Why Should Naive Investors Avoid Stock Markets ?

The goal of this paper is to present an original and simple analysis aimed to understand why investing in capital markets can be very dangerous for “naive investors”. Stock markets are characterized by instability and subjected to external shocks. The probability of making money on them is often very low, especially in high volatility periods. We will show that, in absence of any “wise” asset allocation strategy and not being professional investors, a risk-free portfolio may perform better than a portfolio composed entirely by risky assets.Asset Allocation, Investment Strategies, Stock Markets, Risk-Free Securities

Understanding the Global Demand Collapse: Empirical Analysis and Optimal Policy Response

The goal of this project is to deeply investigate on the main causes of the global economic and financial crises and, based on a theoretical framework, to describe a suitable optimal monetary policy. According to our empirical analysis (basically based on US data) we will prove that a mix of extraordinary conditions have been crucial for the origin, develop and growth of the recent crisis. In finding what has been the main cause of such collapse we will prove that the credit crunch has played a crucial role, especially as a sort of contractionary monetary policy. We will also discuss the quantitative easing policies implemented by the Central Banks. Finally, we will seek to establish, by using an existing theoretical model and given extraordinary market conditions, in what central banks were wrong, and if so, where they made mistakes.Economic and Financial Crisis, Credit Crunch, Optimal Monetary Policy

International diffusion of shocks under different degrees of cross-country shocks comovement and economic integration

This paper studies the international transmission of shocks under different degrees of cross-country shocks comovement and economic integration via a two country-two good model with recursive preferences, frictionless markets, and correlated short- and long-run innovations. In contrast to recent studies, I show that the inclusion of cross-country balance sheet linkages and borrowing constraints does not represent a necessary condition to produce a strong international propagation mechanism. The novel risk sharing mechanism embodied in the model produces symmetric and synchronized movements in consumption and stock prices even if there are uncorrelated shocks and segmented goods markets. Nevertheless, model's results give rise to a "quantitative trade-off". On the one side, the presence of correlated long-run growth prospect is needed to produce a relatively low risk-free rate and a relatively high equity risk premium (consistent with asset pricing data), a no-close to unity cross-country consumption growth correlation (consistent with international consumption data), and the Backus-Smith correlation. On the other side, a negative short-run shock is key to produce a large and synchronized drop in real and financial flows (consistently with the properties of the 2008-2009 global demand collapse)

International diffusion of shocks under different degrees of cross-country shocks comovement and economic integration

This paper studies the international transmission of shocks under different degrees of cross-country shocks comovement and economic integration via a two country-two good model with recursive preferences, frictionless markets, and correlated short- and long-run innovations. In contrast to recent studies, I show that the inclusion of cross-country balance sheet linkages and borrowing constraints does not represent a necessary condition to produce a strong international propagation mechanism. The novel risk sharing mechanism embodied in the model produces symmetric and synchronized movements in consumption and stock prices even if there are uncorrelated shocks and segmented goods markets. Nevertheless, model's results give rise to a "quantitative trade-off". On the one side, the presence of correlated long-run growth prospect is needed to produce a relatively low risk-free rate and a relatively high equity risk premium (consistent with asset pricing data), a no-close to unity cross-country consumption growth correlation (consistent with international consumption data), and the Backus-Smith correlation. On the other side, a negative short-run shock is key to produce a large and synchronized drop in real and financial flows (consistently with the properties of the 2008-2009 global demand collapse).This paper studies the international transmission of shocks under different degrees of cross-country shocks comovement and economic integration via a two country-two good model with recursive preferences, frictionless markets, and correlated short- and long-run innovations. In contrast to recent studies, I show that the inclusion of cross-country balance sheet linkages and borrowing constraints does not represent a necessary condition to produce a strong international propagation mechanism. The novel risk sharing mechanism embodied in the model produces symmetric and synchronized movements in consumption and stock prices even if there are uncorrelated shocks and segmented goods markets. Nevertheless, model's results give rise to a "quantitative trade-off". On the one side, the presence of correlated long-run growth prospect is needed to produce a relatively low risk-free rate and a relatively high equity risk premium (consistent with asset pricing data), a no-close to unity cross-country consumption growth correlation (consistent with international consumption data), and the Backus-Smith correlation. On the other side, a negative short-run shock is key to produce a large and synchronized drop in real and financial flows (consistently with the properties of the 2008-2009 global demand collapse).LUISS PhD Thesi

Uncertainty shocks and policymakers' behavior: evidence from the subprime crisis era

Purpose - The purpose of this paper is to examine the effects of the 2007-2009 uncertainty shocks on policymakers' behavior.Design/methodology/approach - Uncertainty shocks in the US credit, financial and production markets are represented by extraordinary events. As in Bloom (2009), these events are associated with significant economic and political shocks (e.g. Lehman Brothers' collapse). Credit markets uncertainty shocks, which played a crucial role in the aftermath of the house prices collapse in the USA, are first analyzed in a bivariate VAR context, and then, embodied in a simple theoretical framework.Findings - The empirical evidence suggests that the US credit, financial and production markets have been affected by a relative large number of uncertainty shocks (i.e. rare events). In a Brainard's (1967) uncertainty scenario, it is shown that a bizarre money-liquidity relationship exacerbates the "policymakers' cautiousness-aggressiveness trade-off." In addition, the model suggests that a "double" dose of policy, in presence of a global credit crunch, might be useless.Originality/value - This paper improves the existing literature in two main directions. First, it provides novel empirical evidence on the unusual dynamics of the US credit market and its effects on the real economic activity during the crisis. Second, in a very simple theoretical framework accounting for parameter uncertainty, it addresses whether a bizarre money-credit relationship affects policymakers' behavior (i.e. cautiousness vs aggressiveness)

Using past epidemics to estimate the macroeconomic implications of COVID-19: A bad idea!

This work is intended to show that past epidemic scenarios are not suitable to estimate the macroeconomic impact of the new 2019 coronavirus. Using five centuries of macroeconomic data for England and a unique dataset on epidemics and other significant events (i.e., wars and natural disasters), we show that the macroeconomic effect of epidemics reflects the socio-economic features characterizing different eras. A mapping between past epidemic scenarios and the COVID-19-induced environment can thus lead to misleading outcomes. We believe our evidence to be of general interest and key for policymakers forced to implement rapid and effective policies

Global risks, the macroeconomy, and asset prices

We propose a novel index of global risks awareness (GRAI) based on the most concerning risks-classified in five categories (economic, environmental, geopolitical, societal, and technological)-reported by the World Economic Forum (WEF) according to the potential impact and likelihood occurrence. The degree of public concern toward these risks is captured by Google search volumes on topics having the same or similar wording of that one of the WEF Global Risk Report. The dynamics of our GRAI exhibits several spillover episodes and indicates that concerns on the five different categories of global risks are-on average-highly interconnected. We further examine the interconnection between global risks perceptions and the macroeconomy and find that concerns on economic-, geopolitical-, and societal-related risks are net shock transmitters, whereas the macroeconomic variables are largely net receivers. Finally, we perform standard cross-sectional asset pricing tests and provide evidence that rising interconnection among global risks awareness commands a positive and statistically significant risk premium