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CARLO AMBROGIO FAVERO

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Econometric Methods for Finance and Macroeconomics


The objective of this course is to illustrate how VAR models can be applied to empirical models in finance and macroeconomics. We first illustrate how present value models are constructed and why they constitute a framework for integrating macroeconomic information in the determination of asset prices. We shall then illustrate the empirics by considering in turn, the Bond Market, the Stock Market  the relation between Wealth and Consumer Behaviour and the analysis of the macroeconomic impact of fiscal  policy.  Data and draft of the MATLAB and E-VIEWS codes for replication are made available here, as well as a reading list for the discussion.

EXAM: The exam consists in an essay that each student has to write individually. Each essay should be based on one of the articles included in the reading list. Different  students are not allowed to work on the same article. Each essay should contain three compulsory parts: 1) Replication of the main results in the original article 2) A referee's report on the article 3) A proposal, based on 1) and 2), for further research on the topic of the article. 

  1. Consumption and Asset Price Fluctuations, long-run risk

  1. VARs and CVARs in macroeconomics and finance.

VARs and CVARs
Using VAR models
Identification and Description of VAR models
From VAR Innovations to Structural Shocks
Structural Shocks identified independently from VARs
Cointegration and Multivariate Trend-Cycle Decompositions
Global VARs
VARs in Finance
VARs in Macro

LECTURE NOTES , LECTURE NOTES (P-T DECOMP)

READINGS

 Campbell J.Y., A.W. Lo and A.C.MacKinley (1997) The Econometrics of Financial Markets, Princeton University Press, Chapter 7 
Campbell J.Y. and R.J. Shiller (1987) "Cointegration and Tests of Present Value Models", Journal of Political Economy, 95, 5, 1062-1088 
Cochrane J. (2000) "Asset Pricing", Princeton University Press, Chapter 20
Cochrane J.(1994) "Permanent and Transitory Components of GNP and Stock Prices", the Quarterly Journal of Economics, 109, 1, 241-26
Campbell J.Y. and R.J. Shiller(1988) "Interpreting Cointegrated Models" NBER W.P. 2568
Garratt A., D. Robertson ans S.Wright(2003) "Permanent vs Transitory Components and Economic Fundamentals",  mimeo 
Lettau M. and S.Ludvigson(2004) Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption. American Economic Review, 2004, March, Volume 94, No. 1, pages 276-299.

EXERCISE 1

DATA AND CODES

2. Models for the Term Structure

Single Equation Evidence on the Expectations Theory
The Present Value approach
Factor Models of the Term Structure
Ad hoc Factor Models
No Arbitrage Factor Models
Affine Term Structure Models

LECTURE NOTESSLIDES 

READINGS

Piazzesi M. and A. Ang (2003) A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables" Journal of Monetary Economics Volume 50, Issue 4, May 2003, 745-7
Ang A., Piazzesi M. and M.Wei(2003) "What does the yield curve tell us about GDP growth?" paper available from http://www.columbia.edu/∼aa610
Campbell J., A. Lo and C.MacKinlay, 1997, The Econometrics of Financial Markets, Princeton University Press: Princeton
Campbell,J.,and Shiller,R. "Cointegration and Tests of Present Value Models" J.P.E. 95 (1987) 1062-1088
Chen R.R. and L. Scott, (1993) "Maximum Likelihood estimation for a multi-facor equilibrium model of the term structure of interest rates"Journal of Fixed Income, 3, 14-31.
Cochrane, JH. 2005. Asset Pricing, revised ed. Princeton University Press, Princeton,
Cochrane J. and M.Piazzesi(2008) "Decomposing the Yield Curve"
Cochrane, JH and M Piazzesi. 2005. Bond Risk Premia. American Economic Review 95, 138—160
Diebold and Li (2005) "Forecasting the Term Structure of Government Bond Yields",  Journal of Econometrics
Diebold F.X., Piazzesi M and G.D. Rudebusch(2005) "Modeling Bond Yields in Finance and Macroeconomics", Appendix 
Diebold and Li (2005) "Forecasting the Term Structure of Government Bond Yields",  Journal of Econometrics
Gürkaynak, RS, B Sack, and JH Wright. 2006, The US Treasury Yield Curve
Ireland P.(2015) “Bond Risk Premia, Monetary Policy and the Economy” mimeo
Nelson C.R. and A.F. Siegel (1987) "Parsimonious modelling of yield curves", Journal of Business, 60, 473-489
Shiller, R. (1979) "The Volatility of Long Term Interest Rates and Expectations Models of the Term Stucture" Journal of Political Economy, 87, 1190-1219 
Thornton D. (2003) "Predicting the Short-Term Rate: Some Good and Bad News for the Expectations Hypothesis of the Term Structure of Interest Rates", mimeo Federal Reserv Bank of St.Louis  

EVIEWS CODES FOR NS INTERPOLANT 
EXERCISE 2, DATA AND CODES EXERCISE 3, DATA AND CODES 
EXTENDED SOLUTION OF EXERCISE 3 (by A.Gobbi) EXTENDED SOLUTION OF EXERCISE 3 (by Haoxi Yang)

  3. Consumption and Asset Price Fluctuation, long-run risk

Consumption and Asset Pricing Puzzles
Long-run Consumption Growth
Stock returns and Cointegration between Consumption and Wealth
Consumption and Present Value Models for the Stock Market
Long-Run Risk

LECTURE NOTES

READINGS:

Bansal R.(2007) Long-run risk and Financial Markets, Federal Reserve Bank of St Loouis  
Bansal Yaron (2002) Risk for the Long-run: a Potential Resolution of asset pricing puzzles
Bansal, Dittmar and Kiku (2007) "Cointegration and Consumption risk in Asset Returns" Review of Financial Studies
Beeler J and J.Campbell (2009) "The long-run risks model and aggregate asset prices: an empirical assessment"
Campbell J.Y., A.W. Lo, and A.C. MacKinlay(1997) "The Econometrics of Financial Markets", Princeton University Press
Cochrane J.(2001) "Asset Pricing", Princeton University Press
Cochrane J.(2005) Financial Markets and the Real Economy, mimeo Chicago GSB.
Cochrane J.Y. and Hansen L.(1992) "Asset Pricing Explorations for Macroeconomics, NBER Macroeconomics Annual, vol.7, pp 115-165.
Epstein L. and S.Zin,(1989), "Substitution, Risk Aversion and the Temporal Behaviour of Consumption and Asset returns: A theoretical framework" Econometrica, 57, 937-968
Hansen L.P., J.C. Heaton and N.Li(2004) "Consumption Strikes Back?",
 Julliard P.(2004) "Labor Income Risk and Asset Returns", Job Market Paper, Princeton University
M.Lettau and S.Ludvigson (2001) "Consumption, Aggregate Wealth and Expected Stock Returns", Journal of Finance, 56,3, 815-854
Parker J.A and C.Julliard(2003) "Consumption Risk and Cross-Sectional Returns", NBER Working Paper 9538
Sargent T (2007) Commentary to Bansal, Long-run risk and Financial Markets, Federal Reserve Bank of St Louis

EXERCISE 4

DATA AND CODES

4. Present Value Models for the Stock Market and the Term Structure of Stock Market Risk

(a) the Dynamic Dividend Growth model
Campbell, John Y., and Robert Shiller, 1988, Stock Prices,Earnings, and Expected Dividends, Journal of Finance, 43, 661-676.
Campbell, John Y., and Robert Shiller, 1988, The Dividend-Price Ratio and Expectations of future Dividends and Discount Factors, Review of Financial Studies, 1:195-228
Campbell, John Y., and Robert Shiller, 1998 Valuation Ratios and The Long-Run Stock Market Outlook, 1998, Journal of Portfolio Management
Campbell, John Y., and Robert Shiller, 2001 Valuation Ratios and The Long-Run Stock Market Outlook, an update, Cowles Foundation DP 1295
Cochrane John, 2006, The dog that did Not Bark: a Defense of return Predictability, NBER WP 12026
Fama, Eugene and Kenneth R. French, 1988, Dividend Yields and Expected Stock Returns, Journal of Financial Economics, 22, 3-26.
Robert J. Shiller. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?" American Economic Review 71 (June 1981), 421-436. 21

(b) Cointegration and the Dynamic Dividend Growth Model
Campbell JY and R. Shiller (1987) "Cointegration and Present Value Models" Journal Of Political Economy, 95, 1062-1088

(c) The Econometrics of Stock Market Predictability
Boudoukh, Jacob, Richardson, Matthew and Robert F. Whitelaw, 2008, The Myth of Long-Horizon Predictability, The Review of Financial Studies, 21, 4, 1577-1605.
Campbell, John Y., and Samuel B. Thomson, 2008, Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?, The Review of Financial Studies, 21, 1509-1531.
Goyal, Amit, and Ivo Welch, 2008, A Comprehensive Look at the Empirical Performance of Equity Premium Prediction. The Review of Financial Studies, 21-4, 1455-1508.
Ribeiro R.M.(2002) "Predictable dividends and returns" mimeo, GSB, Univeristy of Chicago.
Pesaran M.H. and A.Timmermann (1995) `Predictability of Stock Returns: Robustness and Economic Significance', Journal of Finance, 50, 4, 1201-1228
Valkanov, R., 2003. Long-horizon regressions: Theoretical results and applications. Journal of Financial Economics 68, 201--232. 33

(d) Cointegration between Dividends and Prices
Boudoukh, J., Michaely, R., Richardson, M. and M. Roberts, 2007, On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing, Journal of Finance.
Favero CA, A.Gozluklu and A.Tamoni(2010) "Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-Run Stock Market Returns"
Lettau, Martin, and Stijn Van Nieuwerburgh, 2008, Reconciling the Return Predictability Evidence, Review of Financial Studies, 21, 4, 1607-1652.

(e) Inflation and the FED model of the Stock Market
Asness C.(2003) Fight the Fed model: the relationship between future returns and stock and bond market yields, Journal of Portfolio Management, Fall 2003
John Y. Campbell and John Ammer (1993), "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance 48, 337.
John Y. Campbell and Tuomo Vuolteenaho (2004), "Inflation Illusion and Stock Prices" (Cambridge: NBER Working Paper 10263)
Lander J., Orphanides A. and M.Douvogiannis(1997) "Earning forecasts and the predictability of stock returns: evidence from trading the S&P" Board of Governors of the Federal Reserve System, http:www.bog.frb.fed.org
Franco Modigliani and Richard Cohn (1979), "Inflation, Rational Valuation, and the Market," Financial Analysts’ Journal.
 Thomas J.(2006) Don’t Fight the FED Model, Yale University School of Management Discussion Paper. 

(f)Cointegration and Consumption based models of stock-market returns
Lettau, Martin, and Sydney Ludvigson, 2005, Expected Returns and Expected Dividend Growth, Journal of Financial Economics, 76, 583-626
Lettau, M., and S. Ludvigson. "Consumption, Aggregate Wealth and Expected Stock Returns." Journal of Finance, 56 (2001), 3, 815-849.

(g) An Alternative Approach
Ferreira and Santa Clara (2011) "Forecasting stock market returns: The sum of the parts is more than the whole." Journal of Financial Economics, forthcoming.

(h) The Term Structure of risk 

Van Binsbergen J.H. and R.Kojnen, 2009, Predictive Regression:a Present Value Approach, mimeo
Campbell, J., and L. Viceira, (2005), "The term structure of risk-return trade-off"
Campbell, J., and L. Viceira, (2004), "Long-horizon mean-variance analysis. A Primer"
Favero CA and Tamoni A.(2010) "Demographics and the Term Structure of Stock Market Risk"
Pastor and Stambaugh(2008) "Are Stock less volatile in the long-run?"
Pastor and Stambaugh(2009) "Predictive Systems. Living with imperfect predictors" Technical Appendix

NOTESNOTES on Returns' Predictability and the TS of Stock MArket Risk
REPLICATION PS
EXERCISE 5, CODES,DATA

5. The Econometrics of Fiscal Policy
SLIDESAUSTERITY 

Favero C. and M.Karamisheva(2015) What Do We know about Fiscal Multipliers? SLIDES

Alesina A., Favero C.A. and F.Giavazzi (2015) "The Output effect of Fiscal Consolidation Plans", Journal of International Economics
Auerbach, Alan, and Yuriy Gorodnichenko (2012), “Fiscal Multipliers in Recession and Expansion.” in Fiscal Policy after the Financial Crisis, edited by Alberto Alesina and Francesco Giavazzi (Chicago: University of Chicago Press).
Blanchard, Olivier and R. Perotti [2002]: "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output", Quarterly Journal of Economics
Caldara D.(2011) "The Analytics of SVAR:A unified framework to measure fiscal multipliers"
Chari, V.V., P. Kehoe, and E. McGrattan,   Are structural VARs with long run restrictions useful in developing business cycle theory?, Fed of Minneapolis Staff Report,  May 2007
Christiano, L., M. Eichenbaum, and R. Vigfusson, Assessing structural VARs'', NBER Macroeconomics Annual, 2006, 1-72
Dai Q. and T.Philippon (2004) "Fiscal Policy and the Term Structure of Interest Rates", mimeo
Favero C.A., Giavazzi F.(2011) "Measuring Tax Multipliers: the narrative Method in fiscal VARs" forthcoming the American Economic Journal, Economic Policy
Fernandez-Villaverde, J. et al, A,B,C's (and D's) for understanding VARs'',  AER, June 2007,  1021-1026
Chung Hess and E.Leeper [2007]: "What has Financed Government Debt?" NBER WP 13425
Jordà, Oscar (2005), “Estimation and Inference of Impulse Responses by Local Projections”, American Economic Review, 95(1): 161-182
Jordà, Òscar and Alan M. Taylor (2013), "Last update 08/03/2019