because the individual bankers cannot internalize the effect of issuing money on the prices and the pledgeability of the assets in general equilibrium. We find that imposing an entry cost is more effective in correcting pecuniary externality because the counterfeiting incentive can be discouraged by a positive franchise value. Maximum haircut requirements have an advantage of eliminating a self-fulfilling liquidity dry-up.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105216"},"PeriodicalIF":2.3,"publicationDate":"2025-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145569958","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-04DOI: 10.1016/j.jedc.2025.105203
Xinrui Duan , Li Guo , Frank Weikai Li , Jun Tu
We demonstrate that valuation uncertainty and information arrival are critical stock characteristics determining whether individual factors in leading factor models are influenced by sentiment or limited attention. Therefore, the ability of a factor model to explain cross-sectional stock returns depends on including two distinct types of factors: those that capture sentiment and those that tackle limited attention. Yet, many leading factor models include factors for sentiment but fall short in incorporating factors for limited attention. Our findings are important, guiding future research towards developing new factor models that more effectively capture both sentiment and limited attention compared to existing models. This includes uncovering powerful factors capable of simultaneously capturing sentiment and limited attention.
{"title":"Do factor models capture both sentiment and limited attention?","authors":"Xinrui Duan , Li Guo , Frank Weikai Li , Jun Tu","doi":"10.1016/j.jedc.2025.105203","DOIUrl":"10.1016/j.jedc.2025.105203","url":null,"abstract":"<div><div>We demonstrate that valuation uncertainty and information arrival are critical stock characteristics determining whether individual factors in leading factor models are influenced by sentiment or limited attention. Therefore, the ability of a factor model to explain cross-sectional stock returns depends on including two distinct types of factors: those that capture sentiment and those that tackle limited attention. Yet, many leading factor models include factors for sentiment but fall short in incorporating factors for limited attention. Our findings are important, guiding future research towards developing new factor models that more effectively capture both sentiment and limited attention compared to existing models. This includes uncovering powerful factors capable of simultaneously capturing sentiment and limited attention.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105203"},"PeriodicalIF":2.3,"publicationDate":"2025-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145569993","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-03DOI: 10.1016/j.jedc.2025.105205
Miroslav Gabrovski , Mario Rafael Silva
The Diamond-Mortensen-Pissarides model has been the primary workhorse for analyzing the dynamics of unemployment, vacancies, and market tightness over the business cycle. However, it predicts a near-perfect comovement between these variables and labor productivity, whereas the empirical correlation is only mild. We resolve this discrepancy by extending the model to incorporate sunk entry costs and finitely elastic vacancy creation, and by carefully distinguishing between business opportunity destruction and match separation as distinct sources of job loss. These features render vacancies a partially predetermined, positively valued stock variable. If the destruction rate is low, then most vacancies are inherited from the past and reflect historical rather than current productivity, breaking the tight unemployment-productivity link, while preserving strong correlations among labor market variables. We show that, when calibrated to information on job turnover and recall rates, the model reproduces the empirical contemporaneous and dynamic correlations between labor market variables and productivity while preserving the strong correlation between unemployment, vacancies, and the market tightness observed in the data.
{"title":"Unemployment and labor productivity comovement: the role of firm exit","authors":"Miroslav Gabrovski , Mario Rafael Silva","doi":"10.1016/j.jedc.2025.105205","DOIUrl":"10.1016/j.jedc.2025.105205","url":null,"abstract":"<div><div>The Diamond-Mortensen-Pissarides model has been the primary workhorse for analyzing the dynamics of unemployment, vacancies, and market tightness over the business cycle. However, it predicts a near-perfect comovement between these variables and labor productivity, whereas the empirical correlation is only mild. We resolve this discrepancy by extending the model to incorporate sunk entry costs and finitely elastic vacancy creation, and by carefully distinguishing between business opportunity destruction and match separation as distinct sources of job loss. These features render vacancies a partially predetermined, positively valued stock variable. If the destruction rate is low, then most vacancies are inherited from the past and reflect historical rather than current productivity, breaking the tight unemployment-productivity link, while preserving strong correlations among labor market variables. We show that, when calibrated to information on job turnover and recall rates, the model reproduces the empirical contemporaneous and dynamic correlations between labor market variables and productivity while preserving the strong correlation between unemployment, vacancies, and the market tightness observed in the data.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105205"},"PeriodicalIF":2.3,"publicationDate":"2025-11-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145521080","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jedc.2025.105199
Junhong Yu , Xinfeng Ruan , Zheqi Fan
Motivated by the widespread use of implied volatility in the Black-Scholes-Merton (BSM) model, we shift the concept to implied jumps using the Merton jump-diffusion (MJD) model, aiming to extract jump-related information in an analogous manner. Such a novel attempt introduces challenges in the estimation process, and thus, we propose a hybrid estimation procedure that incorporates a pre-search step to identify reliable initial values for the model parameters, thereby enhancing estimation accuracy. Using the daily cross-section of option prices, we construct two new indices: the Implied Jump Expectation Index (JIX) and the Jump Volatility Index (JVIX) to represent implied jump. Our empirical results indicate the implied jump combined with the implied diffusive risk under the MJD model significantly provides incremental predictive power for shortly future realized volatility compared with VIX9D and the historical components of HAR models. Also, we document that JIX has significantly predictive power for the next-day market return even under the market extreme events or high economic uncertainty.
{"title":"Merton (1976) implied jump","authors":"Junhong Yu , Xinfeng Ruan , Zheqi Fan","doi":"10.1016/j.jedc.2025.105199","DOIUrl":"10.1016/j.jedc.2025.105199","url":null,"abstract":"<div><div>Motivated by the widespread use of implied volatility in the Black-Scholes-Merton (BSM) model, we shift the concept to implied jumps using the Merton jump-diffusion (MJD) model, aiming to extract jump-related information in an analogous manner. Such a novel attempt introduces challenges in the estimation process, and thus, we propose a hybrid estimation procedure that incorporates a pre-search step to identify reliable initial values for the model parameters, thereby enhancing estimation accuracy. Using the daily cross-section of option prices, we construct two new indices: the Implied Jump Expectation Index (JIX) and the Jump Volatility Index (JVIX) to represent implied jump. Our empirical results indicate the implied jump combined with the implied diffusive risk under the MJD model significantly provides incremental predictive power for shortly future realized volatility compared with VIX9D and the historical components of HAR models. Also, we document that JIX has significantly predictive power for the next-day market return even under the market extreme events or high economic uncertainty.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105199"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145417536","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jedc.2025.105201
Giovanni Barci
I study the dynamic causal relationship between monetary policy and macroeconomic downside risk, focusing on structural asymmetries in recessions and expansions. I find that a monetary easing during economic slowdowns reduces downside risk by about twice as much as a monetary tightening during booms increases it. If this asymmetry is not properly accounted for, it could lead to an overly cautious behaviour by policymakers when tightening during booms; the conclusion also holds when considering monetary contractions occurring during highly-leveraged expansions. Results align with theoretical models that include a financial accelerator mechanism. I obtain evidence by building downside risk indicators as linear combinations of relevant quantiles of the conditional forecast density of output growth. Generalised state-dependent impulse response functions to structural shocks of quantiles linear combinations are recovered using a novel econometric framework that mixes structural VAR and quantile regressions, both adapted to accommodate smooth-transition parameters.
{"title":"The effects of monetary policy on macroeconomic downside risk: state-dependence matters","authors":"Giovanni Barci","doi":"10.1016/j.jedc.2025.105201","DOIUrl":"10.1016/j.jedc.2025.105201","url":null,"abstract":"<div><div>I study the dynamic causal relationship between monetary policy and macroeconomic downside risk, focusing on structural asymmetries in recessions and expansions. I find that a monetary easing during economic slowdowns reduces downside risk by about twice as much as a monetary tightening during booms increases it. If this asymmetry is not properly accounted for, it could lead to an overly cautious behaviour by policymakers when tightening during booms; the conclusion also holds when considering monetary contractions occurring during highly-leveraged expansions. Results align with theoretical models that include a financial accelerator mechanism. I obtain evidence by building downside risk indicators as linear combinations of relevant quantiles of the conditional forecast density of output growth. Generalised state-dependent impulse response functions to structural shocks of quantiles linear combinations are recovered using a novel econometric framework that mixes structural VAR and quantile regressions, both adapted to accommodate smooth-transition parameters.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105201"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145417534","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jedc.2025.105198
Santiago Forte
This study introduces a nonparametric approach to pricing credit default swaps (CDSs) and other single-name credit-risky securities. This method is notable for its simplicity, estimation speed, and flexibility. That is, it relies exclusively on closed-form solutions, which provide instantaneous results, and allows the user to reproduce any term structure of CDS spreads. I empirically assess its pricing performance by comparing it with an otherwise equivalent semiparametric (piecewise constant default probability) model that requires a series of root-search algorithms and represents the current market convention for marking-to-market CDS contracts. This analysis demonstrates that the new method also implies a reduction in mean percentage absolute pricing errors.
{"title":"A simple nonparametric approach to pricing credit default swaps","authors":"Santiago Forte","doi":"10.1016/j.jedc.2025.105198","DOIUrl":"10.1016/j.jedc.2025.105198","url":null,"abstract":"<div><div>This study introduces a nonparametric approach to pricing credit default swaps (CDSs) and other single-name credit-risky securities. This method is notable for its simplicity, estimation speed, and flexibility. That is, it relies exclusively on closed-form solutions, which provide instantaneous results, and allows the user to reproduce any term structure of CDS spreads. I empirically assess its pricing performance by comparing it with an otherwise equivalent semiparametric (piecewise constant default probability) model that requires a series of root-search algorithms and represents the current market convention for marking-to-market CDS contracts. This analysis demonstrates that the new method also implies a reduction in mean percentage absolute pricing errors.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105198"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145466327","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.jedc.2025.105200
Volker Hahn, Annika Schürle
We develop an overlapping-generations model with sticky wages and prices to study the socially optimal inflation rate in the long term. While sticky prices and firms’ productivity growth would yield a positive optimal inflation rate, we show that sticky wages, in combination with empirically plausible changes in productivity over workers’ lives, make moderate deflation optimal. We also study intergenerational conflicts and show that younger voters gain from lower inflation, whereas older voters prefer higher inflation.
{"title":"How does inflation affect different age groups?","authors":"Volker Hahn, Annika Schürle","doi":"10.1016/j.jedc.2025.105200","DOIUrl":"10.1016/j.jedc.2025.105200","url":null,"abstract":"<div><div>We develop an overlapping-generations model with sticky wages and prices to study the socially optimal inflation rate in the long term. While sticky prices and firms’ productivity growth would yield a positive optimal inflation rate, we show that sticky wages, in combination with empirically plausible changes in productivity over workers’ lives, make moderate deflation optimal. We also study intergenerational conflicts and show that younger voters gain from lower inflation, whereas older voters prefer higher inflation.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105200"},"PeriodicalIF":2.3,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145417535","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-10-30DOI: 10.1016/j.jedc.2025.105204
Toyoichiro Shirota
This study explores the mechanism behind the persistent effects of monetary policy shocks, resolving a discrepancy between an assumption in typical macroeconomic models and micro evidence. While standard macro models often rely on a large demand kink (a micro real rigidity) to generate persistent real effects of monetary policy shocks, micro-empirical studies find this kink to be modest. I show that this discrepancy can be resolved by focusing on a previously underexplored interaction: the effects of this modest, empirically consistent micro real rigidity are amplified when combined with the macro real rigidities inherent in production linkages. A stylized production-chain model first clarifies the mechanism, showing how upstream micro rigidities are transformed into downstream macro rigidities. A large-scale production-network model, disciplined by empirical data, then demonstrates that this combined mechanism is quantitatively important for macroeconomic persistence.
{"title":"Demand-side real rigidities revisited","authors":"Toyoichiro Shirota","doi":"10.1016/j.jedc.2025.105204","DOIUrl":"10.1016/j.jedc.2025.105204","url":null,"abstract":"<div><div>This study explores the mechanism behind the persistent effects of monetary policy shocks, resolving a discrepancy between an assumption in typical macroeconomic models and micro evidence. While standard macro models often rely on a large demand kink (a micro real rigidity) to generate persistent real effects of monetary policy shocks, micro-empirical studies find this kink to be modest. I show that this discrepancy can be resolved by focusing on a previously underexplored interaction: the effects of this modest, empirically consistent micro real rigidity are amplified when combined with the macro real rigidities inherent in production linkages. A stylized production-chain model first clarifies the mechanism, showing how upstream micro rigidities are transformed into downstream macro rigidities. A large-scale production-network model, disciplined by empirical data, then demonstrates that this combined mechanism is quantitatively important for macroeconomic persistence.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105204"},"PeriodicalIF":2.3,"publicationDate":"2025-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145448682","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-10-09DOI: 10.1016/j.jedc.2025.105197
Kwok Ping Tsang , Zichao Yang
Using FOMC transcripts and customized deep learning models, we quantify “hidden dissent”, or disagreement in the FOMC that is unobserved in formal votes. We find hidden dissent to be prevalent and systematically driven by macroeconomic conditions like inflation and unemployment. It strongly correlates with divergent member projections (SEP) and measures of policy sub-optimality, reflecting heterogeneity among members in policy preferences. Furthermore, we show that the financial markets respond to the hidden dissent implied in FOMC minutes.
{"title":"Agree to disagree: Measuring hidden dissent in FOMC meetings","authors":"Kwok Ping Tsang , Zichao Yang","doi":"10.1016/j.jedc.2025.105197","DOIUrl":"10.1016/j.jedc.2025.105197","url":null,"abstract":"<div><div>Using FOMC transcripts and customized deep learning models, we quantify “hidden dissent”, or disagreement in the FOMC that is unobserved in formal votes. We find hidden dissent to be prevalent and systematically driven by macroeconomic conditions like inflation and unemployment. It strongly correlates with divergent member projections (SEP) and measures of policy sub-optimality, reflecting heterogeneity among members in policy preferences. Furthermore, we show that the financial markets respond to the hidden dissent implied in FOMC minutes.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105197"},"PeriodicalIF":2.3,"publicationDate":"2025-10-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145268731","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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