Discount Rates and Employment Fluctuations

Transcription

1 Discussion of Discount Rates and Employment Fluctuations by Jaroslav Borovička and Katarína Borovičková Mathieu Taschereau-Dumouchel The Wharton School of the University of Pennsylvania Cowles Macro and Labor Conference /10

2 Summary This paper Can we explain unemployment fluctuations with shocks to the way cash-flows from jobs are valued? Quantify this channel using asset pricing model (Hall, 2014) This discussion Brief overview and some comments 2/10

3 Summary This paper Can we explain unemployment fluctuations with shocks to the way cash-flows from jobs are valued? Quantify this channel using asset pricing model (Hall, 2014) This discussion Brief overview and some comments 2/10

4 Summary This paper Can we explain unemployment fluctuations with shocks to the way cash-flows from jobs are valued? Quantify this channel using asset pricing model (Hall, 2014) This discussion Brief overview and some comments 2/10

5 DMP Model Average cost of hiring a worker Expected value of a job κ q(θ t ) J t = j=1 ] E t [β j (1 δ) j (z t+j w t+j ) Free-entry κ q(θ t ) = J t Changes in J t changes in θ t changes in u t 3/10

6 DMP Model Average cost of hiring a worker Expected value of a job J t = j=1 κ q(θ t ) [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Free-entry κ q(θ t ) = J t Changes in J t changes in θ t changes in u t 3/10

7 DMP Model Average cost of hiring a worker Expected value of a job J t = j=1 κ q(θ t ) [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Free-entry κ q(θ t ) = J t Changes in J t changes in θ t changes in u t 3/10

8 DMP Model Average cost of hiring a worker Expected value of a job J t = j=1 κ q(θ t ) [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Free-entry κ q(θ t ) = J t Changes in J t changes in θ t changes in u t 3/10

9 DMP Model What moves J t? J t = j=1 [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Note Most of the literature shocks z Here, focus on S The real risk-free rate does not move much in the data Variation must come from the dispersion of S (risk premium) 4/10

10 DMP Model What moves J t? J t = j=1 [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Note Most of the literature shocks z Here, focus on S The real risk-free rate does not move much in the data Variation must come from the dispersion of S (risk premium) 4/10

11 DMP Model What moves J t? J t = j=1 [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Note Most of the literature shocks z Here, focus on S The real risk-free rate does not move much in the data Variation must come from the dispersion of S (risk premium) 4/10

12 DMP Model What moves J t? J t = j=1 [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Note Most of the literature shocks z Here, focus on S The real risk-free rate does not move much in the data Variation must come from the dispersion of S (risk premium) 4/10

13 DMP Model What moves J t? J t = j=1 [ ] St+j E t (1 δ) j (z t+j w t+j ) S t Note Most of the literature shocks z Here, focus on S The real risk-free rate does not move much in the data Variation must come from the dispersion of S (risk premium) 4/10

14 Statistical model of S Epstein-Zin preferences U t = (1 β)logc t β θ t loge t [exp( θ t U t+1 )] where 1+θ t is time-varying risk-aversion parameter. Need stochastic process for C t and all components of cash-flows VAR on X t = to get statistical model SDF from data ( ) 1, c t,rxt m, y t,pd t,rt f,log(1 δ t) Given θt use C t from data to compute SDF S t Pick θt to exactly match excess return on stock market Use the estimated VAR to figure out J t Plug J t into free-entry to figure out u t 5/10

15 Statistical model of S Epstein-Zin preferences U t = (1 β)logc t β θ t loge t [exp( θ t U t+1 )] where 1+θ t is time-varying risk-aversion parameter. Need stochastic process for C t and all components of cash-flows VAR on X t = to get statistical model SDF from data ( ) 1, c t,rxt m, y t,pd t,rt f,log(1 δ t) Given θt use C t from data to compute SDF S t Pick θt to exactly match excess return on stock market Use the estimated VAR to figure out J t Plug J t into free-entry to figure out u t 5/10

16 Statistical model of S Epstein-Zin preferences U t = (1 β)logc t β θ t loge t [exp( θ t U t+1 )] where 1+θ t is time-varying risk-aversion parameter. Need stochastic process for C t and all components of cash-flows VAR on X t = to get statistical model SDF from data ( ) 1, c t,rxt m, y t,pd t,rt f,log(1 δ t) Given θt use C t from data to compute SDF S t Pick θt to exactly match excess return on stock market Use the estimated VAR to figure out J t Plug J t into free-entry to figure out u t 5/10

17 Statistical model of S Epstein-Zin preferences U t = (1 β)logc t β θ t loge t [exp( θ t U t+1 )] where 1+θ t is time-varying risk-aversion parameter. Need stochastic process for C t and all components of cash-flows VAR on X t = to get statistical model SDF from data ( ) 1, c t,rxt m, y t,pd t,rt f,log(1 δ t) Given θt use C t from data to compute SDF S t Pick θt to exactly match excess return on stock market Use the estimated VAR to figure out J t Plug J t into free-entry to figure out u t 5/10

18 Results Standard deviation of (detrended) unemployment rate Data: Model: /10

19 Results Standard deviation of (detrended) unemployment rate Data: Model: /10

20 Comments Huge swings in risk-aversion θ t [ 10,25] Do we have the right model of the SDF? Is the estimation loading on risk-aversion features of the cashflows? Many alternative specifications Long-run risk (Bansal & Yaron 2004) Habit formation (Campbell & Cochrane 1999) Disaster risk (Barro 2006) These models explain excess returns with various combinations of SDF vs cashflows structure Fitting them to the data would give us different SDFs Using these SDFs to value cashflow from a job should give us different results 7/10

21 Comments Huge swings in risk-aversion θ t [ 10,25] Do we have the right model of the SDF? Is the estimation loading on risk-aversion features of the cashflows? Many alternative specifications Long-run risk (Bansal & Yaron 2004) Habit formation (Campbell & Cochrane 1999) Disaster risk (Barro 2006) These models explain excess returns with various combinations of SDF vs cashflows structure Fitting them to the data would give us different SDFs Using these SDFs to value cashflow from a job should give us different results 7/10

22 Comments Huge swings in risk-aversion θ t [ 10,25] Do we have the right model of the SDF? Is the estimation loading on risk-aversion features of the cashflows? Many alternative specifications Long-run risk (Bansal & Yaron 2004) Habit formation (Campbell & Cochrane 1999) Disaster risk (Barro 2006) These models explain excess returns with various combinations of SDF vs cashflows structure Fitting them to the data would give us different SDFs Using these SDFs to value cashflow from a job should give us different results 7/10

23 Comments Huge swings in risk-aversion θ t [ 10,25] Do we have the right model of the SDF? Is the estimation loading on risk-aversion features of the cashflows? Many alternative specifications Long-run risk (Bansal & Yaron 2004) Habit formation (Campbell & Cochrane 1999) Disaster risk (Barro 2006) These models explain excess returns with various combinations of SDF vs cashflows structure Fitting them to the data would give us different SDFs Using these SDFs to value cashflow from a job should give us different results 7/10

24 Comments Huge swings in risk-aversion θ t [ 10,25] Do we have the right model of the SDF? Is the estimation loading on risk-aversion features of the cashflows? Many alternative specifications Long-run risk (Bansal & Yaron 2004) Habit formation (Campbell & Cochrane 1999) Disaster risk (Barro 2006) These models explain excess returns with various combinations of SDF vs cashflows structure Fitting them to the data would give us different SDFs Using these SDFs to value cashflow from a job should give us different results 7/10

25 Comments Huge swings in risk-aversion θ t [ 10,25] Do we have the right model of the SDF? Is the estimation loading on risk-aversion features of the cashflows? Many alternative specifications Long-run risk (Bansal & Yaron 2004) Habit formation (Campbell & Cochrane 1999) Disaster risk (Barro 2006) These models explain excess returns with various combinations of SDF vs cashflows structure Fitting them to the data would give us different SDFs Using these SDFs to value cashflow from a job should give us different results 7/10

26 Comments Asset side of the model assumes endowment economy, labor side assumes production economy Fine as first pass Interesting interaction between the two (Petrosky-Nadeau, Zhang & Kuehn 2016; Kilic & Wachter 2016) What drives the changes in the SDF? 8/10

27 Comments Asset side of the model assumes endowment economy, labor side assumes production economy Fine as first pass Interesting interaction between the two (Petrosky-Nadeau, Zhang & Kuehn 2016; Kilic & Wachter 2016) What drives the changes in the SDF? 8/10

28 Comments Asset side of the model assumes endowment economy, labor side assumes production economy Fine as first pass Interesting interaction between the two (Petrosky-Nadeau, Zhang & Kuehn 2016; Kilic & Wachter 2016) What drives the changes in the SDF? 8/10

29 Comments Cost of a vacancy is κ 0 }{{} 6 + κ 1 }{{} 102 v t 1 u t There is built-in amplification of shocks here. Would be interesting to see counterfactual u t when terms in payoffs are held constant Hiring decisions have no impact on wages Using return on the market instead of return on wealth How does the household interpret risk-aversion θ t? 9/10

30 Comments Cost of a vacancy is κ 0 }{{} 6 + κ 1 }{{} 102 v t 1 u t There is built-in amplification of shocks here. Would be interesting to see counterfactual u t when terms in payoffs are held constant Hiring decisions have no impact on wages Using return on the market instead of return on wealth How does the household interpret risk-aversion θ t? 9/10

31 Comments Cost of a vacancy is κ 0 }{{} 6 + κ 1 }{{} 102 v t 1 u t There is built-in amplification of shocks here. Would be interesting to see counterfactual u t when terms in payoffs are held constant Hiring decisions have no impact on wages Using return on the market instead of return on wealth How does the household interpret risk-aversion θ t? 9/10

32 Comments Cost of a vacancy is κ 0 }{{} 6 + κ 1 }{{} 102 v t 1 u t There is built-in amplification of shocks here. Would be interesting to see counterfactual u t when terms in payoffs are held constant Hiring decisions have no impact on wages Using return on the market instead of return on wealth How does the household interpret risk-aversion θ t? 9/10

33 Comments Cost of a vacancy is κ 0 }{{} 6 + κ 1 }{{} 102 v t 1 u t There is built-in amplification of shocks here. Would be interesting to see counterfactual u t when terms in payoffs are held constant Hiring decisions have no impact on wages Using return on the market instead of return on wealth How does the household interpret risk-aversion θ t? 9/10

34 Conclusion Interesting first attempt at carefully measuring importance of SDF for unemployment fluctuations Look forward to see the cross-sectional results 10/10