Asset Price Fluctuations Research Articles

Asset Prices and Unemployment Fluctuations: A Resolution of the Unemployment Volatility Puzzle

Abstract Recent work has demonstrated that existing solutions of the unemployment volatility puzzle are at odds with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model of business cycles that is immune to these critiques by incorporating two key features. First, we allow for preferences that generate time-varying risk over the business cycle to account for observed fluctuations in asset prices. Second, we introduce human capital acquisition, as is consistent with the evidence on how wages grow with experience in the labor market. Our model reproduces the observed fluctuations in unemployment because hiring a worker is a risky investment with long-duration returns. As in the data, the price of risk in our model sharply increases in recessions. The benefit from hiring new workers therefore greatly declines, leading to a large decrease in job vacancies and an increase in unemployment of the same magnitude as in the data. We show that our results extend to versions of the model that include physical capital, a life cycle for workers, and alternative preference structures common in the asset-pricing literature.

Monetary policy and speculative asset markets

I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, that potentially cause endogenous, nonfundamental bubbles and bursts. Booms in asset prices improve firms financing conditions and are therefore deflationary. These features significantly improve the power of the model to replicate empirical key moments. A monetary policy that targets asset prices can dampen financial cycles and reduce volatility in asset markets (dampening effect). This comes at the cost of creating an additional channel through which asset price fluctuations transmit to macroeconomic fundamentals (spillover effect). I find that unless financial markets are severely overheated, the undesirable fluctuations in inflation and output caused by the spillover effect more than outweigh the benefits of the dampening effect.

The Influence and Prediction of Industry Asset Price Fluctuation Based on The LSTM Model and Investor Sentiment

In a real-world environment, not only can different levels of market expectations be triggered by factors such as macroeconomic policies, market operating trends, and current company developments have an impact on sector assets, but sector asset rises and falls are also influenced by a factor that cannot be ignored: market sentiment. Therefore, this paper uses LSTM to construct a forecasting model for industrial assets based on investor sentiment and public historical trading data of industry asset markets to determine future trends and obtains two conclusions: first, forecasting models incorporating investor sentiment have better forecasting effects than those without the incorporation of sentiment characteristics, indicating that the factor of investor sentiment should not be ignored when studying the problem of industry asset forecasting; secondly, investor sentiment quantified by different methods.

Global Disaster Risk Matters

This article examines the cross-country asset pricing implications of disaster risk concerns. We construct a new disaster risk index, relying on six news-implied rare disaster proxies of Manela and Moreira (2017) , and show that this index is a powerful predictor for stock returns and other asset returns in international markets both in and out of sample. By further disentangling a global common component from our rare disaster index, we find evidence supporting theories that emphasize globally shared disaster risk as the important driving force of asset price fluctuations. Moreover, we conduct a return decomposition analysis and find that the global disaster risk drives stock returns primarily through the discount rate channel. This paper was accepted by Karl Diether, finance. Funding: This work was supported by National Natural Science Foundation of China [72132002, 71903112, 72192842, U1811462, and 71502152], the Basic Scientific Center of National Science Foundation of China [71988101], the National Social Science Foundation [21&ZD088 and 20&ZD102], SIIFE [2018110262], and the Shanghai University of Finance and Economics [2018110698]. Supplemental Material: The data files and e-companion are available at https://doi.org/10.1287/mnsc.2022.4328 .

THE ISSUES OF MONETARY POLICY RESPONSE TO ASSET PRICE BUBBLES IN MODELS WITH ASSUMPTION OF THE FINANCIAL ACCELERATOR

In economic modeling problems, asset prices are considered endogenous variables. Meanwhile, there are times when they do not reflect the true nature of the economy, that is, pricing is not based on the fundamentals. It is worth noting that such fluctuations in asset prices are not only the result of deviations from the fundamentals of the economy; but also have an impact on the economy, causing real economic instability. Such fluctuations in asset prices can be attributed to both the irrational (or so-called behavioral) characteristics of investors and the liberal policies pursued by regulators, which are characterized by increased access to credit and can lead to asset overvaluation. The paper aims to present possible ways in which asset price bubbles affect real macroeconomic variables, as well as the models used by regulators to respond to bubbles, emphasizing those based on the concept of a financial accelerator. The paper expands the results of the statistical test for the presence of bubbles in the real estate market in Yerevan and the approaches used by the Central Bank of RA to respond to asset price fluctuations

MОDEL OF DETERMINING STOCK MARKET VOTALITY

The article considers different approaches to determining stock market volatility. It is one of the most important indicators of the financial market and characterizes the degree of fluctuations in asset prices, reflects how high the deviations of price changes relative to the general trend. The obtained values of volatility make it possible to analyze the duration of the process in the stock market, make adjustments and concrete steps to improve the situation to optimize the financial strategies of both market participants and economic agents in general. Volatility is an indicator of the meaningfulness of the actions of stock market participants. Thus, volatility is a key concept for assessing market risk and making investment decisions. Derivatives on volatility indicators are very popular among foreign investors. Such instruments allow you to hedge the risks associated with increasing stock market fluctuations, and due to the negative correlation with stock indices increase the benefits of investment diversification if they are in the investment portfolio, especially in a declining market. The calculation of market volatility is based on the following pattern – the size of the option premium directly depends on the current market volatility. The stronger the fluctuations in the market, the greater the risk of the seller of the option, and hence the amount of payment for this risk – the option premium. A further step in the development of volatility indicators is the creation of new derivatives, which means that investors will also be able to hedge risks associated with growing fluctuations in financial markets and earn additional profits by improving the efficiency of portfolio management.

The Impact of Financial Assets on Accounting Robustness-Based on the Perspective of Macro-Monetary Policy Changes

Accounting robustness is not only affected by micro business activities such as accounting policy changes, accounting treatments, and management profit manipulation, but also by changes in monetary policies in the broader environment in which firms operate. This paper examines the impact of financial asset price fluctuations on accounting soundness from the perspectives of investment return, discounted stock value, the purchasing power of money, company performance, and market follow-through effect, and concludes that a loose monetary environment will overestimate the value of financial assets and reduce accounting soundness; a tight monetary policy will underestimate the value of financial assets and improve accounting soundness.

Forecasting in the Presence of Instabilities: How We Know Whether Models Predict Well and How to Improve Them

This article provides guidance on how to evaluate and improve the forecasting ability of models in the presence of instabilities, which are widespread in economic time series. Empirically relevant examples include predicting the financial crisis of 2007–08, as well as, more broadly, fluctuations in asset prices, exchange rates, output growth, and inflation. In the context of unstable environments, I discuss how to assess models’ forecasting ability; how to robustify models’ estimation; and how to correctly report measures of forecast uncertainty. Importantly, and perhaps surprisingly, breaks in models’ parameters are neither necessary nor sufficient to generate time variation in models’ forecasting performance: thus, one should not test for breaks in models’ parameters, but rather evaluate their forecasting ability in a robust way. In addition, local measures of models’ forecasting performance are more appropriate than traditional, average measures. (JEL C51, C53, E31, E32, E37, F37)

Asset price beliefs and optimal monetary policy

We characterize optimal monetary policy when agents learn about endogenous asset prices. Learning leads to inefficient asset price fluctuations and distortions in consumption and investment decisions. We find that the policy-relevant natural real interest rate increases with subjective asset price beliefs. Optimal monetary policy raises interest rates when expected capital gains are high, but does not eliminate deviations of asset prices from their fundamental value. When we add investment to the model, optimal policy also “leans against the wind”. In a simple calibration of the model, a positive response to capital gains in simple interest rate rules is beneficial.

Mortgage spreads, asset prices, and business cycles in emerging countries

We investigate an unexplored link between the US mortgage spread and business cycle and asset price fluctuations in emerging market economies (EMEs). Controlling for changes in global financial risk, an increase in the US mortgage spread leads to substantially lower EME output, investment, consumption, house and stock prices, and to a contraction in lending by global banks to EMEs. The explanatory power of US mortgage spread shocks for EME macroeconomic fluctuations increases with EME exposure to lending by global banks. This explanatory power is greatly reduced when we turn off the response of EME stock prices to movements in the US mortgage spread in a counterfactual experiment, demonstrating the channel through which US mortgage spread shocks are transmitted to EMEs. The US mortgage spread is a key driver of business and asset price cycles in EMEs when extending the baseline model with additional domestic and foreign variables, and considering alternative country subgroups.

Does Perception Matter in Asset Pricing? Modeling Volatility Jumps Using Twitter-Based Sentiment Indices

This article uses public perceptions to forecast short-term fluctuations in asset prices. Based on four billion tweets scraped between 2009 and 2019, I perform textual analysis to construct daily sentiment indices. The sentiment indices allow us to forecast stock volatility jumps as well as expected jump levels. The implications of forecasting volatility jumps are substantive. First, volatility jumps have a significant effect on option prices. Second, changes in the volatility path lead to large (negatively related) changes in the prices’ future trajectory. Determining what information causes jumps allows for better risk management and more accurate asset pricing models.

Short-Term Funding Stresses and Asset Prices: Lessons from U.S. History

<ns2:p>Recent stress episodes in U.S. short-term dollar funding markets have brought renewed attention to the functioning of these markets and how they interact with capital markets more generally. The history of U.S. money markets and stock and bond markets before the founding of the Federal Reserve offer a unique perspective on how the structure of money markets can contribute to broader asset price fluctuations.</ns2:p>

Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions

This paper analyzes the implications of short-termism on portfolio decisions of investors, and its potential consequences on green investments. We study a dynamic portfolio choice problem that contains two assets, one asset with fluctuating returns and another asset with a constant risk-free return. Fluctuating returns can arise from fossil or from clean energy-related assets. Short-termism is seen to be driven by discount rates (exponential and hyperbolic) and the decision horizon of investors. We also explore the impact of the fluctuating assets returns on the fate of the portfolio, for both a deterministic and stochastic model variant, and in cases where innovation efforts are spent for fossil fuel or clean energy sources. Detailing dynamic portfolio decisions in such a way may allow us for better pathways to empirical tests.

Implications of quantal response statistical equilibrium

This paper explores the foundations and properties of the quantal response statistical equilibrium (QRSE) model developed by Scharfenaker and Foley (2017). The QRSE model provides a behavioral foundation for the formation of aggregate economic outcomes in social systems characterized by negative feedbacks. It can approximate a wide range of commonly encountered theoretical distributions that have been identified as economic statistical equilibrium and displays qualitatively similar behavior to the Subbotin and Asymmetric Subbotin distributions that range from the Laplace to the Normal distribution in the limit. Asymmetry in the frequency distributions of economic outcomes can be understood as arising from the unfulfilled expectations of entropy-constrained decision makers. This paper demonstrates the logic of the QRSE model in an application to US stock market data dating back to 1926. The model provides a parsimonious explanation for the distribution of rates of return on private equities as well as a behavioral foundation for asset price fluctuations.

Operations of Futures and Options with Reference to India Infoline Ltd, India

Financial markets are helpful to provide liquidity in the system and for the smooth functioning of the system. These markets are the centres that provide facilities for buying and selling of financial claims and services. The emergence of the market for derivatives products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against sun certainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. The article major intends is to scrutinize operations of futures and options with reference to India Infoline Ltd.

Risk aversion, uninsurable idiosyncratic risk, and the financial accelerator

We develop a tractable model to study jointly the role of non-diversifiable risk and financial frictions for business cycles. Non-diversifiable risk induces strong precautionary motives, which reduce the exposure of entrepreneurs to aggregate disturbances ex-ante, and make it easier to increase leverage ex-post. In general equilibrium, these precautionary motives dampen fluctuations in asset prices and risk premia, thus making the economy more resilient to financial shocks. We provide microeconomic evidence consistent with the model's predictions about firm behavior.

Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions

Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions

Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions

Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions

EXPECTATION-DRIVEN ASSET PRICE FLUCTUATIONS UNDER THE SPIRIT OF CAPITALISM HYPOTHESIS: THE ROLE OF HETEROGENEITY

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely lived households, under the hypothesis of spirit of capitalism (SOC). I consider heterogeneous households in terms of preferences, endowments, and initial wealth, and capture the SOC through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest SOC are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.

Asset Price Learning and Optimal Monetary Policy

We characterize optimal monetary policy when agents learn about endogenous asset prices. Learning leads to inefficient asset price fluctuations and distortions in consumption and investment decisions. We find that the policy-relevant natural real interest rate increases with subjective asset price beliefs. Optimal monetary policy therefore raises interest rates when expected capital gains are high. When the asset is not in fixed supply, optimal policy also "leans against the wind". In a simple calibration of the model, a positive response to capital gains in simple interest rate rules is beneficial. Our results are robust to alternative belief specifications.