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A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets
Ravi Bansal,Ivan Shaliastovich +1 more
459
TL;DR: In this article, the authors develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation, which simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets.
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Abstract: We show that bond risk-premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these two uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets.
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Citations
Exchange Rate Disconnect Revisited
Ryan Chahrour,Vito Cormun +1 more
TL;DR: This article found that variation in expected U.S. productivity explains more than half of G6 exchange rate fluctuations vis-a-vis the USD and that these disturbances account for many unconditional exchange rate patterns, including predictable excess returns, low Backus-Smith correlations, and excess volatility.
1
Inflation, Risk, and Equilibrium Asset Returns
Claude Bergeron
- 01 Jan 2014
TL;DR: In this paper, the authors examined the theoretical effect of inflation and risk on asset returns and showed that the equilibrium expected rate of return on risky asset can be expressed by a linear combination of its standard beta and inflation beta.
1
Equilibrium Implications of Interest Rate Smoothing
Diogo Duarte,Rodolfo Prieto +1 more
TL;DR: In this paper, the authors introduce a macro-finance model in which monetary authorities adjust the money supply by targeting not only output and inflation but also the slope of the yield curve, and study the impact of McCallum-type rules on capital growth, the volatility of interest rates, the spread between long and short-term rates, persistence of monetary shocks and equity volatility.
1
Common Risks in the Eurozone
TL;DR: In this paper, the authors construct a single consistent jump diffusion model with stochastic volatility which incorporates a common Eurozone shock factor to value currency, interest and sovereign debt products in European financial markets.
1
Beta inversion effect of COVID-19 pandemic using capital asset pricing model
Mohammad Al-Dwiry,Weaam Amira +1 more
TL;DR: This paper analyzed the effect of the beta inversion on COVID-19 by applying the capital asset pricing model and difference-in-differences (DiD) model in the US covering the five-year period from April 26, 2017, to April 22, 2022.
1
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Ravi Bansal,Amir Yaron +1 more
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