C51 Model Construction and Estimation
Capturing the zero: a new class of zero-augmented distributions and multiplicative error processes
- We propose a novel approach to model serially dependent positive-valued variables which realize a non-trivial proportion of zero outcomes. This is a typical phenomenon in financial time series observed at high frequencies, such as cumulated trading volumes. We introduce a flexible point-mass mixture distribution and develop a semiparametric specification test explicitly tailored for such distributions. Moreover, we propose a new type of multiplicative error model (MEM) based on a zero-augmented distribution, which incorporates an autoregressive binary choice component and thus captures the (potentially different) dynamics of both zero occurrences and of strictly positive realizations. Applying the proposed model to high-frequency cumulated trading volumes of both liquid and illiquid NYSE stocks, we show that the model captures the dynamic and distributional properties of the data well and is able to correctly predict future distributions.
Financial network systemic risk contributions
- We propose the realized systemic risk beta as a measure for financial companies’ contribution to systemic risk given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market as well as balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm’s Value-at-risk (VaR) on the system’s VaR. Statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the U.S. financial system. Our approach can be used to monitor companies’ systemic importance allowing for a transparent macroprudential supervision.
Sovereign credit ratings and their impact on recent financial crises
- This paper discusses the role of the credit rating agencies during the recent financial crises. In particular, it examines whether the agencies can add to the dynamics of emerging market crises. Academics and investors often argue that sovereign credit ratings are responsible for pronounced boom-bust cycles in emerging-markets lending. Using a vector autoregressive system this paper examines how US dollar bond yield spreads and the short-term international liquidity position react to an unexpected sovereign credit rating change. Contrary to common belief and previous studies, the empirical results suggest that an abrupt downgrade does not necessarily intensify a financial crisis.
The new keynesian approach to dynamic general equilibrium modeling: models, methods, and macroeconomic policy evaluation
- This chapter aims to provide a hands-on approach to New Keynesian models and their
uses for macroeconomic policy analysis. It starts by reviewing the origins of the New Keynesian
approach, the key model ingredients and representative models. Building blocks of
current-generation dynamic stochastic general equilibrium (DSGE) models are discussed in
detail. These models address the famous Lucas critique by deriving behavioral equations
systematically from the optimizing and forward-looking decision-making of households and
firms subject to well-defined constraints. State-of-the-art methods for solving and estimating
such models are reviewed and presented in examples. The chapter goes beyond the mere
presentation of the most popular benchmark model by providing a framework for model
comparison along with a database that includes a wide variety of macroeconomic models.
Thus, it offers a convenient approach for comparing new models to available benchmarks
and for investigating whether particular policy recommendations are robust to model uncertainty.
Such robustness analysis is illustrated by evaluating the performance of simple
monetary policy rules across a range of recently-estimated models including some with financial
market imperfections and by reviewing recent comparative findings regarding the
magnitude of government spending multipliers. The chapter concludes with a discussion of
important objectives for on-going and future research using the New Keynesian framework.