Liquidity Premium and Investment Horizons

Price Conflict and US Stock Return Volatility Forecasting: Insights from over 150 Years with a Mixed-Frequency Framework

The Impact of Monetary Policy Shocks on Stock Price Crash Risk

This study examines the impact of monetary policy shocks (MPS) on future stock price crash risk (SPCR), using a sample of US firms from 1995 to 2019. We find that expansionary MPS significantly reduce the likelihood of SPCR, while contractionary MPS show no statistically significant effect on SPCR. These results remain robust after controlling for omitted variable bias, reverse causality concern, selection bias, varying forecasting windows, and incorporating different industry definitions. Furthermore, we find that expansionary MPS prevent the accumulation of bad news by curbing aggressive accrual and real earnings management (REM). We also provide evidence for two non–earnings–management‐based channels, where expansionary shocks alleviate external financing constraints and improve investment efficiency. The relation between expansionary MPS and SPCR is more pronounced among firms with better governance monitoring, lower ex‐ante risk, less information asymmetry, greater financial constraints, higher product market competition, and greater stock return sensitivity to MPS. Overall, our findings highlight the important role of macroeconomic policy uncertainty in shaping corporate financial disclosure.

Reaching for Duration

Using historical data on U.S. commercial bank balance sheets, we show that banks’ maturity mismatch has more than tripled since the mid-1980s, moving in close lockstep with declining interest rates and term premia. We rationalize these trends in a model of bank portfolio choice in which banks must cover operating costs out of current earnings. When term premia or short-term rates decline, banks extend the duration of their assets to remain profitable. This “reaching for duration” effect is convex in the degree of term premium compression. The resulting maturity mismatch renders banks increasingly vulnerable to self-fulfilling runs by uninsured depositors. Consistent with the model, less profitable banks subsequently raise their asset maturities, particularly in periods of low term premia and large Federal Reserve asset holdings. Quantitative easing, designed to remove duration risk from the private sector, may thus paradoxically concentrate it on bank balance sheets and undermine financial stability.

Analyzing GDP and stock market dynamics

This paper aims to examine whether the forces linking financial markets to real economic activity operate differently across business cycle phases, using quarterly US data from 1990 to 2024, spanning four recession episodes. Specifically, the author asks whether the mechanism that normally keeps equity markets anchored to corporate earnings and real output remains stable between expansions and recessions and what the accumulated output cost is when that mechanism breaks down. The author first estimates a vector error correction model among real gross domestic product (GDP), the S&P 500 Total Return Index and Earnings Per Share, using cointegration tests to identify the long-run equilibrium structure and controlling for monetary policy, consumer confidence, market uncertainty and real GDP expectations. The author then extends this to a Bayesian Markov-Switching vector error correction model that holds the cointegrating vectors constant while allowing adjustment dynamics and shock covariance structures to vary across regimes, with regime identification anchored to NBER recession dates. The author identifies two stable long-run equilibria anchored by earnings per share. This study finds that the stock market index self-corrects toward its earnings equilibrium in normal expansions, while in recessions, the adjustment coefficient linking the stock market index to earnings reverses sign, with the index moving further from earnings fundamentals; as the Granger causality tests detect predictive content from stock returns and earnings growth to GDP growth but not in the reverse direction, no offsetting predictive force is found within the estimated system. The accumulated output cost amounts to 1.78 percentage points of cumulative GDP growth deficit by quarter 20 following a recession onset. The author provides direct evidence that the corrective mechanism linking the stock market index to its long-run earnings equilibrium is regime-dependent, reversing during recessions in a way that has not previously been documented within a regime-switching cointegration framework.

Long Memory and Asymmetric Uncertainty Effects on Stock Returns and Volatility: A Fractional Integration Approach

This paper investigates how Economic Policy Uncertainty (EPU) affects the returns and volatility (proxied by squared returns) of 448 S&P 500 stocks over the period January 2010–December 2020, and whether volatility persistence is related to EPU sensitivity. Persistence is measured with three semiparametric estimators of the degree of fractional integration: the Geweke–Porter-Hudak log-periodogram regression, the local Whittle, and the exact local Whittle. The linear EPU–volatility link does not survive market-level controls, but extreme EPU shocks generate significant volatility responses in roughly one-fifth of the stocks examined, with a slightly greater impact of adverse (bad) news. Long memory in volatility is pervasive. Persistence and EPU sensitivity are negatively related at the standard bandwidth (ρ = −0.182, p = 0.0001), a link that survives controls for size, liquidity, market beta, and sector fixed effects, and that holds for the subsample of stocks whose long memory is statistically significant according to the Qu (2011) test. This association is mainly concentrated at low frequencies, consistently with a low-frequency phenomenon possibly caused by level shifts.

Identification of daily oil price shocks and their uncertainties via conditional heteroskedasticity