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1 – 10 of 775Thomas Emmerling, Robert Jarrow and Yildiray Yildirim
Whereas much of previous literature focuses upon the impact on yields from the Federal Reserve’s large-scale asset purchases (LSAPs), the purpose of this paper is to study the…
Abstract
Purpose
Whereas much of previous literature focuses upon the impact on yields from the Federal Reserve’s large-scale asset purchases (LSAPs), the purpose of this paper is to study the changes to expected returns.
Design/methodology/approach
This empirical investigation offers support for changes to risk premia coincident with LSAPs.
Findings
For both equity and bonds, the authors find evidence for supply/demand LSAPs effects; the equity effects are consistent with a substitution effect from bonds to equities, whereas the bond effects appear to be an anomaly.
Originality/value
The findings represent new insight for weighing the efficacy and identifying the scope of LSAPs.
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I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to…
Abstract
I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.
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Kai Li and Chenjie Xu
This paper aims to study the asset pricing implications for stock and bond markets in a long-run risks (LRR) model with regime shifts. This general equilibrium framework can not…
Abstract
Purpose
This paper aims to study the asset pricing implications for stock and bond markets in a long-run risks (LRR) model with regime shifts. This general equilibrium framework can not only generate sign-switching stock-bond correlations and bond risk premium, but also quantitatively reproduce various other salient empirical features in stock and bond markets, including time-varying equity and bond return premia, regime shifts in real and nominal yield curves, the violation of the expectations hypothesis of bond returns.
Design/methodology/approach
The researchers study the joint determinants of stock and bond returns in a LRR model framework with regime shifts in consumption and inflation dynamics. In particular, the means, volatilities, and the correlation structure between consumption growth and inflation are regime-dependent.
Findings
The model shows that the term structure of interest rates and stock-bond correlation are intimately related to business cycles, while LRR play a more important role in accounting for high equity premium than do business cycle risks.
Originality/value
This paper studies the joint determinants of stock and bond returns in a Bansal and Yaron (2004) type of LRR framework. This rational expectations general equilibrium framework can (1) jointly match the dynamics of consumption, inflation and cash flow; (2) generate time-varying and sign-switching stock and bond correlations, as well as generating sign-switching bond risk premium; and (3) coherently explain another long list of salient empirical features in stock and bond markets, including time-varying equity and bond return premia, regime shifts in real and nominal yield curves, the violation of the expectations hypothesis of bond returns.
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Tien Foo Sing, Leiting Deng and Hong Wang
This paper aims to test the predictability of the three asset classes, namely direct property, bond and property stocks in Singapore.
Abstract
Purpose
This paper aims to test the predictability of the three asset classes, namely direct property, bond and property stocks in Singapore.
Design/methodology/approach
Using the generalized method of moment (GMM) estimation methodology, the authors first estimate the excess returns of assets on five instrumental variables and a constant term. Next the common risk factors are tested in three parts involving different portfolio of sample assets.
Findings
The empirical results shows that there are at most three common risk factors that can be used to predict the excess returns of six asset classes, that include four direct property assets, bonds and property stocks. The results also indicate that there are separate common risk premia that are priced in property stock and direct property markets, which indirectly reject the hypothesis that the two property markets are integrated.
Practical implications
The empirical results that reject the market integration between property and property stock markets imply that there are significant diversification benefits for holding both assets in investors' portfolios. The two property assets capture different risk premia in the markets.
Research limitations/implications
The GMM specifications that include five instrumental variables may not fully capture all risk information. Omission of other variables is, however, traded‐off against the parsimony of the model specification. More independent variables could be included in the future studies, and more asset classes could also be added to the tests.
Originality/value
The study provides alternative evidence to the test of market integration between property and property stocks in Singapore. It also verifies the earlier study in the USA that property and stock market effects could be separately priced by the market.
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Alejandra Olivares Rios, Gabriel Rodríguez and Miguel Ataurima Arellano
Following Ang and Piazzesi’s (2003) study, the authors use an affine term structure model to study the relevance of macroeconomic (domestic and foreign) factors for Peru’s…
Abstract
Purpose
Following Ang and Piazzesi’s (2003) study, the authors use an affine term structure model to study the relevance of macroeconomic (domestic and foreign) factors for Peru’s sovereign yield curve in the period from November 2005 to December 2015. The paper aims to discuss this issue.
Design/methodology/approach
Risk premia are modeled as time-varying and depend on both observable and unobservable factors; and the authors estimate a vector autoregressive model considering no-arbitrage assumptions.
Findings
The authors find evidence that macro factors help to improve the fit of the model and explain a substantial amount of variation in bond yields. However, their influence is very sensitive to the specification model. Variance decompositions show that macro factors explain a significant share of the movements at the short and middle segments of the yield curve (up to 50 percent), while unobservable factors are the main drivers for most of the movements at the long end of the yield curve (up to 80 percent). Furthermore, the authors find that international markets are relevant for the determination of the risk premium in the short term. Higher uncertainty in international markets increases bond yields, although this effect vanishes quickly. Finally, the authors find that no-arbitrage restrictions with the incorporation of macro factors improve forecasts.
Originality/value
To the authors’ knowledge this is the first application of this type of models using data from an emerging country such as Peru.
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Michael Chin, Ferre De Graeve, Thomai Filippeli and Konstantinos Theodoridis
Long-term interest rates of small open economies (SOE) correlate strongly with the USA long-term rate. Can central banks in those countries decouple from the United States? An…
Abstract
Long-term interest rates of small open economies (SOE) correlate strongly with the USA long-term rate. Can central banks in those countries decouple from the United States? An estimated Dynamic Stochastic General Equilibrium (DSGE) model for the UK (vis-á-vis the USA) establishes three structural empirical results: (1) Comovement arises due to nominal fluctuations, not through real rates or term premia; (2) the cause of comovement is the central bank of the SOE accommodating foreign inflation trends, rather than systematically curbing them; and (3) SOE may find themselves much more affected by changes in USA inflation trends than the United States itself. All three results are shown to be intuitive and backed by off-model evidence.
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Zhiwu Hong, Linlin Niu and Gengming Zeng
Using a discrete-time version of the arbitrage-free Nelson–Siegel (AFNS) term structure model, the authors examine how yield curves in the US and China react to exchange rate…
Abstract
Purpose
Using a discrete-time version of the arbitrage-free Nelson–Siegel (AFNS) term structure model, the authors examine how yield curves in the US and China react to exchange rate policy shocks as China introduces gradual reforms to make its exchange rate regime more flexible. The paper aims to discuss this issue.
Design/methodology/approach
The authors characterize the specification of the discrete-time AFNS model, prove the uniqueness of the solution for model identification, perform specification analysis on its canonical form and detail the MCMC estimation method with a fast and reliable prior extraction step.
Findings
Model decomposition reveals that in the US yield responses, changes in risk premia for medium- to long-term yields dominate changes in yield expectation for short- to medium-term yields, indicating that the portfolio rebalancing effect due to varying risk perception is stronger than the signaling effect due to policy rate expectation.
Practical implications
The results are helpful in diagnosing market sentiment and exchange rate risk pricing as China further internationalizes its currency.
Originality/value
The methodology can be easily extended to study yield curve responses to other scenarios of policy shocks or regime changes.
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Cay Oertel, Jonas Willwersch and Marcelo Cajias
The purpose of this study is to introduce a new perspective on determinants of cross-border investments in commercial real estate, namely, the relative attractiveness of a target…
Abstract
Purpose
The purpose of this study is to introduce a new perspective on determinants of cross-border investments in commercial real estate, namely, the relative attractiveness of a target market. So far, the literature has analyzed only absolute measures of investment attractiveness as determinants of cross-border investment flows.
Design/methodology/approach
The empirical study uses a classic ordinary least squares estimation for a European panel data set containing 28 cities in 18 countries, with quarterly observations from Q1/2008 to Q3/2018. After controlling for empirically proven explanatory covariates, the model is extended by the new relative measurement based on relative yields/cap rates and relative risk premia. Additionally, the study applies a generalized additive mixed model (GAMM) to investigate a potentially nonlinear relationship.
Findings
The study finds on average a ceteris paribus, statistically significant lagged influence of the proxy for relative attractiveness. Nonetheless, a differentiation is needed; relative risk premia are statistically significant, whereas relative yields are not. Moreover, the GAMM confirms a nonlinear relationship for relative risk premia and cross-border transaction volumes.
Practical implications
The results are of interest for both academia and market participants as a means of explaining cross-border capital flows. The existing knowledge on determinants is expanded by relative market attractiveness, as well as an awareness of nonlinear relationships. Both insights help to comprehend the underlying transaction dynamics in commercial real estate markets.
Originality/value
Whereas the existing body of literature focuses on absolute attractiveness to explain cross-border transaction activity, this study introduces relative attractiveness as an explanatory variable.
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Purpose – The purpose of this chapter is to assess the role of collateralizable wealth and systemic risk in explaining future asset returns.Methodology/approach – To test this…
Abstract
Purpose – The purpose of this chapter is to assess the role of collateralizable wealth and systemic risk in explaining future asset returns.
Methodology/approach – To test this hypothesis, the chapter uses the residuals of the trend relationship among housing wealth and labor income to predict both stock returns and government bond yields. Specifically, it shows that nonlinear deviations of housing wealth from its cointegrating relationship with labor income, hwy, forecast expected future returns.
Findings – Using data for a set of industrialized countries, the chapter finds that when the housing wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner and (ii) if, however, investors perceive the increase in government bond returns as signaling a future rise in taxes or a deterioration of public finances, then they interpret the fall in the housing wealth-to-income ratio as a fall in future bond premia. Finally, this work shows that the occurrence of crisis episodes amplifies the transmission of housing market shocks to financial markets.
Originality/value of chapter – These findings are novel. They also open new and challenging avenues for understanding the dynamics of the relationship between the housing sector, stock market and government bond developments, and the banking system.
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Stephanos Papadamou, Costas Siriopoulos and Nikolaos A. Kyriazis
This paper presents an integrated overview of the empirical literature on the impact of all forms of unconventional monetary policy on macroeconomic variables and on markets.
Abstract
Purpose
This paper presents an integrated overview of the empirical literature on the impact of all forms of unconventional monetary policy on macroeconomic variables and on markets.
Design/methodology/approach
This survey covers the findings concerning portfolio rebalancing, signaling, liquidity, bank lending and confidence channels.
Findings
The positive effect of QE announcements on stock and bond prices seems to be unified across studies. A contagion effect from US QE to other emerging markets is identified, while currency devaluation is present in most cases for the country that its central bank adopted such policies. Moreover, impacts of non-conventional practices on GDP, inflation and unemployment are examined. The studies presenting weak instead of strong positive effects on inflation are more, and these studies, also, present weak positive effects on GDP growth.
Originality/value
Based on the large body of research on non-conventional action taking, this is the first survey including effects of each country that adopted quantitative easing (QE) measures and that provides results from every methodology employed in order to estimate unconventional practices' impacts.
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