Working Papers

Confidence, Bond Risks, and Equity Returns,” July 2015  R&R at Journal of Financial Economics

Abstract: We show that investor confidence (size of ambiguity) about future consumption growth is driven by past consumption growth and inflation. The impact of inflation on confidence has moved considerably over time and switched on average from negative to positive in 1997. Motivated by this evidence, we develop and estimate a model in which the confidence process has discrete regime shifts, and find that the time-varying impacts of inflation on confidence enables the model to match the bond risks over different subperiods. The model can also account for stock and bond return predictability, correlation between price-dividend ratios and inflation, among others.

“Learning from Monetary Shocks and Asset Returns” (joint with Simon Gilchrist), October 2015

Abstract: In an otherwise standard New Keynesian model, we assume that Fed has more information about TFP growth than agent. Agent cannot distinguish a negative monetary shock from higher TFP growth rate when Fed sets interest rate following Taylor rule, and updates his belief using Kalman Filter. Following an expansionary monetary policy shock, agent expects a higher TFP growth rate which causes stock returns, nominal and real bond yields, output growth, labor and inflation go up simultaneously. The estimated model can match the empirical reactions of stock and bond markets to monetary shocks quantitative. Monetary shocks work like noise shocks and generate business cycle comovements among key macro variables.

“Confidence, Asset Returns, and Monetary Policy in a New Keynesian Model,” December 2014.

Abstract: The volatility of macroeconomic and financial variables has exhibited a high degree of time variation in the data, and the conditional volatility of inflation is positively correlated with future volatility of other macroeconomic and financial variables. Instead of assuming exogenous stochastic volatility, this paper proposes a novel model that generates these features endogenously in a simple New Keynesian framework. The model can generate upward sloping yield curves and positive correlation between inflation and dividend yields. I assume that agents are ambiguity averse, and that the amount of ambiguity is affected by the past performance of the central bank. If the central bank was unable to control inflation and output recently, the agent becomes more ambiguous about technology growth and the ambiguity process becomes more volatile, thus (a) output, consumption, dividend yields, and stock returns fall, (b) risk free rate rises, and (c) the volatility rises. The first two effects imply an positive premium for long term bond relative to short term bond. Time-varying volatility in confidence implies time-varying volatility in macroeconomic and financial variables.

“Ambiguity Yields, Bond Yields, and Dividend Yields,” October 2015

Work in Progress

“Portfolio Choice under Constant and Time Varying Ambiguity” 

“Central Bank Performance and Cross Country Stock Returns”