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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.
Journal ArticleDOI
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
Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result
TL;DR: For homothetic time and state separable preferences, the coefficient of relative risk aversion (CRRA) is equal to the reciprocal of the elasticity of intertemporal substitution (EIS) as discussed by the authors.
Journal ArticleDOI
A Macro-Finance Model of the Term Structure, Monetary Policy and the Economy
Glenn D. Rudebusch,Tao Wu,Tao Wu +2 more
TL;DR: In this paper, a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure of interest rates with standard macroeconomic aggregate relationships for output and inflation is developed and estimates.
Journal ArticleDOI
No-arbitrage macroeconomic determinants of the yield curve
Ruslan Bikbov,Mikhail Chernov +1 more
TL;DR: This article proposed an alternative measure that is based on levels of macro variables as opposed to shocks, which accounts for the correlation between the macro and latent factors via projection of the latter onto the former.
Journal ArticleDOI
Equilibrium Yield Curves [with Comments and Discussion]
TL;DR: In this article, the role of inflation as a leading business cycle indicator affects the pricing of nominal bonds and the level of nominal interest rates and term spreads are high in times when inflation news is harder to interpret.
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