Signal on the Margin: Behavior of Levered Investors and Future Economic Conditions*

2020 ◽  
Vol 24 (5) ◽  
pp. 1039-1077
Author(s):  
Prachi Deuskar ◽  
Nitin Kumar ◽  
Jeramia Allan Poland
Keyword(s):  
Interest Rates ◽  
Economic Activity ◽  
Equity Capital ◽  
Economic Conditions ◽  
Policy Uncertainty ◽  
Lower Growth ◽  
Lending Standards ◽  
Aggregate Earnings ◽  
Debt Capacity

Abstract Margin capacity, defined as the aggregate excess debt capacity of investors buying securities on margin, strongly predicts (i) lower S&P 500 returns, (ii) lower growth in aggregate earnings, dividends, employment, and overall economic activity, (iii) higher macro, financial, and policy uncertainty, (iv) lower interest rates, (v) tighter lending standards by banks, and (vi) lower intermediary equity capital. High margin capacity is a precursor, not a response, to borrowing and intermediary constraints and higher volatility. It typically arises when levered investors with profitable past positions limit their leverage. We interpret that it reflects informed investors’ conservatism ahead of bad times.

scholarly journals Brexit a sytuacja ekonomiczna Wielkiej Brytanii

2017 ◽  
Vol 17(32) (1) ◽  
pp. 19-30
Author(s):  
Katarzyna Czech ◽  
Michał Wielechowski
Keyword(s):  
United Kingdom ◽  
Interest Rates ◽  
Economic Activity ◽  
Negative Impact ◽  
Manufacturing Sector ◽  
Fiscal Year ◽  
Policy Uncertainty ◽  
The European Union ◽  
The United Kingdom ◽  
The Impact

On 23th June, 2016, British voters decided in a referendum to cut long-term relationship with the European Union. The aim of a paper is to present the impact of UK’s Brexit vote on the British economy. The paper depicts review of international scientific literature and economic press concerning the vast range of issues affected by Brexit. It has been shown that the British referendum outcome caused the growth of uncertainty about economy of the United Kingdom. Economic Policy Uncertainty Index reached British record-high levels in post-referendum period. Growing economic and financial uncertainty had negative effects on British economic activity. The paper presents the impact of the referendum on British currency, fundamental macroeconomic indicators, economic activity in manufacturing, and public finance. It has been shown that, in post-referendum period, the pound sterling plunged the depths it had reached after the speculative attack on pound sterling led by George Soros in 1992, after invasion of Iraq in 2003 and during financial crisis in 2008-2009. British referendum outcome contributed also to inflation rate increase and GDP growth rate decrease. Thus, the United Kingdom decided to implement more expansionary monetary policy by cutting interest rates and increasing quantitative easing. As a result of the referendum, the level of economic activity in the manufacturing sector went shortly down. Britain’s vote to leave the EU had also a negative impact on British public finances. The forecasted general government deficit in 2017 increased by more than 30 percent. Chancellor of the Exchequer was forced to abandon the ambitious goal of eliminating the negative balance by fiscal year 2019–2020.

An explanation of spread’s ability to predict economic activity

2016 ◽  
Vol 43 (3) ◽  
pp. 488-503 ◽  
Author(s):  
Anastasios Evgenidis ◽  
Costas Siriopoulos
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Economic Activity ◽  
Regime Switching ◽  
Relevant Literature ◽  
Predictive Ability ◽  
Economic Conditions ◽  
Powerful Predictor ◽  
Content Type ◽  
Interest Rate Volatility

Purpose – For over two decades numerous studies have provided evidence on the predictive ability of the yield spread for real economic growth. While all this large literature has focussed on how well the spread helps predict real activity, none of these has given an answer on why the spread predicts. The purpose of this paper is to deal with this issue by trying to find an answer on the reason and the economic conditions under which the spread proves to be so powerful predictor of economic activity. Design/methodology/approach – The authors examine whether the explanation of spread’s predictive ability lies behind interest rate volatility supposing that the economy oscillates between high- and low-volatility regimes. For this reason the authors nest GARCH models into Markov regime switching models. Findings – When the authors assume that the economy simply oscillates between different regimes, interest rate volatility does not explain the spread’s predictive ability. However, the authors obtain a very interesting result when the authors augment the conditional variance with a level effects term. This ensures that in an environment with high levels of interest rates – in which the rational agents expect the economy to slow down – there is a greater possibility for the economy to switch to a high-volatility regime. Under these economic conditions, interest rate volatility appears to be the reason of spread’s predictive power from one up to three years. Originality/value – This study contributes to the relevant literature by providing an explanation on the reason and the economic conditions under which the spread proves to be so powerful predictor of economic activity.

Economic effects of monetary policy in Russia: What do large datasets tell us?

2020 ◽  
pp. 31-53 ◽  
Author(s):  
Anna A. Pestova ◽  
Natalia A. Rostova
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Economic Activity ◽  
Global Financial Crisis ◽  
Exchange Rate Regime ◽  
Aggregate Demand ◽  
Economic Effects ◽  
Theoretical Concepts ◽  
Empirical Estimates

Is the Bank of Russia able to control inflation and, at the same time, manage aggregate demand using its interest rate instruments? In other words, are empirical estimates of the effects of monetary policy in Russia consistent with the theoretical concepts and experience of advanced economies? This paper is aimed at addressing these issues. Unlike previous research, we employ “big data” — a large dataset of macroeconomic and financial data — to estimate the effects of monetary policy in Russia. We focus exclusively on the period after the 2008—2009 global financial crisis when the Bank of Russia announced the abandoning of its fixed ruble exchange rate regime and started to gradually transit to an interest rate management. Our estimation results do not confirm standard responses of key economic activity and price variables to tightening of monetary policy. Specifically, our estimates do not reveal a statistically significant restraining effect of the Bank of Russia’s policy of high interest rates on inflation in recent years. At the same time, we find a significant deteriorating effect of the monetary tightening on economic activity indicators: according to our conservative estimates, each of the key rate increases occurred in March and December 2014 had led to a decrease in the industrial production index by about 0.2 percentage points within a year.

scholarly journals South Africa’s economic response to monetary policy uncertainty

2017 ◽  
Vol 44 (2) ◽  
pp. 282-293 ◽  
Author(s):  
Mehmet Balcilar ◽  
Rangan Gupta ◽  
Charl Jooste
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Stochastic Volatility ◽  
Stochastic Volatility Model ◽  
Economic Consequences ◽  
Policy Uncertainty ◽  
Dsge Model ◽  
Content Type ◽  
Volatility Model ◽  
Central Bankers

Purpose The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy. Design/methodology/approach The authors use a sign restricted SVAR with an endogenous feedback of stochastic volatility to evaluate the sign and size of uncertainty shocks. The authors use a nonlinear DSGE model to gain deeper insights about the transmission mechanism of monetary policy uncertainty. Findings The authors show that monetary policy volatility is high and constant. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. The DSGE model shows that the size of the uncertainty shock matters – high uncertainty can lead to a severe contraction in output, inflation and interest rates. Research limitations/implications The authors model only a few variables in the SVAR – thus missing perhaps other possible channels of shock transmission. Practical implications There is a lesson for monetary policy: monetary policy uncertainty, in isolation from general macroeconomic uncertainty, often creates unintended adverse consequences and can perpetuate a weak economic environment. The tasks of central bankers are incredibly difficult. Their models project output and inflation with relatively large uncertainty based on many shocks emanating from various sources. It matters how central bankers react to these expectations and how they communicate the underlying risks associated with setting interest rates. Originality/value This is the first study that looks into monetary policy uncertainty into South Africa using a stochastic volatility model and a nonlinear DSGE model. The results should be very useful for the Central Bank as it highlights how uncertainty, that they create, can have adverse economic consequences.

Spillover effects of financial development on the informal economic activity

2020 ◽  
Vol 13 (3) ◽  
pp. 471-482
Author(s):  
Salih Katircioglu ◽  
Hatice Imamoglu
Keyword(s):  
Interest Rates ◽  
Financial Development ◽  
Informal Economy ◽  
Economic Activity ◽  
Missing Values ◽  
Spillover Effects ◽  
Ordinary Least Squares ◽  
Annual Data ◽  
Content Type ◽  
Cointegration Tests

Purpose This study aims to investigate the role and spillover effects of the financial sector on the size of the informal economic activity in Turkey. Design/methodology/approach Time series analysis has been adopted for annual data of the 1970-2017 period. New approaches in unit root and cointegration tests have been used in this study. Estimations have been done via dynamic ordinary least squares and fully modified ordinary least square approaches. Findings Results confirm the existence of a long-run equilibrium relationship between the financial system and informal economic activities in Turkey. At the earlier stages of financial development (FD), informality tends to rise while in further stages, informality tends to decline over time. This study confirms the U-shaped relationship between FD and the informal economy in Turkey. Research limitations/implications This study has used logarithmic values of series in the econometric analysis except for real interest rates because of negative values in some periods. Thus, by using level forms of real interest, missing values would be avoided. Practical implications Increasing efficiency, control and institutional quality, as well as the quality of governance environment, would be useful tools in reducing the size of informality, as this study finds that spillover effects of financial services on the informal economic activity are adverse. Originality/value This study is the first of its kind to the best of the knowledge in the case of Turkey, which estimates the spillover effects of FD on informal economic activity.

scholarly journals The COVID-19 Shock: A Bayesian Approach

2021 ◽  
Vol 14 (10) ◽  
pp. 495
Author(s):  
Oussama Abi Younes ◽  
Sumru Altug
Keyword(s):  
Interest Rates ◽  
Unemployment Rate ◽  
Bayesian Approach ◽  
Economic Activity ◽  
Preventive Measures ◽  
Impulse Response Functions ◽  
Response Functions ◽  
Vector Autoregressive ◽  
Unemployment Rates ◽  
Explicit Recognition

The coronavirus crisis that started in December 2019 was declared a pandemic by March 2020 and had devastating global consequences. The spread of the virus led to the implementation of different preventive measures prior to the availability of effective vaccines. While many governments implemented lockdowns to counter the pandemic, others did not let the virus halt economic activity. In this paper, we use a Bayesian Vector Autoregressive framework to study the effects of the pandemic on prices, unemployment rates, and interest rates in nine countries that took distinctive approaches in tackling the pandemic, where we introduce lockdowns as shocks to unemployment. Based on impulse response functions, we find that in most countries the unemployment rate rose, interest rates fell or turned negative, and prices fell initially following the implementation of the lockdown measures. However, the massive fiscal and monetary stimulus packages to counteract the effects of the pandemic reversed some of the effects on the variables, suggesting that models with explicit recognition of such effects should be developed.

scholarly journals Risks and the influence of negative interest rates on economic activity: a case study of Sweden, Denmark, and Switzerland

2020 ◽  
Vol 15 (1) ◽  
pp. 30-41
Author(s):  
Liběna Černohorská ◽  
Darina Kubicová
Keyword(s):  
Time Series ◽  
Interest Rates ◽  
Granger Causality ◽  
Economic Activity ◽  
Central Banks ◽  
Time Interval ◽  
Short Term ◽  
Stock Indices ◽  
Negative Interest Rates ◽  
The Impact

The purpose of this paper is to analyze the impact of negative interest rates on economic activity in a selected group of countries, in particular Sweden, Denmark, and Switzerland, for the period 2009–2018. The central banks of these countries were among the first to implement negative interest rates to revive the economic growth. Therefore, this study analyzed long- and short-term relationships between interest rates announced by central banks and gross domestic product and blue chip stock indices. Time series analysis was conducted using Engle-Granger cointegration analysis and Granger causality testing to identify long- and short-term relationship. The first step, using the Akaike criteria, was to determine the optimal delay of the entire time interval for the analyzed periods. Time series that seem to be stationary were excluded based on the results of the Dickey-Fuller test. Further testing continued with the Engle-Granger test if the conditions were met. It was designed to identify co-integration relationships that would show correlation between the selected variables. These tests showed that at a significance level of 0.05, there is no co-integration between any time series in the countries analyzed. On the basis of these analyses, it was determined that there were no long-term relationships between interest rates and GDP or stock indices for these countries during the monitored time period. Using Granger causality, the study only confirmed short-term relationship between interest rates and GDP for all examined countries, though not between interest rates and the stock indices. Acknowledgment The paper has been created with the financial support of The Czech Science Foundation GACR 18-05244S – Innovative Approaches to Credit Risk Management.

Bank Risk-taking, Securitization, Supervision, and Low Interest Rates: Evidence from the Euro-area and the U.S. Lending Standards

2011 ◽  
Vol 24 (6) ◽  
pp. 2121-2165 ◽  
Author(s):  
Angela Maddaloni ◽  
José-Luis Peydró
Keyword(s):  
Interest Rates ◽  
Euro Area ◽  
Risk Taking ◽  
Bank Risk ◽  
Lending Standards ◽  
Low Interest Rates ◽  
The U.S

Large US household balance sheets pose macro risks

2021 ◽  
Keyword(s):  
Interest Rates ◽  
Health Costs ◽  
Gdp Growth ◽  
Lower Growth ◽  
Content Type ◽  
Balance Sheets ◽  
Trade Growth ◽  
Productivity Gains ◽  
Macroeconomic Risks

Significance An examination of the factors behind the expansion indicates that outsized balance sheets will persist and will pose a number of macroeconomic risks. Impacts Slower workforce growth will pressure GDP growth, trade growth and long-term interest rates, unless productivity gains can offset this. A record number of US business deaths and births in 2020 will affect productivity and have unpredictable impacts on the economy. Lower growth makes it harder to stabilise debt-to-GDP ratios, just as pension and health costs rise as populations age in major economies.

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