Research

The views expressed here do not reflect those of the Federal Reserve Board or Federal Reserve System.

Publications

Capital Share Risk in U.S. Asset Pricing (Appendix)

with Martin Lettau (Berkeley Hass) and Sydney C. Ludvigson (NYU)

NBER Working Paper No. 20744, Blog updates, Replication Files

Forthcoming in Journal of Finance

Abstract: A single macroeconomic factor based on growth in the capital share of aggregate income exhibits significant explanatory power for expected returns across a range of equity characteristic portfolios and non-equity asset classes, with risk price estimates that are of the same sign and similar in magnitude. Positive exposure to capital share risk earns a positive risk premium, commensurate with recent asset pricing models in which redistributive shocks shift the share of income between capital owners, who finance consumption primarily out of asset ownership, and workers, who finance consumption primarily out of wages and salaries.

New Working Papers

Housing Cycle and Exchange Rates 

with Shaojun Zhang (OSU Fisher)

Abstract: This paper documents that U.S. housing capital investment is a strong negative predictor of U.S. dollar changes and excess returns over the next six months to five years. Other advanced economies exhibit similar patterns. Moreover, positive housing supply shocks predict lower prices of housing services and nontradables relative to that of tradables, as well as higher output growth and macroeconomic volatility. An analytical model shows that these channels generate the exchange rate predictability under incomplete and complete markets, respectively. Cross-sectionally, currencies with higher loadings on the U.S. housing cycle carry higher average currency premia, compensating the U.S. investor for bearing the U.S. long-run consumption risk.

Uncertainty and Growth Disasters

with Boyan Jovanovic (NYU)

Abstract: This paper documents several stylized facts on the real effects of economic uncertainty. First, higher uncertainty leads to a more dispersed and negatively skewed distribution of output growth. Second, the response of economic growth to an increase in uncertainty is highly nonlinear and asymmetric. Third, higher asset volatility magnifies the negative impact of uncertainty on growth. We present and estimate an analytically tractable model in which rapid adoption of new technology may raise economic uncertainty which causes measured productivity to decline. The equilibrium growth distribution is negatively skewed and higher uncertainty leads to a thicker left tail.

Under Review/Revisions

Heterogeneous Intermediaries and Asset Prices  (Under Review)

Abstract: Canonical intermediary asset pricing models assume a representative intermediary with an SDF linear in its leverage. This paper proposes, derives and tests a heterogeneous intermediary stochastic discount factor (HI-SDF) that depends non-linearly on aggregate leverage as well as net worth shares of individual intermediaries. The estimated HI-SDF is found to exhibit substantial explanatory power for cross-sectional variation in expected returns across a wide range of test assets. In contrast to representative intermediary empirical models, the HI-SDF exhibits lower pricing errors and explains larger fractions of the cross-section of expected returns.

Competition and Implementation Cycles (Under Review)

Abstract: This paper studies how innovating firms’ timing decisions on implementing new ideas affect macroeconomic fluctuations with the presence of two sources of competition: imperfect substitutability across products and imitations within products. Using U.S. IPO and Venture-backed companies data, I provide some empirical evidence on the existence of implementation cycles with an average frequency of 3.7 years. A stylized model shows that smaller substitutability across products and longer imitation processes can contribute to a longer and lower frequent implementation cycle; it, however, has a larger impact on driving the fluctuations of macro variables.

Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response? (Under Review)

with Sydney C. Ludvigson (NYU) and Serena Ng (Columbia)

NBER Working Paper No. 21803, Media Coverage: Bloomberg View

Abstract:  Uncertainty about the future rises in recessions. But is uncertainty a source of business cycle fluctuations or an endogenous response to them, and does the type of uncertainty matter? We find that sharply higher uncertainty about real economic activity in recessions is most often an endogenous response to other shocks that cause business cycle fluctuations, while uncertainty about financial markets is a likely source of the fluctuations. To establish the dynamic effects of uncertainty shocks, we exploit information from external variables and the timing of extraordinary economic events to identify structural vector autoregressions under credible interpretations of the structural shocks.

Shock Restricted Structural Vector-Autoregressions (Under Revision)

with Sydney C. Ludvigson (NYU) and Serena Ng (Columbia)

NBER Working Paper No. 23225

Abstract: Identifying assumptions need to be imposed on autoregressive models before they can be used to analyze the dynamic effects of economically interesting shocks. Often, the assumptions are only rich enough to identify a set of solutions. This paper considers two types of restrictions on the structural shocks that can help reduce the number of plausible solutions. The first is imposed on the sign and magnitude of the shocks during unusual episodes in history. The second restricts the correlation between the shocks and components of variables external to the autoregressive model. These non-linear inequality constraints can be used in conjunction with zero and sign restrictions that are already widely used in the literature. The effectiveness of our constraints are illustrated using two applications of the oil market and Monte Carlo experiments calibrated to study the role of uncertainty shocks in economic fluctuations.

Work in Progress

Momentum Undervalue Puzzle 

with Martin Lettau (Berkeley Haas) and Sydney Ludvigson (NYU) (Draft coming soon)

Abstract: Capital share risk exhibits significant explanatory power for several cross-sections of expected returns, while subsuming much or all of the explanatory power of predominant return-based factor models. For most portfolios, positive exposure to capital share risk earns a positive risk premium, commensurate with recent inequality-based asset pricing models. But in a striking and puzzling exception to this finding, the risk price is strongly negative for momentum. We show that this finding is central for understanding one key feature of the data, namely the negative correlation between value and momentum strategies, both of which earn high average returns.

Asset Prices and Dynamic Intermediation Chains in OTC Markets (Under Major Revision)

Abstract: Transactions in over-the-counter (OTC) markets often involve intermediation chains: multiple dealers are involved in one round-trip transaction. Why are intermediation chains formed in the first place? How does the length of the chain impact underlying asset prices? In order to address these issues, I construct a dynamic search model in which an intermediation chain emerges endogenously in equilibrium. Using TRACE OTC data, the model’s implications for the chain length and bid-ask spread are consistent with both time-series and cross-sectional empirical facts in corporate bond markets.