Does Inflation Adjust Faster to Aggregate Technology Shocks than to Monetary Policy Shocks?

This paper studies U.S. inflation adjustment speed to aggregate technology shocks and to monetary policy shocks in a medium size Bayesian vector autoregression model. According to the model estimated on the 1959–2007 sample, inflation adjusts much faster to aggregate technology shocks than to monetary policy shocks. These results are robust to different identification assumptions and measures of aggregate prices. However, by separately estimating the model over the pre‐ and post‐1980 periods, this paper further shows that inflation adjusts much faster to technology shocks than to monetary policy shocks in the post‐1980 period, but not in the pre‐1980 period.     

Does bank capital affect lending behavior?

This paper investigates the existence of cross-sectional differences in the response of lending to monetary policy and GDP shocks owing to differences in bank capitalization. It adds to the literature by using the excess capital-to-asset ratio, which can better control the riskiness of banks' portfolios, and by disentangling the effects of the “bank lending channel” from those of the “bank capital channel.” The results, based on a sample of Italian banks, indicate that bank capital matters in the propagation of different types of shocks to lending, owing to the existence of regulatory capital constraints and imperfections in the market for bank fund-raising.     

Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data

This paper examines the main implications of recently increasing foreign bank penetration on bank lending as a channel of monetary policy transmission in emerging economies. Using a dynamic panel model of loan growth, we investigate the loan granting behavior of 1273 banks in the emerging economies of Asia, Latin America, and Central and Eastern Europe during the period from 1996 to 2003. Applying the pooled OLS, system GMM, and panel VAR estimators, we find consistent evidence that foreign banks are less responsive to monetary shocks in host countries, as they adjust their outstanding loan portfolios and interest rates to a lesser extent than domestic private banks, independent of their liquidity, capitalization, size, efficiency, and credit risk, and although there exists a bank lending channel in the emerging economies, it is declining in strength due to the increased level of foreign bank penetration. We also explore possible driving factors for the different responses of foreign and domestic banks to monetary policy shocks by investigating foreign banks’ different behavior during banking crises and tranquil periods, the effects of mode of entry to host countries, the home-country effects, and the response of foreign banks from OECD countries vs. all foreign countries including non-OECD countries. We suggest the access of foreign banks to funding from parent banks through internal capital markets as the most convincing explanation.     

Euro area banking and monetary policy shocks in the QE era

This paper assesses the effects of monetary policy shocks on the macroeconomy and the euro area banking sector after the global financial crisis. First, financial risk-return indicators of the banking sector based on a compound option-based structural credit risk model are embedded in a large macro-financial quarterly database covering the period 2008Q4–2019Q4. Second, a SFAVAR identifies and estimates the shocks’ responses relating them to the endogenous build-up of banks’ vulnerabilities which are consistent with the internally coherent structure of the credit risk model. By introducing structure in the understanding of banks’ asset-liability management behavior following monetary policy shocks, the research strategy contributes to disentangling results that are often mixed in the empirical literature. The study finds that unconventional monetary policy, in particular the Asset Purchase Program of the European Central Bank, seems to have been more successful than conventional monetary policy in raising output and inflation. The desired boost to bank lending has been muted and loan cyclicality has varied across countries and loan types. The performance of the banking sector following monetary policy shocks can be characterized by a drop in expected return on equity and assets, a relaxation of lending conditions and increased correlation between banks’ assets return and the market return, a mechanism pointing to enhanced risk-taking. While banks’ probabilities of default fall following monetary policy shocks, the price of risk increases. Banks’ net worth rises via higher market capitalization and implied assets value together with lower volatility, despite often incurring more debt. Risk-taking in the banking sector may pose a risk to financial stability, especially if its effects on banks’ vulnerability spread and increase systemic risk. The unintended endogenous build-up of macro-financial vulnerabilities may need to become part of monetary policymaking.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

Stock market reaction to fed funds rate surprises: State dependence and the financial crisis

This paper examines the response of US stock returns to Federal Funds rate (FFR) surprises between 1989 and 2012, focusing on the impact of the recent financial crisis. We find that outside the crisis period, stock prices increased as a response to unexpected FFR cuts. State dependence is identified with stocks exhibiting larger increases when interest rate easing coincided with recessions, bear markets, and tightening credit conditions. However, an important structural shift occurred during the crisis, changing the stocks’ response to FFR shocks and the nature of state dependence. Throughout the crisis period, stocks did not react positively to unexpected FFR cuts, which were interpreted as signals of worsening future economic conditions. This triggered a rebalancing of investment portfolios away from falling equities and towards safe-haven assets. Our results highlight the severity of the crisis and the ineffectiveness of conventional monetary policy close to the zero lower bound.     

Show me the money: The monetary policy risk premium

We create a parsimonious monetary policy exposure (MPE) index based on observable firm characteristics that previous studies link to how stocks react to monetary policy. Our index successfully captures stocks’ responses to both conventional and unconventional monetary policy. Stocks whose prices react more positively to expansionary monetary policy (high-MPE stocks) earn lower average returns. This result is consistent with the notion that high-MPE stocks provide a hedge against bad economic shocks, to which the Federal Reserve responds with expansionary monetary policy. A long-short trading strategy designed to exploit this effect achieves an annualized Sharpe Ratio of 0.77.     

Downside risk of international stock returns

This paper investigates the downside risk exposure of international stock returns in 14 major industrialized economies around the world. For the period 1975–2010, we find that differences in returns on value and growth portfolios can be rationalized by assets’ reagibilities to market’s downside shocks. International value stocks are particularly sensitive to market’s permanent downside shocks, while international growth stocks are particularly sensitive to market’s temporary downside shocks. In line with recent evidence for the US, risk associated with unfavorable changes in market’s cash-flow innovations carries a premium which is pervasive and statistically significant.     

Is U.S. economic policy uncertainty priced in China's A-shares market? Evidence from market,industry, and individual stocks

This paper is motivated by Bali, Brown, and Tang (2017) who find U.S. economic policy uncertainty (EPU) is priced in the cross-section of U.S. stock returns, and uses weekly data from March 2006 to April 2016 to study whether shocks in U.S. EPU also influence prices of China's A-shares from a market, industry, and individual stock perspective. Our methodology relies on an ARMA (1,1) model to extract shocks in the U.S. EPU series and a GARCH (1,1) model to examine how returns of China's A-shares respond to these shocks after controlling for business conditions proxied by term and credit spread in China. Generally, we find that shocks in U.S. EPU significantly and negatively explain returns of Chinese A-shares with a lag of one week. In addition, the market index containing small and growth stocks is more sensitive to shocks in U.S. EPU than the index containing big and value stocks. Furthermore, we find that firms in manufacturing, information technology, and media industries in China are more sensitive to shocks in U.S. EPU, while firms in agriculture and real estate industries respond less to shocks in U.S. EPU. Finally, China's A-shares which decline more in response to shocks in U.S. EPU have higher returns, smaller market capitalization, weaker operating profitability, higher asset growth, and better past year's cumulative returns. Overall, our findings show that investors in the Chinese A-shares market require a premium to hold stocks that are sensitive to shocks in U.S. economic policy uncertainty.     

Macroeconomic Factors and Microlevel Bank Behavior

We analyze the link between banks and the macroeconomy using a model that extends a macroeconomic VAR for the U.S. with a set of factors summarizing conditions in about 1,500 commercial banks. We investigate how macroeconomic shocks are transmitted to individual banks and obtain the following main findings. Backward‐looking risk of a representative bank declines, and bank lending increases following expansionary shocks. Forward‐looking risk increases following an expansionary monetary policy shock. There is, however, substantial heterogeneity in the transmission of macroeconomic shocks, which is due to bank size, capitalization, liquidity, risk, and the exposure to real estate and consumer loans.     

Monetary policy and stock valuation: structural VAR identification and size effects

This paper examines the relationship between the US monetary policy and stock valuation using a structural VAR framework that allows for the simultaneous interaction between the federal funds rate and stock market developments based on the assumption of long-run monetary neutrality. The results confirm a strong, negative and significant monetary policy tightening effect on real stock prices. Furthermore, we provide evidence consistent with a delayed response of small stocks to monetary policy shocks relative to large stocks.     

Long-run stock performance of German initial public offerings and seasoned equity issues

We estimate the long-run stock performance after initial public offerings (IPOs) in the German capital market with a larger sample than prior studies and alternative benchmarks (the equally and the value-weighted market portfolio, size portfolios and matching stocks). In addition we present the first results on the long-run performance after seasoned equity issues (SEOs) in Germany. We conclude that size portfolios and matching stocks are better benchmarks than market portfolios. Using buy‐and-hold abnormal returns, we estimate that German stocks involved in an IPO or in a SEO, on average, underperform a portfolio consisting of stocks with a similar market capitalization by 6% in three years. This is considerably less than the underperformance after IPOs and SEOs in the US market reported by Loughran and Ritter (1995) and the underperformance after IPOs in Germany reported by Ljungqvist (1997). We also show that the apparent underperformance of the 1988–1990 IPO cohort discussed by Ljungqvist (1997) disappears when the abnormal performance estimate is based on size instead of market portfolios.     

Monetary policy and the cyclicality of risk

A dynamic general equilibrium model to study the relationship between monetary policy and movements in risk is developed. Variation in risk arises because households face fixed costs of transferring cash across financial accounts, implying that some households rebalance their portfolios infrequently. Accordingly, prices for risky assets respond sharply to aggregate shocks because only a relatively small subset of consumers are available to absorb these shocks. The model can account for both the mean and the volatility of returns on equity and the risk-free rate and generates a decline in the equity premium following an unanticipated easing of monetary policy.     

新常态下的居民投资理财研究——基于均值-方差模型下的大类资产配置

随着《关于规范金融机构资产管理业务的指导意见》的落地,我国资产管理行业的发展进入了新常态。我国居民的投资期限及投资工具将发生明显变化,包括:产品投资期限可能大幅延长;投资工具的主要形态将由传统的预期收益型理财产品转化为净值型产品。本文重点探讨在行业管理新规的新常态下,居民如何通过合理的大类资产配置实现有效投资。本文在均值-方差模型(Mean-Variance Model)的基础上,结合过去12年我国股票、债券、货币、黄金和国债五大类资产的投资数据,构建有效边界(Efficient Frontier),并在此基础上寻得夏普比率(Sharpe Ratio)最高的风险资产组合,进而绘制资本市场线(Capital Market Line)。通过对资本市场线及有效边界上若干组合的实证检验,本文发现:通过对大类资产的合理组合,可以为投资者带来长期稳定的投资回报;因流动性需求,投资者进行中短期投资时,低预期收益目标的投资组合表现更优。     

Short-term predictability of equity returns along two style dimensions

This study uses daily return data on 20 portfolios split along two dimensions, growth/value and market size, over the period of four decades and employs over 12,000 trading rules to investigate the short-term predictability of portfolio returns. It shows that, historically, portfolios of small stocks and value stocks have been more suitable for active trading strategies since returns on value portfolios exhibit more predictability than returns on growth portfolios and returns on portfolios of large stocks appear to be less predictive than returns on portfolios of small stocks. The predictive ability of trading rules is all but gone during the 2000s. Popularization of exchange-traded funds and the introduction of quote decimalization on the exchanges are the most likely reasons behind the lack of predictability.     

Identifying sources of macroeconomic and exchange rate fluctuations in the UK

Using quarterly data for the period 1985:1–2011:1, this paper uses a stylised, open economy, structural VAR model to identify the types of shocks responsible for macroeconomic fluctuations in the UK economy. The stylised model implies a set of short-run restrictions that allow for the identification of the shocks. The importance of each shock is determined by examining forecast-error variance decompositions, impulse response functions, and implied long-run (or permanent) effects. The results presented here imply that two shocks (called the technology and IS shocks) are relatively more important than other shocks. Monetary shocks do exhibit long-run monetary neutrality, but clearly monetary policy is not responsible for a meaningful share of output and employment fluctuations during the sample period. The estimated VAR and structural disturbances imply that the model accurately reflects the UK economy. There is little evidence of a price puzzle or an exchange rate puzzle (evidence against uncovered interest rate parity) in response to an unexpected monetary policy tightening.     

The Credit Channel at the Zero Lower Bound through the Lens of Equity Prices

This study examines the impact of unconventional monetary policies on the stock market when the short‐term nominal interest rate is stuck at the zero lower bound (ZLB). Unconventional monetary policies appear to have significant effects on stock prices and the effects differ across stocks. In agreement with existing credit channel theories, I find that firms subject to financial constraints react more strongly to unconventional monetary policy shocks [especially large‐scale asset purchases (LSAPs)] than do less constrained firms. These results imply that the credit channel is as important as the interest rate channel in the transmission of unconventional monetary policies at the ZLB.     

Stock liquidity and the Taylor rule

This paper examines how stock market liquidity and commonality in liquidity are impacted by real-time output gap and inflation, as these macroeconomic variables have been shown to be the main drivers of monetary policy according to the Taylor rule. We show that an increase in the output gap and inflation lowers stock liquidity and increases commonality in liquidity, since it points to a contractionary monetary policy and is likely to lead to a decline in the liquidity providers' funding liquidity. This effect is larger for stocks with low market capitalization and low liquidity.     

Do Invesrtors Capture the Value Premium?

Do investors realize higher returns by investing in value stocks instead of gorwth stocks? Examination of a sample of equity indexes, mutual funds, and large‐cap stocks reveals no evidence that value firms have earned higher returns than growth firms. The value premium reported in the literarture is historically strongest for small‐capitalization firms, yea average annual rerturns for small‐cap equity funds are 14.10% for value funds compared to 14.52% for growth funds. Despite dramatic increases in mutual fund expense ratios from 1965 to 2001, fee differences across style funds cannot explain the absence of a value premium.