This paper solves explicitly a simple equilibrium model with liquidity risk. In our liquidityadjusted capital asset pricing model, a security s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return and liquidity. In addition, a persistent negative shock to a security s liquidity results in low contemporaneous returns and high predicted future returns. The model provides a unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels and provide evidence of flight to liquidity. r 2005 Elsevier B.V. All rights reserved.

Market Liquidity: Asset Pricing with Liquidity Risk

Handbook of the Economics of Finance

IDENTIFICATION AND INFERENCE FOR ECONOMETRIC MODELS ESSAYS IN HONOR OF THOMAS ROTHENBERG PDF Are you looking for Ebook identification and inference for econometric models essays in honor of thomas rothenberg PDF? You will be glad to know that right now identification and inference for econometric models essays in honor of thomas rothenberg PDF is available on our online library. With our online resources, you can find identification and inference for econometric models essays in honor of thomas rothenberg or just about any type of ebooks, for any type of product.

Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg

This chapter reviews and synthesizes our current understanding of the shocks that drive economic fluctuations. The chapter begins with an illustration of the problem of identifying macroeconomic shocks, followed by an overview of the many recent innovations for identifying shocks. It then reviews in detail three main types of shocks: monetary, fiscal, and technology. After surveying the literature, each section presents new estimates that compare and synthesize key parts of the literature. The penultimate section briefly summarizes a few additional shocks. The final section analyzes the extent to which the leading shock candidates can explain fluctuations in output and hours. It concludes that we are much closer to understanding the shocks that drive economic fluctuations than we were 20 years ago.

/pdf/macroeconomic-shocks-and-their-propagation-ajda5fs5br.pdf

Macroeconomic Shocks and Their Propagation

This paper investigates whether U.S. government spending multipliers differ according to two potentially important features of the economy: (1) the amount of slack and (2) whether interest rates are near the zero lower bound. We shed light on these questions by analyzing new quarterly historical U.S. data covering multiple large wars and deep recessions. We estimate a state-dependent model in which impulse responses and multipliers depend on the average dynamics of the economy in each state. We find no evidence that multipliers differ by the amount of slack in the economy. These results are robust to many alternative specifications. The results are less clear for the zero lower bound. For the entire sample, there is no evidence of elevated multipliers near the zero lower bound. When World War II is excluded, some point estimates suggest higher multipliers during the zero lower bound state, but they are not statistically different from the normal state. Our results imply that, contrary to recent conjecture, government spending multipliers were not necessarily higher than average during the Great Recession.

/pdf/government-spending-multipliers-in-good-times-and-in-bad-1lbocynsxy.pdf

Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical Data

We develop a test for weak instruments in linear instrumental variables regression that is robust to heteroscedasticity, autocorrelation, and clustering. Our test statistic is a scaled nonrobust first-stage F statistic. Instruments are considered weak when the two-stage least squares or the limited information maximum likelihood Nagar bias is large relative to a benchmark. We apply our procedures to the estimation of the elasticity of intertemporal substitution, where our test cannot reject the null of weak instruments in a larger number of countries than the test proposed by Stock and Yogo in 2005. Supplementary materials for this article are available online.

/pdf/a-robust-test-for-weak-instruments-tuodpfa280.pdf

A Robust Test for Weak Instruments

Our new model of consumption-based habit generates time-varying risk premia on bonds and stocks from log-linear, homoskedastic macroeconomic dynamics. Consumers’ first-order condition for the real ...

/pdf/macroeconomic-drivers-of-bond-and-equity-risks-3bbnfh53gk.pdf

Macroeconomic Drivers of Bond and Equity Risks

This paper decomposes inflation-indexed and nominal government bond excess return predictability into liquidity, real interest rate risk and inflation risk. We estimate a systematic liquidity premium in Treasury Inflation Protected Securities (TIPS) yields relative to nominal yields. The liquidity premium is around 30 bps during normal times but larger during the early years of TIPS and during the financial crisis 2008-2009. We find that time-varying liquidity premia in TIPS and time-varying inflation risk premia in nominal bonds generate return predictability. We find no evidence that shocks to relative issuance generate bond return predictability in the US or UK. Since their first issuance in 1997, inflation-indexed bonds in the U.S. have gained wide acceptance among investors and they now constitute a significant fraction of the stock of U.S. Treasury debt. Yet many academics and Treasury market pundits argue that these bonds, known as Treasury Inflation Protected Securities (TIPS), have a smaller and less liquid market than their nominal counterparts, U.S. Treasury notes and bonds.2 This paper conducts an empirical investigation of the sources and magnitude of illiquidity in the TIPS market. Conditional on a measure of the liquidity discount on TIPS relative to nominal Treasury bonds, it asks to what extent liquidity risk and to what extent time-varying inflation risk and time-varying real interest rate risk generate excess return predictability in government bonds. Understanding the liquidity differential between TIPS and Treasury bonds is important for several reasons. First, it is well-known that the Expectations Hypothesis of the term structure of interest rates does not hold for U.S. nominal government bonds (Campbell and Shiller 1991, Fama and Bliss 1987, Cochrane and Piazzesi 2005). Equivalently, excess returns on U.S. nominal government bonds are predictable. Explanations of return predictability in government bond returns emphasize either a time-varying real interest rate risk premium, or a time-varying inflation risk premium, or a combination of those two (Wachter 2006, Campbell, Sunderam, and Viceira 2010). Pflueger and Viceira (2011) have highlighted that inflation-indexed bonds can be very helpful in disentangling inflation risk and real interest rate risk as the fundamental sources of government bond return predictability. But such an exercise requires identifying price and return differentials between the two bond markets 2For evidence of relatively lower liquidity in TIPS see D’Amico, Kim, and Wei (2008), Campbell, Shiller, and Viceira (2009), Fleckenstein, Longstaff, and Lustig (2010), Fleming and Krishnan (2009), Dudley, Roush, and Steinberg Ezer (2009), Gurkaynak, Sack, and Wright (2010), and Haubrich, Pennacchi, and Ritchken (2011).

https://www.treasury.gov/about/organizational-structure/offices/RoundTable/2011%20session%201%20viceira_TIPS%20liquidity%20premium%20PAPER.pdf

An Empirical Decomposition of Risk and Liquidity in Nominal and Inflation-Indexed Government Bonds

We introduce a routine, weakivtest, that implements the test for weak instruments by Montiel Olea and Pflueger (2013, Journal of Business and Economic Statistics 31: 358–369). weakivtest allows for errors that are not conditionally homoskedastic and serially uncorrelated. It extends the Stock and Yogo (2005, Testing for weak instruments in linear IV regression. In Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg, ed. D. W. K. Andrews and J. J. Stock, 80–108. [Cambridge University Press]) weak-instrument tests available in ivreg2 and in the ivregress postestimation command estat firststage. weakivtest tests the null hypothesis that instruments are weak or that the estimator’s Nagar (1959, Econometrica 27: 575–595) bias is large relative to a benchmark for both two-stage least-squares estimation and limited-information maximum likelihood with one endogenous regressor. The routine can accommodate Eicker–Huber–White heteroskedasticity robust estimates, Newey and West (1987, Econometrica 55: 703–708) heteroskedasticity- and autocorrelation-consistent estimates, and clustered variance estimates.

https://journals.sagepub.com/doi/pdf/10.1177/1536867X1501500113

A Robust Test for Weak Instruments in Stata

We introduce and describe a Stata routine weakivtest implementing the test for weak instruments of Montiel Olea and Pflueger (2013). weakivtest allows for errors that are not conditionally homoskedastic and serially uncorrelated. It extends the Stock and Yogo (2005) weak instrument tests available in ivreg2 and in the ivregress postestimation command estat firststage.weakivtest tests the null hypothesis that instruments are weak or that the estimator Nagar bias is large relative to a benchmark for both Two-Stage Least Squares (TSLS) and Limited Information Maximum Likelihood (LIML) with one single endogenous regressor. The routine can accommodate Eicker-Huber-White heteroskedasticity robust, Newey and West (1987) heteroskedasticity- and autocorrelation-consistent, and clustered variance estimates.

/pdf/a-robust-test-for-weak-instruments-in-stata-101jq5omsj.pdf

Carolin E. Pflueger

Papers

A Robust Test for Weak Instruments

Macroeconomic Drivers of Bond and Equity Risks

An Empirical Decomposition of Risk and Liquidity in Nominal and Inflation-Indexed Government Bonds

A Robust Test for Weak Instruments in Stata

A Robust Test for Weak Instruments in Stata