The uncovered interest parity puzzle concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits. A separate puzzle is that high real ...interest rate countries tend to have currencies that are stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two findings have apparently contradictory implications for the relationship of the foreign-exchange risk premium and interest-rate differentials. We document these puzzles, and show that existing models appear unable to account for both. A model that might reconcile the findings is discussed.
We explore the impact of negative policy rates on banks using data on 5200 banks from 27 advanced European and Asian countries, 2010–2017. Our cross-country panel specification allows us to condition ...on global shocks and bank-specific fixed effects. Banks offset interest income losses under negative rates with lower deposit expenses and gains in non-interest income, including fees and capital gains. Small and low deposit-ratio banks drive most results. Banks respond to negative rates by increasing lending activity and raising their share of deposit funding. Overall, our results indicate benign implications of negative rates to date for bank profitability.
Macro-Finance Cochrane, John H
Review of Finance,
05/2017, Letnik:
21, Številka:
3
Journal Article
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Macro-finance addresses the link between asset prices and economic fluctuations. Many models reflect the same rough idea: the market's ability to bear risk is greater in good times, and less in bad ...times. Models achieve this similar result by quite different mechanisms. I contrast their strengths and weaknesses. I highlight directions for future research, including additional facts to be matched, and limitations of the models that should prod future theoretical work. I describe how macro-finance models can fundamentally alter macroeconomics, by putting time-varying risk premiums and risk-bearing capacity at the center of recessions rather than variation in the interest rate and intertemporal substitution.
RARE DISASTERS AND EXCHANGE RATES Farhi, Emmanuel; Gabaix, Xavier
The Quarterly journal of economics,
02/2016, Letnik:
131, Številka:
1
Journal Article
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We propose a new model of exchange rates, based on the hypothesis that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets. The probability of ...world disasters as well as each country’s exposure to these events is time-varying. This creates joint fluctuations in exchange rates, interest rates, options, and stock markets. The model accounts for a series of major puzzles in exchange rates: excess volatility and exchange rate disconnect, forward premium puzzle and large excess returns of the carry trade, and comovements between stocks and exchange rates. It also makes empirically successful signature predictions regarding the link between exchange rates and telltale signs of disaster risk in currency options.
Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the US economy ...to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in US GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed.
ABSTRACT
We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and ...insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.
Interest rates and bank risk-taking Delis, Manthos D.; Kouretas, Georgios P.
Journal of banking & finance,
04/2011, Letnik:
35, Številka:
4
Journal Article
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A recent line of research views the low interest-rate environment of the early to mid 2000s as an element that triggered increased risk-taking appetite of banks in search for yield. This paper uses ...approximately 18000 annual observations on euro area banks over the period 2001–2008 and presents strong empirical evidence that low-interest rates indeed increase bank risk-taking substantially. This result is robust across a number of different specifications that account,
inter alia, for the potential endogeneity of interest rates and/or the dynamics of bank risk. Notably, among the banks of the large euro area countries this effect is less pronounced for French institutions, which held on average a relatively low level of risk assets. Finally, the distributional effects of interest rates on bank risk-taking due to individual bank characteristics reveal that the impact of interest rates on risk assets is diminished for banks with higher equity capital and is amplified for banks with higher off-balance sheet items.
Credit record panel data from 1999-2010 indicates that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one's home) peaked in 2003 when mortgage rates reached ...historic lows. We estimate a 27 percent rise in extraction in response to a 100 basis point rate decline, and that house price growth amplifies this relationship. Differential responses to interest rates and home price appreciation by borrower age and credit score provide new evidence of financial frictions. Finally, equity extractions are associated with higher default risk, consistent with the use of borrowed funds for consumption or illiquid investment.
This paper examines the sensitivity of the Dow Jones Islamic market index and its corresponding industry equity indices to changes in the level, slope and curvature of the U.S. term structure of ...interest rates over the period 1996-2015 using the quantile regression approach. The empirical results reveal that the Islamic stock market has a considerable negative exposure to interest rate risk, although a declining time pattern of interest rate sensitivity is observed. The unexpected changes in the level factor of the U.S. yield curve, closely linked to long-term interest rates, are identified as the most important interest rate factor in explaining the variability of Islamic equity returns. Furthermore, the interest rate exposure tends to be stronger during extreme bearish conditions in the stock market, possibly due to the greater pessimism and risk aversion under these market circumstances. It is also shown that Islamic equities are not different from their mainstream counterparts in terms of interest rate sensitivity, indicating that the Islamic stock market does not provide a cushion against interest rate risk.
Using evidence from four major central banks, we decompose news conveyed by central-bank communication into news about monetary policy (monetary news), as well as non-monetary news, i.e., news about ...economic growth and news affecting financial risk premia. Our approach exploits high-frequency comovement of stocks and interest rates combined with monotonicity restrictions across maturities in the yield curve. We find significant differences in the news composition depending on the communication channel used by central banks. Monetary news prevails in policy decision announcements. However, the non-monetary component accounts for more than half of communications that provide context to policy decisions such as press conferences and minutes. We show that non-monetary news drives a significant part of financial markets' reaction during the financial crisis and in the early recovery, while monetary news gains importance since 2013.
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