Global Pricing of Risk and Stabilization Policies

Transcription

1 Global Pricing of Risk and Stabilization Policies Tobias Adrian Daniel Stackman Erik Vogt Federal Reserve Bank of New York The views expressed here are the authors and are not necessarily representative of the views of the Federal Reserve Bank of New York or of the Federal Reserve System July 215 T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 1

2 Risk-Return Tradeoff and Economic Policies Previous work: Theory of Adrian and Boyarchenko (212) 1 Welfare Distress probability α This talk: Document risk-return tradeoff empirically 1. For global pricing of risk exposures 2. For monetary, fiscal, prudential policy α T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 2

3 Our Logic 1. Global financial institutions impact the global pricing of risk volatility is key state variable 2. Risk-return tradeoff: Larger global price of risk exposure accompanies higher growth higher volatility 3. Countries can mitigate this shift of the risk-return tradeoff via monetary policy fiscal policy macroprudential policies T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 3

4 Global Institutions and Global Pricing of Risk Outline Global Institutions and Global Pricing of Risk Global Pricing of Risk and the Macro Risk-Return Tradeoff The Macro Risk-Return Tradeoff and Economic Policies T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 4

5 Global Institutions and Global Pricing of Risk VIX as a Measure of Risk Appetite VIX measures global pricing of risk Global capital flows, credit growth, & asset prices comove with the VIX (Rey (215)) Price of sovereign risk correlates strongly with the VIX (Longstaff, Pan, Pedersen, and Singleton (211)) Nonlinear function of the VIX forecasts stock & bond returns (Adrian, Crump, and Vogt (215)) T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 5

6 Global Institutions and Global Pricing of Risk VIX as a Measure of Risk Appetite VIX measures global pricing of risk Global capital flows, credit growth, & asset prices comove with the VIX (Rey (215)) Price of sovereign risk correlates strongly with the VIX (Longstaff, Pan, Pedersen, and Singleton (211)) Nonlinear function of the VIX forecasts stock & bond returns (Adrian, Crump, and Vogt (215)) Monetary policy and the pricing of risk interact Policy rate reacts to the VIX (Bekaert, Hoerova, and Duca (213)) Substantial variation in the VIX attributed to rate shocks (Miranda-Agrippino and Rey (214)) Risk taking channel of monetary policy (Borio and Zhu (212)) Why is the VIX so important? T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 5

7 Global Institutions and Global Pricing of Risk Global Financial Institutions Asset allocation is largely delegated to financial institutions The delegation gives rise to principal agents problems Contractual features between institution and their investors redemptions for asset managers (Vayanos (24)) high water marks for hedge funds (Panageas and Westerfield (29)) VaR constraints for banks (Adrian and Shin (214)) Intermediary constraints tend to correlate with volatility In equilibrium, such constraints impact pricing intermediary asset pricing He and Krishnamurthy (28, 211) T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 6

8 Global Institutions and Global Pricing of Risk VaR Constraints of Global Financial Institutions T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 7

9 Global Institutions and Global Pricing of Risk Large VIX and Fund Flows T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 8

10 Global Institutions and Global Pricing of Risk Institutional Asset Pricing: Theory Each global financial institution i maximizes maxe t [ntr i t+1 ] Cov t [ntr i t+1, X t+1 ]ψ i nt i t s.t.var i t α w i t T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 9

11 Global Institutions and Global Pricing of Risk Institutional Asset Pricing: Theory Each global financial institution i maximizes maxe t [ntr i t+1 ] Cov t [ntr i t+1, X t+1 ]ψ i nt i t s.t.var i t α w i t Then the demand for each risky asset is: n i t = 1 λ i tα [E t[r t+1 ] Cov t [r t+1, X t+1 ]ψ i t][var t (r t+1 )] 1 T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 9

12 Global Institutions and Global Pricing of Risk Institutional Asset Pricing: Theory Each global financial institution i maximizes maxe t [ntr i t+1 ] Cov t [ntr i t+1, X t+1 ]ψ i nt i t s.t.var i t α w i t Then the demand for each risky asset is: n i t = 1 λ i tα [E t[r t+1 ] Cov t [r t+1, X t+1 ]ψ i t][var t (r t+1 )] 1 Market clearing gives equilibrium returns E t [r t+1 ] = Cov t (r t+1, r M t+1) 1 Σ i w i t λ i t α + Cov t [r t+1, X t+1 ] Σ i w i t ψi t λ i t α Σ i w i t λ i t α T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 9

13 Global Institutions and Global Pricing of Risk Institutional Asset Pricing: Predictions Global equilibrium expected returns are: We assume affine prices of risk: E t [r t+1 ] = β t Λ t Λ t = λ + λ 1 X t [ X t = rt M, rt f, φ (vix t ) φ (vix t ) is a nonlinear function of the VIX that is forecasting returns. ] T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 1

14 Global Institutions and Global Pricing of Risk Nonlinearities in the VIX Matter Adrian, Crump, and Vogt (215): Compensation for risk and flight-to-safety in US stock and bond returns is nonlinear in the VIX Intuition: Large moves in VIX are potentially systemic events priced differently than day-to-day fluctuations in uncertainty φ (vix t ) captures these nonlinearities, consistent with asset manager asset pricing, e.g. Vayanos (24) intermediary asset pricing, e.g. Adrian and Boyarchenko (212) T Adrian, D Stackman, E Vogt Global Pricing of Risk July

15 Global Institutions and Global Pricing of Risk Estimation of the VIX Pricing Function The global price of risk variable φ (VIX t ) is unknown Estimate nonparametrically by running a forecasting regressions of global USD equity and bond returns of 27 countries on lagged VIX + global market Sieve Reduced Rank Regressions (SRRR) of (Adrian, Crump, Vogt) r c t+h = ac + b c φ (VIX t ) + η c t+h, c = 1,..., (neqts + n bnds + mkt) Each expected asset return is an affine transformation of a common nonlinear function SRRR advantage: all 27 equity and 27 bond returns are jointly informative about shape of φ( ) T Adrian, D Stackman, E Vogt Global Pricing of Risk July

16 Global Institutions and Global Pricing of Risk Conditional Sharpe Ratios of Global Stocks and Bonds Ê t [ r c t+h ] = â c + ˆb c ˆφ (VIX t ) T Adrian, D Stackman, E Vogt Global Pricing of Risk July

17 Global Institutions and Global Pricing of Risk Robustness of the Shape of the Nonlinearity: φ(v) Separately Estimated for US and Rest-of-the-World T Adrian, D Stackman, E Vogt Global Pricing of Risk July

18 Global Institutions and Global Pricing of Risk Global Pricing of Risk Prices of Risk MKT RF φ(v) λ 1 1.9*** -.3** -.49*** E t [r t+h ] = β(λ + λ 1 X t ) State variables X t = [MKT t, RF t, φ(v t )] are 1. price of risk forecasting variables 2. cross sectional pricing factors T Adrian, D Stackman, E Vogt Global Pricing of Risk July

19 Global Institutions and Global Pricing of Risk Global Equity Exposures β i MKT β i RF β i φ(v) β i λ 1 (α i + β i λ ) MKT.99*** ***.15*** aus Equity 1.1*** -5.5*** -.42** 1.58***.23*** bel Equity 1.2*** ***.19*** can Equity 1.1*** 5.19*** -.49*** 1.17***.19*** che Equity.88*** ***.14*** den Equity 1.3*** 5.51*** ***.19*** deu Equity 1.24*** *** 1.14***.15*** esp Equity 1.2*** -3.45*.49*** 1.18***.18*** fra Equity 1.15*** ** 1.6***.16*** gbr Equity 1.*** 2.21* -.19* 1.11***.15*** ire Equity 1.17*** ***.19*** jpn Equity.89***.53.45**.73***.5*** nld Equity 1.21*** ***.17*** nzl Equity.68*** -4.65* -.66** 1.21***.19*** por Equity 1.28*** *** 1.12***.13*** swe Equity 1.44*** 4.23* ***.21*** usa Equity.89*** ***.16*** T Adrian, D Stackman, E Vogt Global Pricing of Risk July

20 Global Institutions and Global Pricing of Risk Global Bond Exposures β i MKT β i RF β i φ(v) β i λ 1 (α i + β i λ ) aus Bonds.15** -3.5** -.28*.4***.11*** bel Bonds.14** -6.66***.9.32***.9*** can Bonds.12** **.25***.9*** che Bonds *** *.6*** den Bonds *** -..25***.8*** deu Bonds ***.8.21**.7*** esp Bonds.25*** -8.71***.3*.41***.12*** fra Bonds.1* -6.95***.12.28***.8*** gbr Bonds ***.8*** ire Bonds *** ***.1*** jpn Bonds -.15*** nld Bonds ***.1.27***.8*** nzl Bonds.16** -4.29** ***.11*** por Bonds.43*** -8.7***.61*.44***.12*** swe Bonds.17*** -3.25* ***.1*** usa Bonds -.23*** ***.3*** T Adrian, D Stackman, E Vogt Global Pricing of Risk July

21 Global Institutions and Global Pricing of Risk Institutional Asset Pricing Setup Implies b c = β c λ 1 T Adrian, D Stackman, E Vogt Global Pricing of Risk July

22 Global Institutions and Global Pricing of Risk Global Panel VAR Output Gap Output Gap shock Output Gap Inflation shock Output Gap Policy Rate shock Output Gap Risk Aversion shock Output Gap Equity Market shock Inflation Output Gap shock Inflation Inflation shock Inflation.1.5 Policy Rate shock Inflation Risk Aversion shock Inflation Equity Market shock Policy Rate Output Gap shock Policy Rate Inflation shock Policy Rate Policy Rate shock Policy Rate Risk Aversion shock Policy Rate Equity Market shock Risk Aversion Output Gap shock Risk Aversion Inflation shock Risk Aversion Policy Rate shock Risk Aversion Risk Aversion shock Risk Aversion Equity Market shock Equity Market Output Gap shock Equity Market Inflation shock Equity Market Policy Rate shock Equity Market Risk Aversion shock Equity Market Equity Market shock T Adrian, D Stackman, E Vogt Global Pricing of Risk July

23 Global Institutions and Global Pricing of Risk Takeaways from the Global Pricing of Risk Theoretically: VaR constraints of global financial institutions give role to volatility in the pricing of risk Empirically: VIX is a strong nonlinear forecasting variable as predicted by intermediary asset pricing theories Consequence 1: Cross country dispersion in the exposure to the global pricing of risk Consequence 2: Shocks to the global pricing of risk forecasts domestic macro performance What are the macroeconomic consequences? T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 2

24 Global Pricing of Risk and the Macro Risk-Return Tradeoff Outline Global Institutions and Global Pricing of Risk Global Pricing of Risk and the Macro Risk-Return Tradeoff The Macro Risk-Return Tradeoff and Economic Policies T Adrian, D Stackman, E Vogt Global Pricing of Risk July

25 Global Pricing of Risk and the Macro Risk-Return Tradeoff Global Bond Exposures and Macro Outcomes Exposure b to global pricing of risk varies across countries How does it relate to macro outcomes? Are countries with higher exposure more volatile? Do countries with higher exposure grow faster? Are crises more likely? T Adrian, D Stackman, E Vogt Global Pricing of Risk July

26 Global Pricing of Risk and the Macro Risk-Return Tradeoff Macroeconomic Outcomes and Global Risk Exposures T Adrian, D Stackman, E Vogt Global Pricing of Risk July

27 Global Pricing of Risk and the Macro Risk-Return Tradeoff Cross-Section of Macro and Financial Outcomes Panel A: Macro Outcomes Real GDP Inflation Mean Volatility Mean Volatility Equities 3.16*** 4.49*** Bonds * 4.87 p-val R Obs Panel B: Banking Outcomes Credit Crisis Output Boom NPL Pre-Crisis Gain Crisis Loss Equities 1.14*** 28.38*** 19.81*** 6.58** Bonds p-val....4 R Obs Panel C: Financial Market Outcomes Equity Market Bond Market Mean Downside Volatility Mean Upside Volatility Equities..3***.25.2 Bonds.7***.1 5.2***.83** p-val R Obs T Adrian, D Stackman, E Vogt Global Pricing of Risk July

28 Global Pricing of Risk and the Macro Risk-Return Tradeoff Global Bond Exposures and Economic Policies Is aggressiveness of stabilization policies systematically related to global price of risk exposure? Aggressiveness of monetary policy Degree of countercyclicality of fiscal policy Macroprudential policies T Adrian, D Stackman, E Vogt Global Pricing of Risk July

29 Global Pricing of Risk and the Macro Risk-Return Tradeoff Aggressiveness of Stabilization Policies Taylor Rule Coe cients Fiscal Policy Variables Macroprudential Index Mean Gov t Output Gap - Financial Inst. - output infl output c + c infl Spending/GDP Fiscal Exp. Corr. Targeted c c aus *** 1. bel.9 ** *** 2. can *** *** 3. che.5 ***.72 *** ** 1.57 cze.6 **.48 *** ** 1. den.22 *** *** deu.4 ***.67 *** ***.57 esp *** *** 2. fin.19 ***.32 ** ***.7 fra.13 ** 1.22 *** *** 2.21 gbr.9 ***.75 *** ***. hun. *.15 *** **.5 ire.4.18 * ***. ita.3 ***.61 * *** 2. jpn.18 **.69 ** *** 1. kor.34 ***.5 *** ***.71 mal.11 *** *** 1. nld.28 *** 1.31 *** ***.14 nor.43 ***.46 *** ** 1.7 nzl.5 *** ***. pol.28 **.67 *** *** 1. por ** **.5 saf.65 * sgp.1 * swe.9 **.84 *** tha.6 ***.44 *** ***.21 usa.18 *** 1.54 *** *** 2.93 T Adrian, D Stackman, E Vogt Global Pricing of Risk July

30 Global Pricing of Risk and the Macro Risk-Return Tradeoff Global Risk Exposures and Taylor Rule Coefficients More aggressive Taylor rule coefficients associated with lower b T Adrian, D Stackman, E Vogt Global Pricing of Risk July

31 (1) (2) (3) (4) (5) (6) (7) (8) (9) Global Pricing of Risk and the Macro Risk-Return Tradeoff i Taylor Rule: output -.47 *** i Taylor Rule: infl -.18 i Taylor Rule: output + infl i -.11 Fiscal: Mean Gov t Spending/GDP.2 ** Fiscal: Output Gap-Fiscal Expend. Corr..18 Macroprudential -.9 * Crisis: Fiscal Bailout Expenditure. Crisis: Liquidity Injection.1 *** Crisis: Monetary Expansion. Do Aggressive Stabilization Policies Attenuate Global Risk Exposure? R Obs i output -.39 * i infl -.54 *** Dependent Variable: (Stock b i +Bondb i ) (1) (2) (3) (4) (5) (6) (7) (8) (9) Taylor Rule: Taylor Rule: i Taylor Rule: output + infl i -.57 *** Fiscal: Mean Gov t Spending/GDP -. Fiscal: Output Gap-Fiscal Expend. Corr..3 Macroprudential -.22 *** Crisis: Fiscal Bailout Expenditure.3 *** Crisis: Liquidity Injection.2 *** Crisis: Monetary Expansion -.3 R Obs T Adrian, D Stackman, E Vogt Global Pricing of Risk July

32 Global Pricing of Risk and the Macro Risk-Return Tradeoff This also holds when we look at stock and bond loadings individually Dependent Variable: Stock b i (1) (2) (3) (4) (5) (6) (7) (8) (9) *** Taylor Rule: i output.8 Taylor Rule: i infl -.37 Taylor Rule: i + i -.46 *** output infl Fiscal: Mean Gov t Spending/GDP -.2 Fiscal: Output Gap-Fiscal Expend. Corr..12 Macroprudential -.13 ** Crisis: Fiscal Bailout Expenditure.2 *** Crisis: Liquidity Injection.1 *** Crisis: Monetary Expansion -.3 * R Obs Dependent Variable: Bond b i (1) (2) (3) (4) (5) (6) (7) (8) (9) *** Taylor Rule: i output -.47 Taylor Rule: i infl -.18 Taylor Rule: i + i -.11 output infl Fiscal: Mean Gov t Spending/GDP.2 ** Fiscal: Output Gap-Fiscal Expend. Corr..18 Macroprudential -.9 * Crisis: Fiscal Bailout Expenditure. Crisis: Liquidity Injection.1 *** Crisis: Monetary Expansion. R Obs * Dependent Variable: (Stock b i +Bondb i ) (1) (2) (3) (4) (5) (6) (7) (8) (9) i Taylor T Adrian, Rule: D Stackman, E Vogt output Global Pricing of Risk July

33 Global Pricing of Risk and the Macro Risk-Return Tradeoff Takeaway from the Macro Risk-Return Tradeoff 1. Higher exposure to the global pricing of risk corresponds to higher growth and higher volatility Macro risk-return tradeoff 2. Economic policies are systematically related to price of risk exposures Monetary policy Fiscal policy Macroprudential policy How does pricing of risk interact with economic policies? T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 3

34 The Macro Risk-Return Tradeoff and Economic Policies Outline Global Institutions and Global Pricing of Risk Global Pricing of Risk and the Macro Risk-Return Tradeoff The Macro Risk-Return Tradeoff and Economic Policies T Adrian, D Stackman, E Vogt Global Pricing of Risk July

35 The Macro Risk-Return Tradeoff and Economic Policies Macro Risk-Return Tradeoff, Risk Exposure, and Stabilization Policies: Questions How do economic policies interact with the global pricing of risk? Is there a relationship between the macro risk-return tradeoff, global risk exposures, and stabilization policies? Estimate: E[risk c x] = γ + γ 1 ret c + γ 2 (ret c b c ) + γ 3 (ret c p c ) + γ 4 (ret c p c b c ) Risk-Return tradeoff are given by partial effects: E[risk c x]/ ret c = γ 1 + γ 2 b c + γ 3 p c + γ 4 (p c b c ) T Adrian, D Stackman, E Vogt Global Pricing of Risk July

36 The Macro Risk-Return Tradeoff and Economic Policies Macro Risk-Return Tradeoff E[risk c x]/ ret c = γ 1 + γ 2 b c + γ 3 p c + γ 4 (p c b c ) T Adrian, D Stackman, E Vogt Global Pricing of Risk July

37 The Macro Risk-Return Tradeoff and Economic Policies Macro Risk-Return Tradeoff and Monetary Policy GDP Volatility Inflation Volatility (1) (2) (3) (4) (1) (2) (3) (4) r.96 *** 1.4 ** *** 2.6 *** 2.13 *** 2.38 *** r b 1.2 ***.57 *.61 *.91 ***.97 *** 1.56 *** r p.5 ** r b p * R Obs Crisis Peak NPL Bank Flows Volatility (1) (2) (3) (4) (1) (2) (3) (4) r *** * *** * 2.62 ** r b *** *** *** r p ** 1.62 ** 2.26 *** r b p 7.11 ** 3.98 ** R Obs Equity Downside Volatility Yield Upside Volatility (1) (2) (3) (4) (1) (2) (3) (4) r *** 5.15 *** 4.35 ***.14 ***.19 *.15 *.16 r b 4.14 *** 4.1 *** 3.52 *** r p **.6 r b p.84.3 R Obs T Adrian, D Stackman, E Vogt Global Pricing of Risk July

38 The Macro Risk-Return Tradeoff and Economic Policies Macro Risk-Return Tradeoff and Fiscal Policy GDP Volatility Inflation Volatility (1) (2) (3) (4) (1) (2) (3) (4) r.96 *** 1.4 ** *** 2.6 *** 2.7 *** 2.41 *** r b 1.2 ***.82 ***.83 **.91 ***.93 ** 1.18 *** r p.49 ** ** r b p ** R Obs Crisis Peak NPL Bank Flows Volatility (1) (2) (3) (4) (1) (2) (3) (4) r *** 42.1 *** r b *** *** r p * **.7.2 r b p * 1.57 R Obs Equity Downside Volatility Yield Upside Volatility (1) (2) (3) (4) (1) (2) (3) (4) r *** 5.24 *** 5.5 ***.14 ***.19 *.2 *.22 ** r b 4.14 *** 4.14 *** 3.98 *** r p r b p.7.19 R Obs T Adrian, D Stackman, E Vogt Global Pricing of Risk July

39 The Macro Risk-Return Tradeoff and Economic Policies Macro Risk-Return Tradeoff and Macroprudential Policy GDP Volatility Inflation Volatility (1) (2) (3) (4) (1) (2) (3) (4) r.99 ***.99 ** *** 2.6 *** 2.54 *** 2.65 *** r b 1. ***.67 ** 1.48 ***.91 *** 1.32 *** 1.89 *** r p.88 ** 2.11 * 1.17 ** 1.55 *** r b p 2.61 ** 2.61 *** R Obs Crisis Peak NPL Bank Flows Volatility (1) (2) (3) (4) (1) (2) (3) (4) r *** *** *** r b *** 41.8 *** *** r p ** 2.53 ** r b p * 3.29 R Obs Equity Downside Volatility Yield Upside Volatility (1) (2) (3) (4) (1) (2) (3) (4) r *** 5.34 *** 4.93 ***.15 ***.2 **.21 **.22 * r b 4.16 *** 4.2 *** 3.82 *** r p r b p R Obs T Adrian, D Stackman, E Vogt Global Pricing of Risk July

40 Conclusion Conclusion We document that: 1. Global pricing of risk can be measured from nonlinear VIX forecasting 2. Exposure to the global pricing of risk increases both risk and return of macroeconomic and financial performance measures 3. Economic policies can mitigate the impact of the global pricing of risk on the domestic risk-return tradeoff These stylized facts suggest rethinking economic policies in light of global financial institutions role in the transmission of the pricing of risk T Adrian, D Stackman, E Vogt Global Pricing of Risk July

41 Conclusion To do list 1. Instrumenting for the policies 2. Dynamic interactions 3. Magnitudes T Adrian, D Stackman, E Vogt Global Pricing of Risk July

42 Literature Adrian, T., and N. Boyarchenko (212): Intermediary Leverage Cycles and Financial Stability, Federal Reserve Bank of New York Staff Report, 567. Adrian, T., R. Crump, and E. Vogt (215): Nonlinearity and flight to safety in the risk-return trade-off for stocks and bonds, Federal Reserve Bank of New York Staff Report, 723. Adrian, T., and H. S. Shin (214): Procyclical Leverage and Value at Risk, Review of Financial Studies, 27(2), Bekaert, G., M. Hoerova, and M. L. Duca (213): Risk, uncertainty and monetary policy, Journal of Monetary Economics, 6(7), Borio, C., and H. Zhu (212): Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?, Journal of Financial Stability, 8(4), He, Z., and A. Krishnamurthy (28): Intermediary asset pricing, Discussion paper, National Bureau of Economic Research. (211): A model of capital and crises, The Review of Economic Studies, p. rdr36. T Adrian, D Stackman, E Vogt Global Pricing of Risk July

43 Literature Longstaff, F. A., J. Pan, L. H. Pedersen, and K. J. Singleton (211): How Sovereign Is Sovereign Credit Risk?, American Economic Journal: Macroeconomics, 3(2), Miranda-Agrippino, S., and H. Rey (214): World Asset Markets and the Global Financial Cycle, Discussion paper, Technical Report, Working Paper, London Business School. Panageas, S., and M. M. Westerfield (29): High-Water Marks: High Risk Appetites? Convex Compensation, Long Horizons, and Portfolio Choice, The Journal of Finance, 64(1), Rey, H. (215): Dilemma not trilemma: the global financial cycle and monetary policy independence, Discussion paper, National Bureau of Economic Research. Vayanos, D. (24): Flight to quality, flight to liquidity, and the pricing of risk, Discussion paper, National Bureau of Economic Research. T Adrian, D Stackman, E Vogt Global Pricing of Risk July 215 4