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Creator: Levine, David K. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 388 Abstract: Previous authors have argued that the optimal monetary policy is contractionary. If buyers value consumption substantially more than sellers, there is some randomness and informational constraints make asset trading useful, we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies.
Parola chiave: Expansion, Contraction, Optimal monetary policy, Asset trading, Trade, and Private information Soggetto: D82  Information, knowledge, and uncertainty  Asymmetric and private information and E52  Monetary policy, central banking, and the supply of money and credit  Monetary policy 
Creator: Lacker, Jeffrey Malcolm. and Schreft, Stacey Lee Series: Monetary theory and financial intermediation Abstract: We describe a stochastic economic environment in which the mix of money and trade credit used as means of payment is endogenous. The economy has an infinite horizon, spatial separation and a creditrelated transaction cost, but no capital. We find that the equilibrium prices of arbitrary contingent claims to future currency differ from those from onegood cashinadvance models. This anomaly is directly related to the endogeneity of the mix of media of exchange used. In particular, nominal interest rates affect the riskfree real rate of return. The model also has implications for some longstanding issues in monetary policy and for time series analysis using money and trade credit.
Soggetto: G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates and E42  Money and interest rates  Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems 
Creator: Allen, Franklin, 1956 and Gale, Douglas. Series: Monetary theory and financial intermediation Abstract: Traditional theories of asset pricing assume there is complete market participation so all investors participate in all markets. In this case changes in preferences typically have only a small effect on asset prices and are not an important determinant of asset price volatility. However, there is considerable empirical evidence that most investors participate in a limited number of markets. We show that limited market participation can amplify the effect of changes in preferences so that an arbitrarily small degree of aggregate uncertainty in preferences can cause a large degree of price volatility. We also show that in addition to this equilibrium with limited participation and volatile asset prices, there may exist a Paretopreferred equilibrium with complete participation and less volatility.
Soggetto: C58  Financial Econometrics and G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates 
Creator: Mendoza, Enrique G., 1963 and Smith, Katherine A. Series: Advances in dynamic economics Abstract: "Sudden Stops " experienced during emerging markets crises are characterized by large reversals of capital inflows and the current account, deep recessions, and collapses in asset prices. This paper proposes an openeconomy equilibrium asset pricing model in which financial frictions cause Sudden Stops. Margin requirements impose a collateral constraint on foreign borrowing by domestic agents and trading costs distort asset trading by foreign securities firms. At equilibrium, margin constraints may or may not bind depending on portfolio decisions and equilibrium asset prices. If margin constraints do not bind, productivity shocks cause a moderate fall in consumption and a widening current account deficit. If debt is high relative to asset holdings, the same productivity shocks trigger margin calls forcing domestic agents to firesell equity to foreign traders. This sets off a Fisherian assetprice deflation and subsequent rounds of margin calls. A current account reversal and a collapse in consumption occur when equity sales cannot prevent a sharp rise in net foreign assets.
Parola chiave: Collateral constraints, Fisherian deflation, Emerging markets, Margin calls, Open economy asset pricing, Asset pricing, Sudden stops, Nonlinear dynamics, and Trading costs Soggetto: F32  International finance  Current account adjustment ; Shortterm capital movements, D52  General equilibrium and disequilibrium  Incomplete markets, E44  Money and interest rates  Financial markets and the macroeconomy, and F41  Macroeconomic aspects of international trade and finance  Open economy macroeconomics 
Creator: Aiyagari, S. Rao. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 518 Abstract: This paper is about a useful way of taking account of frictions in asset pricing and macroeconomics. I start by noting that complete frictionless markets models have a number of empirical deficiencies. Then I suggest an alternative class of models with incomplete markets and heterogenous agents which can also accommodate a variety of other frictions. These models are quantitatively attractive and computationally feasible and have the potential to overcome many or all of the empirical deficiencies of complete frictionless markets models. The incomplete markets model can also differ significantly from the complete frictionless markets model on some important policy questions.
Parola chiave: Friction, Frictionless market model, Asset pricing, Macroeconomics, and Incomplete markets Soggetto: E13  General aggregative models  Neoclassical and G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates 
Creator: Jagannathan, Ravi. and Wang, Zhenyu. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 517 Abstract: In empirical studies of the CAPM, it is commonly assumed that (a) the return to the value weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assets in the economy, and (b) betas of assets remain constant over time. Under these assumptions, Fama and French (1992) find that the relation between average return and beta is flat. We argue that these two auxiliary assumptions are not reasonable. We demonstrate that when these assumptions are relaxed, the empirical support for the CAPM is surprisingly strong. When human capital is also included in measuring wealth, the CAPM is able to explain 28 percent of the cross sectional variation in average returns in the 100 portfolios studied by Fama and French. When, in addition, betas are allowed to vary over the business cycle, the CAPM is able to explain 57 percent. More important, relative size does not explain what is left unexplained after taking sampling errors into account.
Parola chiave: Capital and Stock prices Soggetto: G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates 
Creator: Jagannathan, Ravi. and Wang, Zhenyu. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 517 Abstract: In empirical studies of the CAPM, it is commonly assumed that (a) the return to the value weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assets in the economy, and (b) betas of assets remain constant over time. Under these assumptions, Fama and French (1992) find that the relation between average return and beta is flat. We argue that these two auxiliary assumptions are not reasonable. We demonstrate that when these assumptions are relaxed, the empirical support for the CAPM is surprisingly strong. When human capital is also included in measuring wealth, the CAPM is able to explain 28 percent of the cross sectional variation in average returns in the 100 portfolios studied by Fama and French. When, in addition, betas are allowed to vary over the business cycle, the CAPM is able to explain 57 percent. More important, relative size does not explain what is left unexplained after taking sampling errors into account.
Parola chiave: Capital and Stock prices Soggetto: G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates 
Creator: Alvarez, Fernando, 1964 and Jermann, Urban J. Series: Endogenous incompleteness Abstract: We study the asset pricing implications of a multiagent endowment economy where agents can default on debt. We build on the environment studied by Kocherlakota (1995) and Kehoe and Levine (1993). We present an equilibrium concept for an economy with complete markets and with endogenous solvency constraints. These solvency constraints prevent default, but at the cost of reduced risk sharing. We show that versions of the classical welfare theorems hold for this equilibrium definition. We characterize the pricing kernel, and compare it to the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks.
Parola chiave: Equilibrium, Default, Solvency constraints, Risk, Shocks, and Assets Soggetto: G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates and D50  General equilibrium and disequilibrium  General 
Creator: Wallace, Neil. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 347 Descrizione: The Harry G. Johnson Lecture, presented at the 1987 A.U.T.E. and the Royal Economic Society Conference, Aberyswyth, April 14.
Parola chiave: Inside money, Equilibrium model, Monetary theory, Assets, Outside money, and Currency Soggetto: G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates and E40  Money and interest rates  General 
On the relation between the expected value and the volatility of the nominal excess return on stocks
Creator: Glosten, Lawrence R., Jagannathan, Ravi., and Runkle, David Edward. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 505 Abstract: Earlier researchers have found either no relation or a positive relation between the conditional expected return and the conditional variance of the monthly excess return on stocks when they used the standard GARCHM model. This is in contrast to the negative relation found when other approaches were used to model conditional variance. We show that the difference in the estimated relation arises because the standard GARCHM model is misspecified. When the standard model is modified allow for (i) the presence for seasonal patterns in volatility, (ii) positive and negative innovations to returns to having different impacts on conditional volatility, and (iii) nominal interest rates to affect conditional variance, we once again find support for a negative relation. Using the modified GARCHM model, we also show that there is little evidence to support the traditional view that conditional volatility is highly persistent. Also, positive unanticipated returns result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility of a similar magnitude. Hence the time series properties of the monthly excess return on stocks appear to be substantially different from that of the daily excess return on stocks.
Parola chiave: Asset valuation, Return rate, Risk, Rate of return, Stocks, and Stock market Soggetto: G11  General financial markets  Portfolio choice ; Investment decisions and G12  General financial markets  Asset pricing ; Trading volume ; Bond interest rates