Abstract
We assess the extent to which the aforementioned
changed monetary conditions have affected the relationship
between financial markets and some leading macro-finance
indicators. In the first part, we thus examine the financialmarkets
dynamics before and after February 2006. We find evidence supporting the view that the macro-finance foundation of market
movements has changed substantially in the Bernanke period. If
real interest rates could explain markets’ performance in the
second part of the Greenspan tenure, the stochastic discount
factor (SDF) seems to be the only factor capable of explaining
financial markets movements after 2006. In the second part, we
relate our findings to the extraordinary growth of money supply
determined by the Federal Reserve’s choice of expanding its
balance sheet by purchasing long-term Treasury securities. In
addition, rather than focusing exclusively on money supply, we
explore the role of the risk premium that seems to lie beneath the
different outcome characterizing the Bernanke sample. Gagnon
et al. (2011), in fact, find that the flattening of the yield curve is
mostly due to declining term premia. Our empirical findings are
in line with the achievements of modern macro-finance theory,
according to which asset pricing is explained by time-varying risk
aversion and the cyclical movements of term premia (Campbell
and Cochrane, 1999; Brandt and Wang, 2003; Wachter, 2006; Li,
2007; Mele, 2007). In particular, we argue that risk premia are
related to changes in both unemployment and risk aversion,
finding evidence that the weak discounting process implied by
high levels of risk aversion can explain the cyclical behavior of
assets prices.
Lingua originale | Inglese |
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Titolo della pubblicazione ospite | RETHINKING VALUATION AND PRICING MODELS: LESSONS LEARNED FROM THE CRISIS AND FUTURE CHALLENGES |
Editor | Carsten Wehn, Christian Hoppe, Greg Gregoriou |
Pagine | 545-570 |
Numero di pagine | 26 |
DOI | |
Stato di pubblicazione | Pubblicato - 2013 |
Keywords
- financial risk
- quantitative easing