Collateral Value and Forbearance Lending

We investigate the foreclosure policy of collateral-based loans in which the endogenous collateral value plays a crucial role. If creditors are able to commit, then the equilibrium arrangement is more likely to feature forebearance lending by specifying a lower level of liquidation (or roll over all of the loans) relative to the expost efficiency criterion for each realization of the interim signal. The key is that collateral value may drop too low when banks call in loans by auctioning off borrowers¿ collateral and this makes clearing up non-performing loans less attractive. We attribute the banks¿ leniency as we have observed in Japan during the 1990s to an equilibrium arrangement where banks can commit due to either relationship banking or an implicit lenderborrower contract, such as the arrangement under Japan¿s main-bank system.Collateral value, forbearance lending, government guarantee.

In the Shadow of the United States: The International Transmission Effect of Asset Returns

We examine how the fluctuations in financial and housing markets in U.S. affect the asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best predictor.currency board, fixed nominal exchange rate, international transmission mechanism, hierarchical Markov regime-switching model, vector autoregressive model

Monetary Policy, Term Structure and Asset Return: Comparing REIT, Housing and Stock

This paper confirms that a regime-switching model out-performs a linear VAR model in terms of understanding the system dynamics of asset returns. Impulse responses of REIT returns to either the federal funds rate or the interest rate spread are much larger initially but less persistent. Furthermore, the term structure acts as an amplifier of the impulse response for REIT return, a stabilizer for the housing counterpart under some regime, and, perhaps surprisingly, almost no role for the stock return. In contrast, GDP growth has very marginal effect in the impulse response for all assets.monetary policy; yield curve; REITs; house prices; Markov Regime Switching

Structural Break or Asymmetry? An Empirical Study of the Stock Wealth Effect on Consumption

The purpose of this paper is to examine whether the stock wealth effect of consumption exhibits structural change(s) or behaves asymmetrically over business cycles. We first perform a general test of linearity for the behavior of aggregate consumption in response to changes in stock wealth based on Hamilton's (2001) approach. When a nonlinear relation is discovered, we move on to investigate the source(s) of this nonlinearity. We consider two types of nonlinearity: structural break and asymmetry. It is of interest to policy makers whether the sensitivity of consumption to changes in households' financial wealth shows a significant shift over time due to institutional and policy changes, and whether consumption is likely to decline more due to stock wealth shrinkage when the economy is in a downturn, as has been found in investmeconsumption, stock wealth, asymmetric effect, structural change

Losing Track of the Asset Markets : The Case of Housing and Stock

This paper revisits the relationships among macroeconomic variables and asset returns. Based on recent developments in econometrics, we categorize competing models of asset returns into different “Equivalence Predictive Power Classes” (EPPC). During the pre-crisis period (1975-2005), some models that emphasize imperfect capital markets outperform an AR(1) for the forecast of housing returns. After 2006, a model that includes both an external finance premium (EFP) and the TED spread “learns and adjusts” faster than competing models. Models that encompass GDP experience a significant decay in predictive power. We also demonstrate that a simulation-based approach is complementary to the EPPC methodology

A Study of Financial Cycles and the Macroeconomy in Taiwan

his paper studies the characteristics of financial cycles (credit and house prices) and their interactions with business cycles in Taiwan. We employ multivariate structural time series model (STSM) to estimate trend and cyclical components in real bank credit, real house prices, and real GDP. We find that financial cycles are roughly twice the length of the business cycles, and house price cycles lead both credit and business cycles. Nevertheless, the estimated length of business and financial cycles in Taiwan is much shorter than those in industrialized economies. We then use machine learning to evaluate the importance of a macroeconomic variable that predicts downturns of financial cycles, by conducting both in-sample fitting and out-of-sample forecasting. Those macro variables selected by machine learning reflects Taiwan's close linkage in trades and financial interdependence with other countries such as China and spillover effects from the Fed's monetary policy

In the Shadow of the United States: The International Transmission Effect of Asset Returns

We examine how the fluctuations in financial and housing markets in U.S. affect the asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best predictor

The Dynamics of Housing Returns in Singapore: How Important are the International Transmission Mechanisms?

This paper studies the dynamics of housing returns in Singapore. We first extract the movements of Singapore's economic aggregates that are free from foreign (U.S. and rest of the world) factors, and then examine the determinants of its housing returns. We find that both the domestic variables (such as GDP growth rate, volume of international trade, and exchange rate) and U.S. variables (such as the Federal Fund Rate and the External Finance Premium) are important during the boom regime. The bust regime is very different. Directions for future research are discussed