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A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets
Ravi Bansal,Ivan Shaliastovich +1 more
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TLDR
In this article, the authors develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation, which simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets.Abstract:
We show that bond risk-premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these two uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets.read more
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Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks
TL;DR: This article quantified how variation in real economic activity and ination in the U.S. Treasury market inuenced the market prices of level, slope, and curvature risks.
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Macroeconomics and the Term Structure
TL;DR: The authors provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance, and shows that many features of the configuration of interest rate are puzzling from the perspective of the expectations hypothesis.
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Crash-Neutral Currency Carry Trades
TL;DR: In this paper, the authors compute returns to crash-hedged portfolios and demonstrate that the high returns to carry trades are not due to peso problems, but due to violations of uncovered interest rate parity in G10 currencies.
Posted Content
Exchange Rates and Interest Parity
TL;DR: The authors surveys recent theoretical and empirical contributions on foreign exchange rate determination, and examines monetary models under uncovered interest parity and rational expectations and then considers deviations from UIP/rational expectations: foreign exchange risk premium, private information, near-rational expectations, and peso problems.
Journal ArticleDOI
Exchange Rates, Interest Rates, and the Risk Premium
TL;DR: The uncovered interest parity puzzle as mentioned in this paper concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits, and a separate puzzle is that high real interest rate country tends to have currencies that are stronger than can be accounted for by the path of expected real interest differentials under uncovering interest parity, which has apparently contradictory implications for the relationship of the foreign exchange risk premium and interest-rate differentials.
References
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Journal ArticleDOI
The Declining Equity Premium: What Role Does Macroeconomic Risk Play?
Martin Lettau,Martin Lettau,Martin Lettau,Jessica A. Wachter,Jessica A. Wachter,Sydney C. Ludvigson,Sydney C. Ludvigson +6 more
TL;DR: In this paper, a two-state regime switching model for the volatility and mean of consumption growth was used to calibrate a rational asset pricing model with regime switches in both the mean and standard deviation of consumption, and evidence of a shift to substantially lower consumption volatility at the beginning of the 1990s.
Journal ArticleDOI
Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium
TL;DR: In this paper, the authors show that time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds and that exchange rates are roughly random walks.
Posted Content
Interpretable Asset Markets
TL;DR: This article showed that measures of economic uncertainty (conditional volatility of consumption) predict and are predicted by valuation ratios at long horizons, and that asset valuations drop as economic uncertainty rises that is, financial markets dislike economic uncertainty.
Journal ArticleDOI
Uncovered Interest Parity Revisited
TL;DR: In this paper, UIP is tested on long-term government bond yields and several different proxies for the latter are constructed. In contrast to the typical finding, the results are rather favorable to UIP, in which the presence of coupon payments induces a measurement error between the observed data and true returns.
Journal ArticleDOI
Nonparametric estimation of structural models for high-frequency currency market data
TL;DR: Empirical modeling of high-frequency currency market data reveals substantial evidence for nonnormality, stochastic volatility, and other nonlinearities and develops a new method for estimation of structural economic models.
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