A standard noisy rational expectations market equilibrium over many periods can be stated as a series of parallel scalar problems: investors optimize frequency-by-frequency. The model then naturally generates high- and low-frequency traders and matches a range of basic features of trade in financial markets. We use it to analyze policies that restrict or encourage high-frequency trade.
Innovations in realized volatility are associated with recessions, while shocks to volatility expectations are not.
Explores how people learn about different aspects of the model driving the world and the implications for the errors they make in consumption and asset prices. Can generate excess sensitivity of consumption to income and momentum and mean reversion in asset returns.
The single strongest predictor of changes in the Fed Funds rate in the period 1982–2007 was the level of the layoff rate. We show that it is welfare optimal for the Fed to respond to the layoff rate when there are large human wealth losses associated with job loss.
Consider an agent with time-separable constant absolute risk aversion preferences who faces an exogenous income process and has access to a riskless saving technology with a constant interest rate. That agent's indirect utility over income streams is a form of Epstein–Zin (1989) preferences. All the qualitative features of the economy that are priced under Epstein–Zin preferences are also priced under time-separable utility.
The long-run risk model (a small, persistent component in consumption growth) is the natural model for investors to use for asset pricing if they are unsure of the true dynamics of the economy.
The price of risk for a shock depends on its dynamic effects on the economy. We derive the relationship between risk prices and dynamic impacts in a range of theoretical models and also estimate it empirically.
The only significantly priced risk in the variance market over the period 1996–2014 was transitory realized variance. News about future variance was unpriced, suggesting it is not an important driver of the real economy. The results allow us to distinguish among consumption-based models.
I develop a new long-run variance estimator and use it to estimate the long-run variance of consumption growth. Point estimates are lower than standard long-run risks calibrations, but the more conservative calibrations cannot be ruled out. The estimates are useful more generally for calibrating models with recursive preferences.
When long-term interest rates are high relative to short-term rates, physical investment shifts towards short-term projects.
Stabilisation policy should focus on the frequencies consumers care most about. This column presents evidence from stock-market returns suggesting that consumers are willing to pay the most to avoid – and are therefore most concerned about – fluctuations that last tens or hundreds of years. Modern macroeconomic theory tends to view the role of monetary policy as smoothing out inflation and unemployment over the business cycle. The authors' findings suggest that resources would be better spent on policies that smooth out longer-run fluctuations.
I review the history of executive compensation disclosure and other government policies affecting CEO pay. In so doing, I also review the literature on the effects of these policies. Disclosure has increased nearly uniformly since 1933. A number of other regulations, including special taxes on CEO pay and rules regarding votes on some pay packages have also been introduced, particularly in the last 20 years. However, there is little solid evidence that any of these policies have had any substantial impact on pay. We can conclude that policy changes have helped drive the move towards more use of stock options, but there is no conclusive evidence on how policy has affected the level or composition of pay otherwise. I also review evidence from overseas on "Say on Pay," recently proposed in the US, which would allow nonbinding shareholder votes on CEO compensation. The experiences of other countries have been positive, with tighter linkages between pay and performance and improved communication with investors. Mandatory say on pay would be beneficial in the US.
Only the top 10% of US earners have seen their incomes grow faster than productivity since 1966. Part of the top-earner income growth is driven by market forces (superstar economics); the only feasible pro-equality policy here is more progressive taxation. For top corporate executives, however, non-market forces (CEO-Board complicity in pay setting) are important, so other policies are warranted. Increased disclosure and improved corporate governance would distribute economic gains more evenly across society and boost firms' value.
Europe's jobs outlook has brightened over the past decade. Recent research suggests that about half the rise in job creation is due to labour market reforms, but much of the rest is due to changing social norms concerning female and immigrant labour force participation. But what's good for European job creation seems to be bad for labour productivity growth – a trade-off that European policymakers must be willing to acknowledge and address.