Global financial cycles and risk premia

Transcription

1 1/20 Global financial cycles and risk premia Òscar Jordà Moritz Schularick Alan M. Taylor Felix Ward IMF 18th Jacques Polak Annual Research Conference 2 3 November 2017 Federal Reserve Bank of San Francisco; University of California, Davis University of Bonn; CEPR University of California, Davis; NBER; CEPR University of Bonn Disclaimer: The views expressed herein are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System.

2 2/20 Motivation What is the interplay of the financial cycle and the business cycle? Study the synchronization of economic and financial cycles in the global economy over 150 years Understand the implications for: Monetary policy and its transmission International risk sharing International economic policy coordination

3 3/20 Research questions & preview of findings Q 1: Patterns of 150 years of cross country financial cycle comovement A 1: Long-run upward trend: synchronization at an all-time high Q 2: Patterns of 150 years of cross country business cycle comovement A 2: Similar financial real synchronization; considerable equity price synchronization since 1980s via risk appetite Q 3: Financial center monetary policy and global risk appetite A 3: U.S. monetary policy increasingly a trigger of swings in risk appetite across global asset markets

4 4/20 Data , annual, 17 countries: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, U.K., U.S. Credit, house prices, equity prices, GDP, consumption, investment and CPI-series Jordà-Schularick-Taylor Macrohistory Database (Jordà, Schularick & Taylor 2016) Dividends and equity return premium The Rate of Return on Everything, (Jordà, Knoll, Kuvshinov, Schularick & Taylor 2017)

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6 6/20 Filtering and synchronicity Baxter-King band-pass filter (findings robust to other filters) Financial cycles last longer than business cycles use wide 2 to 32 year band Report 15-year rolling-window Spearman correlations

7 7/20 Financial cycle synchronization Asset prices growing more synchronized, especially equities Correlation Total loans House prices Equity prices

8 8/20 Business cycle synchronization More synchronization, especially after WW Correlation GDP Consumption Investment

9 9/20 Excess financial comovement y i,t = β 0 + β 1 GDP i,t + β 2 C i,t + β 3 I i,t + ϵ i,t Excess financial comovement = positive correlation in residuals Correlation Total loans House prices Equity prices

10 10/20 What are the sources of equity price comovement? Equity price components: dividends D risk-free rate R risk appetite ρ We can directly observe dividends and the risk-free rates The equity return premium is a measure for risk appetite

11 11/20 Decomposing equity prices Let Q be asset price; Q RN risk neutral price; and ρ risk appetite, then: Q t = Q RN t ρ t Let D be dividends; R risk-free rate. Risk neutral price is the present value: { } k 1 = E t R 1 D t+k Q RN t k=1 j=1 t+j

12 12/20 Comovement of safe rates R is pretty stable Correlation ST rates LT rates

13 13/20 Dividends D and and specially return premiums ρ are up Correlation Dividends Equity return premium

14 14/20 Takeaways so far Financial cycle synchronization trending up the past 150 years Equity price synchronization since 1980s due to global risk appetite synchronization Where does global synchronization in risk appetite come from?

15 15/20 U.S. monetary policy and global risk appetite Local projections: let y be equity price, dividends, or risk-free rate; R c first difference in US short-term rate; X i controls; h = 0,..., 4 h+1 y i,t+h = α h i + 5 βk h y i,t k + k=1 5 γk h Rc i,t k + k=0 5 δk h X i,t k + u i,t+h k=0 How much of the global response is due to dividends and risk-free rates, as opposed to risk appetite?

16 16/20 The response of global equity markets Excess equity price responses are a new phenomenon

17 17/20 Do exchange rate regimes make a difference? Equity price response, full sample: Equity price response, Post-1945: Peg-float distinction blurs in the second half of the sample

18 18/20 Robustness: high frequency instrument 20.0 Post-1990: US rate changes 20.0 Post-1990: HF-Instrument % % Years Equity price Years Risk-neutral OLS results robust to using Gertler-Karadi IV

19 Pegs Floats 19/20 p 0.6 Risk spillovers 0.2 into lending rates Months after shock p Months after shock ppts Safe rates Months after shock Post-Bretton Woods ppts Risky rates Months after shock Pegs Floats See Felix Ward Dancing to the same tune: global risk taking, exchange rates, and monetary policy. (Job Market Paper)

20 20/20 Conclusions and policy implications Conclusions Financial cycle synchronization up for past 150 years Increasing equity price synchronization since 1980 due to global risk appetite synchronization U.S. monetary policy a trigger of risk appetite across global equity markets Policy implications Risk-appetite spillovers can confound monetary policy and financial stability targets Potential role for macropru and capital account policies Benefits to international economic policy coordination