International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada

The U.S. Federal Reserve responded to the great recession by implementing quantitative easing, or large‐scale asset purchases, when its conventional policy rate reached the zero lower bound. We assess the international spillover effects of this quantitative easing program on the Canadian economy in a factor‐augmented vector autoregression (FAVAR) framework, by considering a counterfactual scenario in which the Federal Reserve's long‐term asset holdings do not rise in response to the recession. We find that U.S. quantitative easing boosted Canadian output, mainly through the financial channel.     

House Prices and Government Spending Shocks

We show that dynamic stochastic general equilibrium (DSGE) models with housing and collateralized borrowing predict a fall in house prices following positive government spending shocks. By contrast, we show that house prices in the United States rise persistently after identified positive government spending shocks. We clarify that the incorrect house price response is due to a general property of DSGE models—approximately constant shadow value of housing—and that modifying preferences and production structure cannot help in obtaining the correct house price response. Properly accounting for the empirical evidence on government spending shocks and house prices using a DSGE model therefore remains a significant challenge.     

Stock market reactions to the issuance of FAS 33 and its preceding exposure drafts*

Abstract. This study examines the stock market reactions to the following events: (1) the issuance of Financial Accounting Standards Board's (FASB) exposure draft in December 1978 requiring disclosure of price-level adjusted data, (2) the issuance of a second exposure draft in March 1979, and (3) the issuance of FAS 33 in September 1979. A sample of 119 test firms and 88 control firms is used. The statistical tests show that the results are sensitive to the choice of method used to assess information content. When cross-sectional dependency is taken into account, the hypothesis that FAS 33 and its preceding exposure drafts did not convey information to the market is rejected. Thus the issuance of a later statement that made compliance with FAS 33 optional may have been premature. Résumé. Les auteurs examinent les réactions du marché boursier aux événements suivants: 1) l'émission de l'exposé-sondage du Financial Accounting Standards Board (FASB) en décembre 1978 exigeant la présentation d'information indexée sur le niveau général des prix, 2) rémission d'un second exposé-sondage en mars 1979 et 3) l'émission par le FASB, en septembre 1979, de la Norme n^o 33. Les auteurs ont eu recours à un échantillon de 119 entreprises qu'ils ont soumises au test à un groupe contrôle de 88 entreprises. Les tests statistiques démontrent que les résultats sont sensibles à la méthode choisie pour évaluer le contenu informationnel. La prise en compte de l'effet interactif des facteurs les amène à rejeter l'hypothèse selon laquelle la Norme n^o 33 et les exposés-sondages qui l'ont précédée ne transmettaient pas d'information au marché. La décision subséquente du FASB de rendre facultative l'application de la Norme n^o 33 était peut-être prématurée.     

Financial Speculators' Underperformance: Learning, Self-Selection, and Endogenous Liquidity

We develop an equilibrium model of learning by rational traders to reconcile several empirical regularities: Cross sectionally, most individual speculators lose money; large speculators outperform small speculators; past performance positively affects subsequent trade intensity; most new traders lose money and cease speculation; and performance shows persistence. Learning from trading generates substantial endogenous liquidity, reducing bid–ask spreads and the impact of exogenous liquidity shocks on asset prices, but amplifying the effects of real shocks. Introducing slightly overconfident traders increases bid–ask spreads, hurting all traders. Finally, behavioral theories cannot reconcile all of these empirical regularities.