Articles

[17] "A Note on the Discount for Lack of Marketability" (with Natán Goldberger) Economic Analysis Review (forthcoming)  (Preview)
 In this paper we first demonstrate that the Discount for Lack of Marketability (DLOM) derived from option-based models can be replicated using an at-the-money (ATM) put option approximation. We examine three well-known models used in the industry and show that their DLOM estimates are proportional to asset volatility, offering a consistent framework for comparison. Second, we extend the framework to consider time-variant variance by means of GARCH models. We report that a zero-order approximation of the model provides accurate estimates of DLOM for a given set of parameters. This suggests the use of the average between long-run and current variances.

[16] "Simple estimates for the US Term Premium" (with Andrés Sagner) Economic Analysis Review (forthcoming) Draft

In this paper we propose a simple procedure to estimate term premium for US Treasury bond yields. The procedure is based on the Dynamic-Nelson-Siegel model which has only one parameter under the risk-neutral measure, which we calibrate at 94% based on previous literature but also in empirical exercises using a monthly sample from 1980 to 2024. The calibration allows us to obtain latent factors by inverting a 3x3 matrix, and obtaining the term premium with the parameters of a VAR model estimated for the same sample. Results for the 5 and 10-year bond yields are broadly in line with figures published by the Federal Reserve of New York.

[15] "FX-hedging for Latin American investors" (with Natán Goldberger), Emerging Markets Review 59 (March): 101117. 2024 (Preview)

In this paper, we conduct an empirical evaluation of currency hedging (FXH) strategies designed for Latin American investors managing portfolios of US assets with performance measured in their local currency. By analyzing the volatility and value-at-risk (VaR) of the hedged portfolio, our results reveal that FXH is inefficient in lowering portfolio risk when applied to underlying foreign risk-assets like equities and low credit quality corporate bonds. Conversely, a significant reduction in volatility is evident with FXH when the investments are in safer assets, such as high-grade government and corporate bonds. 

[14] "Modeling S&P 500 returns with GARCH models" (with Alejandra Inzunza), Latin America Journal of Central Banking 4(3): 100096. 2023

This paper provides several estimates of the GARCH models’ parameters for the S&P500 index, based on returns and CBOE VIX. Using a daily sample collected from 2007 to 2022, we can conclude that adding the VIX information improves the estimates of the long-term volatility. By providing an external validation of the model using an option-based index reported by the Federal Reserve of Minneapolis, we are able to propose a calibrate model to track the tail-risk of this stock index. 

[13] "The Holt-Winters filter and the one-sided HP filter: A close correspondence" (with Mathias Drehmann) Economics Letters 222 (January): 110925. 2023 (BIS Working Paper)

We show that the trend of the one-sided HP filter can be asymptotically approximated by the Holt–Winters (HW) filter. The latter is an elegant, moving average representation and facilitates the computation of trends tremendously. We confirm the accuracy of this approximation empirically by comparing the one-sided HP filter with the HW filter for generating credit-to-GDP gaps. We find negligible differences, most of them concentrated at the beginning of the sample. 

[12] "Estimates of the US Shadow-Rate" (with Marco Piña), Latin America Journal of Central Banking 4(1): 100080. 2023

This article provides several estimates for the shadow rate (SR) of the short-term interest rate in US. We assume maximal models with two and three Gaussian factors, and we use forward rates to estimate the model’s parameters. Based on that, we conclude that point estimates of SR should be taken with caution because they depend on the characteristics of the data set, including the sample size, maturities, and smoothness. The latter is even more crucial than other settings discussed previously in the literature, such as the number of factors. 

[11] "The effect of warnings published in a financial stability report on loan-to-value ratios" (with Andrés Alegría & Felipe Córdova), Latin America Journal of Central Banking 2(4): 100041. 2021

This paper shows how central bank communications can play a role in macroprudential supervision. We document how specific warnings about real estate markets, published in the Central Bank of Chile's Financial Stability Reports of 2012, affected bank lending policies. We provide empirical evidence of a rebalancing in the characteristics of mortgage loans granted, which led to a reduction in the number of mortgage loans with high loan-to-value ratio. 

[10] "S&P 500 under a Structural Macro-Financial Model" (with Andrés Sagner), Economic Analysis Review 36(2): 3-20. 2021

In this paper, we propose a macro-financial model that combines a semi-structural, medium-term macroeconomic model with the Dynamic Gordon Model or DGM (Campbell and Shiller, 1988). The proposed framework allows us to analyze the relationship between the output gap, inflation, short-term interest rate, and stock market indicators: price, dividend, and volatility. We estimate the model for the US economy using Bayesian techniques on quarterly data from 1984 to 2020. The decomposition of the unconditional variance of the variables shows that (i) demand shocks are relevant for most macroeconomic variables and stock prices; (ii) supply shocks affect inflation mainly; (iii) shocks to the price-dividend ratio account for around 12%, 5% and 16% of the variability of the output gap, inflation, and interest rates, respectively; and (iv) the DGM mechanism helps to cushion the effects of an interest rate shock and increases the speed of convergence of all macroeconomic variables after an inflation shock, compared to a standard, semi-structural model, reflecting in this manner the importance of stock prices on the dynamics of macroeconomic variables. 

[9] "An Analysis of the Impact of External Risks on the Sovereign Risk Premium of Latin American Economies" (with Carlos Medel & Carola Moreno), Economic Analysis Review 32(2): 131-153. 2017

This article presents a quantification of the response of the sovereign risk premium (EMBI) of a group of Latin American countries, to unexpected changes (shocks) in external financial variables. The main contribution of the paper is to use the estimated parameters of a vector autoregression (VAR) model using a special Cholesky variance-covariance decomposition as a tool for risk scenario’s assessment. The proposed interpretation of the estimated matrix allows for the quantification of the impact of more than one shock and also to quantify spillovers. A VAR is estimated for each country (Colombia, Chile, Mexico, and Peru) in monthly frequency that includes China’s and Brazil’s EMBI, the global volatility index (VIX), plus the value of the dollar against a basket of currencies (Broad Index) and a proxy of the slope of the US Treasury yield curve (Spread US). The VIX and Broad Index shocks turn out to have a relatively homogenous effect on each country’s EMBI, while shocks to the China and Brazil EMBI are more heterogeneous. For the case of Chile, we further study three alternative risk scenarios, incorporating the copper price as an additional variable. The most disruptive scenario at the time when the shock hits is the “Volatility driven” one. Nevertheless, it is the “Emerging markets” scenario (namely one with simultaneous shocks to China’ and Brazil’s EMBI) the one with the most harmful dynamics, as it dyes out slower. Finally, a “Copper price bust” scenario, in which the price of copper drops significantly in addition to a shock to the EMBI China, is the one with the least effect as the price of copper is relatively less affected by shocks to other variables, displaying lower spillovers. 

[8] "Dynamics of the Default Frequency of Consumer Fixed-Payment Credits" [In Spanish] (with David Pacheco & Andrés Sagner), Trimestre Económico LXXX (2), No 318: 329-343. 2013

In this paper we consider an extension of Vasicek’s (1991) model for new consumer fixed-payment credits in the Chilean banking system. Under the assumption that the economy experienced a complete business cycle during 2003-09, we are able to compute the so-called Long-Run Probability of Default (LRPD) which is 14.4% if we consider the number of defaulted credits or 12.9% if we weight default frequencies by loan size. In the model we allow a time-variant threshold which is a function of both macroeconomic factors and average-characteristics of incoming debtors. Also, counterfactual exercises indicate that credit standards for loan applications were relaxed during 2006-07, implying an increment on defaults.

[7] "The Determinants of Household Debt Default" (with Natalia Gallardo), Economic Analysis Review 27(1): 55-70. 2012

In this paper, we study household debt default behavior in Chile using survey data. Previous research in this area suggests financial and personal variables help estimate individual and group probabilities of default. We study mortgage and consumer default separately, as the default decisions and overall borrower behavior are different for each type of debt. Our study finds that income and income-related variables are the only significant and robust variables that explain default for both types of debt. Demographic or personal variables are affected by only one type of debt but not more. For example, the level of education is a factor that affects mortgage default, whereas the determinants of consumer debt default include the age of the household head, and the number of people within the household that contribute to the total family income. We find that the probability of default decreases as the family income increases, and that our estimations are consistent with other studies similar to ours. 

[6] "Democracy and Human Development" (with John Gerring, Strom Thacker), The Journal of Politics 74(1): 1-17. 2012

Does democracy improve the quality of life for its citizens? Scholars have long assumed that it does, but recent research has called this orthodoxy into question. This article reviews this body of work, develops a series of causal pathways through which democracy might improve social welfare, and tests two hypotheses: (a) that a country’s level of democracy in a given year affects its level of human development and (b) that its stock of democracy over the past century affects its level of human development. Using infant mortality rates as a core measure of human development, we conduct a series of time-series—cross-national statistical tests of these two hypotheses. We find only slight evidence for the first proposition, but substantial support for the second. Thus, we argue that the best way to think about the relationship between democracy and development is as a time-dependent, historical phenomenon.

[5] "Estimating Chile’s Nominal Interest Rate Structure: An Application of the Dynamic Nelson-Siegel Model" [In Spanish] (with Andrés Sagner & Juan Sebastián Becerra), The Chilean Economy 14(3): 57-74. 2011 (back-up)

We propose a discrete, dynamic version of the Nelson-Siegel yield curve model, taking as valid the Log Expectations Hypothesis, plus an explicit modeling of the model’s factor dynamics. Within this framework, we propose two ways to identify the model parameters: ARIMA and cointegration. With the latter, the model is estimated for the Chilean economy between July 2004 and June 2011, using nominal interest rates on bonds issued by the Central Bank of Chile. Finally, steady-state factors are computed for the yield curve (slope and curvature), linking them to output and price indicators through a reduced-form macrofinancial model. Significant effects are found between real and financial variables; in particular, the slope of the yield curve affects the output measures with a lag of three to six months. On the other hand, the curvature has medium-term effects on inflation, which seems to be related to the speed of adjustment of the shorter-term interest rate to its steady-state value. 

[4] "Affine Nelson-Siegel Model" Economics Letters 110(1): 1-3. 2011

I introduce a discrete-time version of the dynamic yield curve model proposed by Diebold and Li (2006) which is based on Nelson and Siegel (1987). As in Christensen et al. (2010) I found an affine process that matches the model. 

[3] "Credit Risk of Consumer Loans" [In Spanish] (with Daniel Calvo & Daniel Oda), The Chilean Economy 12(3): 59-77. 2009 (back-up)

Following Jara and Oda (2007), we consider a group of Chilean banks specializing in consumer loans. Taking the dynamics of the group as a whole, we propose a credit risk model that is based on loan loss provisions. Using accounting ratios, we show that a model for this purpose is dynamic and highly non-linear. Our empirical results show that the banking aggregates loan loss provisions, write-offs, and total loans can be modelled for this group of banks using a small number of macroeconomics variables. Actually, we conclude that the output gap is a strong factor in the model, and that the model performs well when only this external factor is considered.  

[2] "Multiple Imputation in Microeconomics Surveys" [In Spanish] (with Marcelo Fuenzalida), Latin America Journal of Economics, 46(134): 273-88. 2009

In the survey analysis, the missing data problem can be managed by using Multiple Imputation (MI) methods. In this paper we show the empirical application of MI methods to the financial variables included in Chile’s Social Protection Survey 2004. Based on a brief review of MI methods we conclude that Multivariate Normal one is more appropiate for our case. In addition, we consider two empirical adjustments: (1) use of the variables in their logistic versions, and (2) implementation of the method by groups of individuals. Our results show that both adjustments improve the performance of the MI method.  

[1] “Index Volatility: the case of Chilean Stock Market” [In Spanish] [In English] (with Carmen Gloria Silva), Latin America Journal of Economics, 45(132): 217-288. 2008

This paper reviews the traditional ways to measure volatility which are based only on closing prices, and introduces alternative measurements that use additional information of prices during the day: opening, minimum, maximum, and closing prices. Using the binomial model, we prove that alternative measurements are more efficient than the traditional ones. An empirical application is performed using daily data of the Chilean stock market index IPSA. From the theoretical and empirical results, we propose an unbiased and efficient measure of daily volatility for this financial market.  


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