Is There a Macro-Announcement Premium? (with Sang Byung Seo)
Abstract: The conditional return volatility barely drops at macro-announcements. This is at odds with the notion that high announcement returns are a manifestation of a large announcement premium. We show that models with an announcement premium cannot explain the joint patterns of return and volatility over announcement days. Surprisingly, traditional models, which do not feature such a premium, can. Our estimation results based on a statistical setup indicate that the average announcement return is mostly attributable to the monetary policy surprise and pure small-sample components, which do not average out in-sample; the announcement premium is estimated to be small, if any.Presented at: University of Houston, Florida State University, University of Wisconsin-Madison, Virtual Derivative Workshop, Seoul National University, MFA 2021, SWFA 2021, EFA 2021, 2021 North American Summer Meeting of the Econometric Society, Silicon Prairie Finance Conference, 2022 European Finance Association MeetingLearning and Subjective Beliefs About Good and Bad Inflation Ranges (with Sang Byung Seo and Ivan Shaliastovich)
Abstract: We identify desirable/undesirable inflation outcomes under subjective beliefs by comparing survey-based and risk-adjusted distributions of inflation. Intuitively, investors dislike inflation at both extremes, preferring a range in the middle. This "good inflation" region, which investors associate with lower-than-average marginal utility, varies substantially over time in position and width, revealing time-varying preferences across inflation ranges. Different ranges contribute to the inflation risk premium with mixed signs, offsetting each other and often masking important insights into the pricing of inflation risk. We rationalize these empirical patterns using a model where investors learn and update beliefs about hidden deflationary and inflationary recession states.Presented at: Syracuse University, Virtual Household Finance Seminar, University of Wisconsin-Madison, Federal Reserve Board of Governors, Michigan State University, Cancun Derivatives and Asset Pricing Conference, World Symposium on Investment Research (Scheduled)Pricing of Corporate Bonds: Evidence From a Century-Long Cross-Section (with Sebastien Plante, Nikolai Roussanov, and Sang Byung Seo)
Abstract: We construct a new historical corporate bond database spanning 128 calendar years to address longstanding data limitations hampering corporate bond research. By hand-collecting monthly corporate bond quotes from three archival print sources, we complement existing datasets and create an extensive database dating back to 1895, comprising nearly 110,000 unique bonds and 8 million observations. Leveraging this expanded sample, we find that the lack of priced risks in corporate bonds documented by recent studies stems from their reliance on short samples. With greater statistical power, we show that prominent bond and stock factors as well as several nontraded macroeconomic factors are significantly priced with theoretically consistent signs. At the same time, the predictive power of corporate bond spreads for real activity is largely robust in the longer sample, except when prewar data are included. Our database, covering major economic episodes like the Great Depression, not only helps validate previous empirical findings but aims to facilitate further research by serving as a CRSP counterpart for corporate bonds. Presented at: Federal Reserve Board of Governors, Cancun Derivatives and Asset Pricing Conference, Wharton Brownbag, Macro-Finance Society Workshop (Scheduled), FIRS (Scheduled)Can Time‐Varying Risk Premia and Household Heterogeneity Explain Credit Cycles?
Abstract: Using micro-level household mortgage data, I measure dispersion in the credit quality of borrowers in the housing market and show that it forecasts regional real economic activity. I provide empirical evidence that associates the predictive power of dispersion with heterogeneity in the exposure of households' labor income to economy-wide shocks. I explain these observations in a model featuring time-varying risk premia, incomplete markets, and household heterogeneity. Due to risk aversion, the consumption and investment responses of households have a convex association with their labor income exposure to aggregate risks. As a result, dispersion forecasts the aggregate output more strongly in more heterogeneous regions, consistent with the data.Presented at: University of Houston, University of Kansas, University of Georgia, Cornerstone Research, SWFA 2021, EFA 2021, AREUEA 2022