Journal ArticleDOI
Back to the Real Economy: The Effects of Risk Mispricing on the Term Premium and Bank Lending
Julieta Yung,Kristina Bluwstein +1 more
TLDR
In this paper , the authors construct a DSGE model with heterogeneous banks, asset pricing rules that generate a time-varying term premium, and introduce bond risk mispricing shocks to study their effect on the real economy.Abstract:
Bond markets can plummet or rally on the back of sentiment-driven reactions which are unrelated to fundamentals. Therefore, changes in bond prices can not only be interpreted as re ecting risk but also mispricing of long-term assets. These perceived risks can often feed back into the economy by a ecting the supply of credit. We construct a DSGE model with heterogeneous banks, asset pricing rules that generate a time-varying term premium, and introduce bond risk mispricing shocks to study their e ects on the real economy. A risk mispricing shock, in which agents overprice perceived risk, increases term premia and lowers output by reducing the availability of credit, as banks rebalance portfolios in favor of longer-term bonds. However, when investors underprice risk, a compressed term premium leads to a `bad' credit boom that results in a more severe recession once the snapbackread more
References
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Journal ArticleDOI
Time to build and aggregate fluctuations
TL;DR: In this article, a general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period, with the assumption that more than one time period is required for the construction of new productive capital and the non-time-separable utility function that admits greater intertemporal substitution of leisure.
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Measuring Economic Policy Uncertainty
TL;DR: The authors developed a new index of economic policy uncertainty based on newspaper coverage frequency and found that policy uncertainty spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute and other major battles over fiscal policy.
Journal ArticleDOI
Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
Larry G. Epstein,Stanley E. Zin +1 more
TL;DR: In this paper, a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries is developed, which allows risk attitudes to be disentangled from the degree of inter-temporal substitutability, leading to a model of asset returns in which appropriate versions of both the atemporal CAPM and the inter-time consumption-CAPM are nested as special cases.
Posted Content
By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
TL;DR: In this paper, a consumption-based model is proposed to explain a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-term horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.
Posted Content
Inside the Black Box: The Credit Channel of Monetary Policy Transmission
TL;DR: The credit channel theory of monetary policy transmission holds that informational frictions in credit markets worsen during tight money periods and the resulting increase in the external finance premium enhances the effects of monetary policies on the real economy as discussed by the authors.