Active Working Papers
The Euro Crisis and the 24h Pre-ECB Announcement Return, (joint work with Elmar Jakobs, Lukas May and Julius Landwehr), Aug 2017
Abstract: We document economically and statistically large 24h pre-ECB announcement returns in European equity. For selected industries, such as the European banking sector, the respective annual premium (2010 – 2015) was 12% (Sharpe ratio of 1.6); at a time when the annual return of the European banking sector was on average flat (lost decade). Our statistical tests point into the direction that in times of abnormally high fear of a eurozone break-up, investors anticipated the ECB to announce monetary policy measures that support the euro and hence the market value of equity across selected industries and countries increased in anticipation of the announcement. In that sense, we conclude that the 24h pre-ECB announcement premium is the result of a 'monetary policy put’.
Monetary Policy During Liquidity Dry-Ups, (joint work with Marliese Uhrig-Homburg and Stefan Fiesel), Dec 2016
Abstract: We provide new international evidence for a monetary policy liquidity transmission channel in the United States, United Kingdom, and the Eurozone. The central banks of these countries are, with a different degree, able to soften the economic downward spiral after an unexpected arrival of a financial market illiquidity shock. In order to uncover this transmission channel, we rely on a nonlinear and international economic set-up to distinguish between times of liquidity crisis and non-crisis and to account for common (global) and country specific (local) shocks. We also find that out of these central banks, the Federal Reserve has an especially influential transmission channel with strong and beneficial spillover effects to the United Kingdom and the Eurozone economy.
Inflation Ambiguity and the Term Structure of U.S. Government Bonds. Journal of Monetary Economics 60, no. 2 (March 2013): 295-309.
Abstract: Variations in trend inflation are the main driver for variations in the nominal yield curve. According to empirical data, investors observe a set of empirical models that could all have generated the time-series for trend inflation. This set has been large and volatile during the 1970s and early 1980s and small during the 1990s. I show that log utility together with model uncertainty about trend inflation can explain the term premium in U.S. Government bonds. The equilibrium has two inflation premiums, an inflation risk premium and an inflation ambiguity premium.
Nominal Bonds, Real Bonds, and Equity (joint work with Andrew Ang); American Finance Assocation 2014.
Abstract: We decompose the term structure of expected equity returns into (1) the real short rate, (2) a premium for holding real long-term bonds, or the real duration premium, the excess returns of nominal long-term bonds over real bonds which reflects (3) expected inflation and (4) inflation risk, and (5) a real cashflow risk premium, which is the excess return of equity over nominal bonds. The shape of the nominal and real bond yield curves are upward sloping due to increasing duration and inflation risk premiums. The term structures of expected equity returns and equity risk premiums, in contrast, are downward sloping due to the decreasing effect of short-term expected inflation, or trend inflation, across horizons. Around 70% of the variation of expected equity returns at the 10-year horizon is due to variation in the output gap and trend inflation.
Economic Policy Uncertainty and Asset Price Volatility; NBER Asset Pricing Meetings 2010, European Finance Assocation 2011.
Abstract: We document that fear about misspecified economic and central bank policies explain 45% of variations in bond option implied volatilities and interest rate volatilities. We endogenize this empirical pattern with a parsimonious equilibrium asset pricing model. In equilibrium, volatility is endogenously driven by fear of not knowing the data generating process that drives future economic and future central bank policies. An increase in either of these two uncertainties steepens the yield curve and increases the volatility in asset and option markets. A structural estimation of the equilibrium model explains the upward sloping term structures of interest rates, bond volatility, and option volatility, with only four in real-time observable economic and central bank related risk and uncertainty factors. The study ends with highlighting an inverse relationship between interest rates and volatility disparity from fundamentals during the policy hiking period of 2004-2007 and during QE1.
How does the Bond Market Perceive Government Interventions?; Western Finance Assocation 2011, NBER Asset Pricing Meetings 2011
Abstract: The ongoing threat of the U.S. public sector sliding over the 'fiscal cliff' urges financial economists to better understand the foundations for how government spending affects the real economy and financial markets. This paper is the first study to document that uncertainty about future government spending is a first-order risk factor in the bond market, leading to rising real and nominal interest rates, a steeper term spread, an increase in bond market volatility and bond premia. We study an equilibrium asset pricing model with a forward-looking representative agent and a forward-looking government to shed light on these empirical facts.