Essays On Money Asset Prices And Liquidity Premia
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Essays On Money Asset Prices And Liquidity Premia
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Author : Seungduck Lee
language : en
Publisher:
Release Date : 2017
Essays On Money Asset Prices And Liquidity Premia written by Seungduck Lee and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
This dissertation analyzes the determinants of asset prices and the effect of monetary policy on not only asset prices, but also on other macroeconomic outcomes such as asset market trade volume and welfare in an environment with search frictions. The analysis in such an environment helps to examine an important component of determining asset prices: liquidity, which is assets' ability to facilitate transactions. Hence, the dissertation particularly examines the effect of monetary policy on asset prices that the traditional asset pricing models without search frictions may be missing, and also explain some phenomena which are often considered abnormal in macroeconomics and international macroeconomics such as negative nominal yields and the Uncovered Interest Parity puzzle. The dissertation consists of three stand-alone papers and I provide their abstracts as follows. The first chapter is "Money, Asset Prices and the Liquidity Premium". This paper examines the effect of monetary policy on the market value of the liquidity services that financial assets provide, known as the liquidity premium. Money supply and nominal interest rates have positive effects on the liquidity premium, but asset supply has a negative effect. This implies that liquid financial assets aresubstantive substitutes for money, and that the opportunity cost of holding money plays a key role in explaining variation in the liquidity premium and thus in asset prices. The higher cost of holding money due to higher money growth rates leads to a higher liquidity premium. My empirical analysis with U.S. Treasury data over the period from 1946 and 2008 confirms the theoretical predictions. The theory also suggests that the liquidity properties of assets can cause negative nominal yields when the cost of holding money is low and liquid assets are scarce. I present empirical findings in the U.S. and Switzerland to support this prediction. The second chapter is a joint paper with Kuk Mo Jung, titled "A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle". In this paper, a new monetary theory is set out to resolve the "Uncovered Interest Parity (UIP)" Puzzle. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bondscarry liquidity premia due to their medium of exchange role as either collateral or a means of payment. In this framework, no-arbitrage ensures a positive comovement of real return on money and nominal bonds. Thus, when inflation in one country becomes relatively lower, i.e., real return on this currency is relatively higher, its nominal bonds should also yield higher real return. We show that their nominal returns can also become higher under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Since a currency with lower inflation is expected to appreciate, the high interest currency does indeed appreciate in this case, i.e., the UIP puzzle is no longer an anomaly in our model. Our liquidity based theory can in fact help understanding many empirical observations that risk based explanations find difficult to reconcile with. The third chapter is joint work with Athanasios Geromichalos, Jiwon Lee, and Keita Oikawa, titled "Over-the-Counter Trade and the Value of Assets as Collateral" and was published in Economic Theory in 2016. We study asset pricing within a general equilibrium model where unsecured credit is ruled out, and a real asset helps agents carry out mutually benecial transactions by serving as collateral. A unique feature of our model is that the agent who provides the loan might have a low valuation for the collateral asset. Nevertheless, the lender rationally chooses to accept the collateral because she can access a secondary asset market where she can sell the asset. Following a recent strand of the finance literature, based on the influential work of Duffie, Garleanu, and Pedersen (2005), we model this secondary asset market as an over-the-counter market characterized by search and bargaining frictions. We study how the asset's property to serve as collateral affects its equilibrium price, and how the asset price and the economy's welfare are affected by the degree of liquidity in the secondary asset market.
Essays On Money Inflation And Asset Prices
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Author : Timothy Gordon Jones
language : en
Publisher:
Release Date : 2008
Essays On Money Inflation And Asset Prices written by Timothy Gordon Jones and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with Interest rates categories.
This dissertation explores different aspects of the interaction between money and asset prices. The first chapter investigates how a firm's financing affects its decision to update prices: does linking interest rates to inflation alter the firm's optimal price updating strategy? Building on the state dependent pricing models of Willis (2000) and the price indexing literature of Azariadis and Cooper (1985) and Freeman and Tabellini (1998), this model investigates the financing and price updating decisions of a representative firm facing state-dependent pricing and a cash-in-advance constraint. The model shows the circumstances under which a firm's financing decision affects its price updating decision, and how the likelihood of changing prices affects the amount borrowed. It also illustrates how the use of nominal (as opposed to inflation-linked) interest rates leads to a lower frequency of price updating and higher profits overall for a firm facing menu costs and sticky prices. The second chapter extends the bank run literature to present a theoretical mechanism that explains how money supply can affect asset prices and asset price volatility. In a two period asset allocation model, agents faced with uncertainty cannot perfectly allocate assets ex-ante. After income shocks are revealed, they will be willing to pay a premium over the future fundamental value for an asset in order to consume in the current period. The size of this premium is directly affected by the supply of money relative to the asset. This paper explores the relationship between economy-wide monetary liquidity on the mean and variance of equity returns and in relation to market liquidity. At an index level, I test the impact of money-based liquidity measures against existing measures of market liquidity. I proceed to do a stock level analysis of liquidity following Pastor and Stambaugh (2003). The results indicated that measures of aggregate money supply are able to match several of the observed relationships in stock return data much better than market liquidity. At an individual stock level, monetary liquidity is a priced factor for individual stocks. Taken together, these papers support the idea that changes in the money supply have consequences for the real economy.
Essays In Macro And Monetary Economics
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Author :
language : en
Publisher:
Release Date : 2016
Essays In Macro And Monetary Economics written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
This dissertation consists of two self-contained essays in macro and monetary economics, organized in the form of two chapters. In the first chapter, I develop a model with limited commitment and endogenous monitoring to study the optimal number and size of banks. Banking arises endogenously because of economies of scale. The planner designates a fraction of ex-ante homogenous agents to be bankers and concentrates monitoring efforts on them. Having fewer bankers reduces total monitoring costs, but this means more deposits per banker. Having more deposits, however, increases the bankers’ incentives to divert deposits for their own profit. The result is that the planner needs to give bankers some reward to dissuade such opportunistic behavior. The optimal number of banks is negatively related to the fixed and marginal monitoring costs, impatience, and the temptation to default, but positively related to the return on real investments. To implement efficient allocations, there is a tension between equilibrium with free entry and having positive bank profit for incentive reasons. When the tax on banks is not too high, there exist non-degenerate stationary equilibriums. The equilibrium allocation is optimal only if the government limits entry of banks. One natural way is to charge a tax on bankers and give a transfer to non-bankers; another way is to simply impose a quota by limiting the number of bank charters. In the second chapter, using an overlapping generations model, I propose a resolution of the high household saving puzzle in China by analyzing the impact of the one-child policy and the resulting flattening of age-earning profiles on household saving behavior. Following Ben-Porath’s (1967) human capital accumulation technology, with the implementation of the one-child policy, the initial human capital of each young worker who enters into the job market increases, which results in a decrease of the worker’s on-the-job-training, and thus a flattening of age-earning profiles. The flattened age-earning profiles encourage younger cohorts to save more for consumption smoothing, and, therefore, provides an explanation for the high saving rates among the young. Both the data and the model demonstrate that the mechanism is valid.
Essays On Monetary Economics
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Author : Chien-Chiang Wang
language : en
Publisher:
Release Date : 2017
Essays On Monetary Economics written by Chien-Chiang Wang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with Electronic dissertations categories.
In the first chapter, I propose a liquidity theory of yield curves to analyze the impact of quantitative easing, especially its influence on the yield curve and the inflation rate at the zero lower bound. In the model, a term premium originates from the endogenous difference in liquidity between securities of varying maturities, and the difference is generated by financial market frictions. Financial market frictions cause liquidation risk and reinvestment risk for holding assets, and households with different characteristics make different assessments of the two risks. Accordingly, different households require different term premia and endogenously participate in markets for different maturities. When the short-term interest rate reaches the zero lower bound, long-term interest rates may not reach the reservation interest rates for long-term bond buyers. Thus, central banks' purchases of long-maturity securities can effectively decrease long-term interest rates and the term premium. Moreover, central banks' long-term security purchases decrease inflation at the zero lower bound. These two effects together result in a distinct policy implication: quantitative easing shifts down the real yield curve at the long-maturity end but shifts it up at the short-maturity end if the households are sufficiently diverse in the term premia they require.In the second chapter, I develop a dynamic general equilibrium model to investigate the interaction between asset market liquidity and repo haircuts. In the economy, investors finance their asset purchases through secured borrowing, and the asset is pledged as collateral. Investors' debt roll over before their assets mature. The maturity of assets is random, and default occurs when the borrowing limit is reached. The search and matching friction in the financial market results in delays in collateral liquidation, and therefore causes a gap between the asset price and the borrowing capacity, which is the haircut. The model reveals an endogenous feedback loop between asset market liquidity and repo haircuts. On the one hand, asset market liquidity determines the easiness of asset liquidation, which in turn determines the haircuts. On the other hand, haircuts influence entrepreneurs' borrowing limits and leverage, which affect the probability of default and therefore influence the asset market liquidity. When an unanticipated shock on market liquidity occurs, the increase in haircuts decreases households' borrowing limit and triggers simultaneous defaults. The liquidation of asset further decreases the liquidity of the asset market, and the impact is exacerbated by the endogenous feedback loop.The third and final chapter studies the macroeconomic consequences of central banks' risky asset purchases. By purchasing risky assets, central banks remove them from the financial market and inject money, which is a less risky and more liquid asset. Whereas, the removed risky assets stay in central banks' balance sheets and increase the instability of their budgets, and thus, create inflation risk. The key friction in the model is the market segmentation between the money transaction sector and financial transaction sector. The households in money transaction sector can only use cash as a medium of exchange, but households in the financial transaction sector can use all forms of assets and asset backed securities to facilitate transaction. The central banks' purchases of risky assets overcome the market segmentation and can improve social welfare through risk sharing between financial sector transactions and money transactions. However, because the risk in money transactions cannot be efficiently allocated between risk-averse and risk-neutral traders by financial intermediaries, central banks should make the holding of cash less risky, and it is not optimal for central banks to purchase all risky assets and completely insure the risk in the financial transactions with money transactions.
Liquidity And Asset Prices
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Author : Yakov Amihud
language : en
Publisher: Now Publishers Inc
Release Date : 2006
Liquidity And Asset Prices written by Yakov Amihud and has been published by Now Publishers Inc this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with Business & Economics categories.
Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
The General Theory Of Employment Interest And Money
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Author : John Maynard Keynes
language : en
Publisher: Springer
Release Date : 2018-07-20
The General Theory Of Employment Interest And Money written by John Maynard Keynes and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018-07-20 with Business & Economics categories.
This book was originally published by Macmillan in 1936. It was voted the top Academic Book that Shaped Modern Britain by Academic Book Week (UK) in 2017, and in 2011 was placed on Time Magazine's top 100 non-fiction books written in English since 1923. Reissued with a fresh Introduction by the Nobel-prize winner Paul Krugman and a new Afterword by Keynes’ biographer Robert Skidelsky, this important work is made available to a new generation. The General Theory of Employment, Interest and Money transformed economics and changed the face of modern macroeconomics. Keynes’ argument is based on the idea that the level of employment is not determined by the price of labour, but by the spending of money. It gave way to an entirely new approach where employment, inflation and the market economy are concerned. Highly provocative at its time of publication, this book and Keynes’ theories continue to remain the subject of much support and praise, criticism and debate. Economists at any stage in their career will enjoy revisiting this treatise and observing the relevance of Keynes’ work in today’s contemporary climate.
Measuring Liquidity In Financial Markets
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Author : Abdourahmane Sarr
language : en
Publisher: International Monetary Fund
Release Date : 2002-12
Measuring Liquidity In Financial Markets written by Abdourahmane Sarr and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002-12 with Business & Economics categories.
This paper provides an overview of indicators that can be used to illustrate and analyze liquidity developments in financial markets. The measures include bid-ask spreads, turnover ratios, and price impact measures. They gauge different aspects of market liquidity, namely tightness (costs), immediacy, depth, breadth, and resiliency. These measures are applied in selected foreign exchange, money, and capital markets to illustrate their operational usefulness. A number of measures must be considered because there is no single theoretically correct and universally accepted measure to determine a market's degree of liquidity and because market-specific factors and peculiarities must be considered.
Estimating Liquidity Premia In The Spanish Government Securities Market
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Author :
language : en
Publisher:
Release Date : 2000
Estimating Liquidity Premia In The Spanish Government Securities Market written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2000 with Government securities categories.
Estudio de la presencia de primas de liquidez (rentabilidad adicional exigida por el mercado a los activos menos liquidos) en los precios relativos de los bonos negociados en el mercado español de deuda publica. En la primera parte se propone una clasificacion de los bonos en cuatro categorias, segun su grado de liquidez. En la segunda se estiman primas de liquidez, incluyendo nuevos parametros en la estimacion de la curva cupon cero. Los resultados sugieren la existencia de primas de liquidez en los bonos clasificados como post-benchmark (bonos que pierden el status de benchmark por la aparicion de una nueva referencia benchmark), si bien su tamaño es relativamente pequeño. Por el contrario, la falta de liquidez de los bonos pre-benchmark (bonos recien emitidos que todavia no han alcanzado el status de benchmark) no parece estar valorada. Todos estos resultados son robustos al impacto de la fiscalidad en el precio de los bonos. (fa) (ad).
Measuring Systemic Risk Adjusted Liquidity Srl
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Author : Andreas Jobst
language : en
Publisher: International Monetary Fund
Release Date : 2012-08-01
Measuring Systemic Risk Adjusted Liquidity Srl written by Andreas Jobst and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012-08-01 with Business & Economics categories.
Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.
Financial Markets And The Real Economy
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Author : John H. Cochrane
language : en
Publisher: Now Publishers Inc
Release Date : 2005
Financial Markets And The Real Economy written by John H. Cochrane and has been published by Now Publishers Inc this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with Business & Economics categories.
Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.