Disagreement about inflation and the yield curve

Este trabajo muestra cómo las discrepancias en torno a la inflación esperada abren una brecha entre las rentabilidades reales y nominales y elevan sus niveles y volatilidades. Se demuestra empíricamente que un incremento de estas discrepancias en una desviación estándar aumenta las rentabilidades reales y nominales y sus volatilidades, la inflación break-even y la prima de riesgo de inflación por lo menos en el 30 % de sus respectivas desviaciones estándar. Las discrepancias en torno a la inflación esperada están positivamente relacionadas con la volatilidad de sección cruzada del crecimiento del consumo y con la participación de los consumidores en los mercados de bonos, futuros sobre tipos de interés y swaps de inflación. La calibración del modelo a los datos de discrepancias en la inflación esperada, inflación y rentabilidades reproduce el impacto económicamente significativo de las discrepancias en torno a la inflación esperada sobre las curvas de rentabilidades reales y nominalesWe show theoretically that inflation disagreement drives a wedge between real and nominal yields and raises their levels and volatilities. We demonstrate empirically that an inflation disagreement increase of one standard deviation raises real and nominal yields and their volatilities, break-even inflation, and the inflation risk premium by at least 30% of their respective standard deviations. Infl ation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in bonds, interest rate futures, and inflation swaps. Calibrating the model to disagreement, inflation, and yield data reproduces the economically significant impact of inflation disagreement on real and nominal yield curve

Correlations

Correlations of equity securities have varied substantially over time and remain a source of continuing policy debate. This paper studies stock market correlations in an equilibrium model with heterogeneous risk aversion. In the model, preference heterogeneity causes countercyclical variations in the volatility of aggregate risk aversion. At times of high volatility of aggregate risk aversion, which is a common factor in returns, we see high correlations. The calibrated model matches average industry return correlations and changes in correlations from business cycle peaks to troughs, and replicates the cyclical dynamics of expected excess returns and standard deviations. A proxy for model-implied aggregate risk aversion jointly explains average industry correlations, expected excess returns, standard deviations and turnover volatility in the data. We fi nd supportive evidence for the model’s prediction that industries with low dividend-consumption correlation have low average return correlation but experience disproportionate increases in return correlations in recessionsLas correlaciones entre los títulos de renta variable han variado sustancialmente con el tiempo y siguen siendo una fuente de constante debate de política económica. Este artículo estudia las correlaciones bursátiles en un modelo de equilibrio con aversión al riesgo heterogénea. En el modelo, la existencia de preferencias heterogéneas causa variaciones contracíclicas en la volatilidad de la aversión al riesgo agregada. En episodios de elevada volatilidad de la aversión al riesgo agregada, que es un hecho común en los rendimientos, se observa una correlación muy alta. El modelo calibrado ajusta las correlaciones promedio de las rentabilidades de la industria y los cambios en las correlaciones entre los picos y valles del ciclo económico, al tiempo que replica la dinámica de los excesos de rentabilidad esperados y las desviaciones estándar a lo largo del ciclo. Una proxy para la aversión al riesgo agregada implícita del modelo explica conjuntamente las correlaciones medias de la industria, el exceso de los rendimientos esperados, las desviaciones estándar y la volatilidad de los rendimientos observadas en los datos. Finalmente, encontramos evidencia a favor de la predicción del modelo, según la cual las industrias con baja correlación entre dividendo y consumo tienen una baja correlación en las rentabilidades medias, pero experimentan subidas desproporcionadas en las correlaciones de las rentabilidades durante las recesione

Asset Prices and Portfolio Choice with Learning from Experience

We study asset prices and portfolio choice with overlapping generations, where the young disregard history to learn from own experience. Disregarding history implies less precise estimates of output growth, which in equilibrium leads the young to increase their investment in risky assets after positive returns, that is, they act as trend chasers. In equilibrium, the risk premium decreases after a positive shock and, therefore, trend chasing young agents lose wealth relative to old agents who behave as contrarians. Consistent with findings from survey data, the average belief about the risk premium in the economy relates negatively to future excess returns and is smoother than the true risk premium

Risk Premia and Volatilities in a Nonlinear Term Structure Model

We introduce a reduced-form term structure model with closed-form solutions for yields where the short rate and market prices of risk are nonlinear functions of Gaussian state variables. The nonlinear model with three factors matches the time-variation in expected excess returns and yield volatilities of US Treasury bonds from 1961 to 2014. Yields and their variances depend on only three factors, yet the model exhibits features consistent with Unspanned Risk Premia (URP) and Unspanned Stochastic Volatility (USV)

International Capital Market and Wealth Transfers

In times of global stress, stock prices fall, the US dollar (USD) appreciates, and the US suffers losses on its net foreign assets (NFA) position. We argue that this does not create a wealth transfer from the US to the rest of the world. The USD appreciation benefits US domestic assets, and the US wealth share actually increases. We generate these patterns within a model with deep habits in which a richer country is more risk-tolerant. The country's NFA position falls in times of stress, yet its wealth share rises. The model matches asset pricing moments and currency risk premia.Paper No 22-1

Disagreement about inflation and the yield curve

We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves

Sources of entropy in dynamic representative agent models

We propose two data-based performance measures for asset pricing models and apply them to models with recursive utility and habits. Excess returns on risky securities are reflected in the pricing kernel's dispersion and riskless bond yields are reflected in its dynamics. We measure dispersion with entropy and dynamics with horizon dependence, the difference between entropy over several periods and one. We compare their magnitudes to estimates derived from asset returns. This exercise reveals tension between a model's ability to generate one-period entropy, which should be large, and horizon dependence, which should be small