tag:blogger.com,1999:blog-582368152716771238.post7730148845220841315..comments2019-07-15T22:54:43.746-05:00Comments on The Grumpy Economist: Sugar MountainJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger19125tag:blogger.com,1999:blog-582368152716771238.post-29329363704618992122017-01-22T22:36:51.586-06:002017-01-22T22:36:51.586-06:00This is a repeat of the agency problem pointed out...This is a repeat of the agency problem pointed out at the top. What you describe is a behavioural mirage, and not a structural parameter.Foneiohttps://www.blogger.com/profile/12529681065564450721noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70944134590349426642014-06-29T22:28:21.388-05:002014-06-29T22:28:21.388-05:00Really enjoyed this post, but dumb question about ...Really enjoyed this post, but dumb question about "Yes, higher risk aversion or consumption volatility would increase precautionary saving and lower interest rates in the second equation, holding β fixed."<br /><br />Doesn't a larger gamma/risk-aversion increase the risk-free rate?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-80810870010446171912014-06-06T21:09:45.638-05:002014-06-06T21:09:45.638-05:00You're welcome! (Glad I haven't lost my t...You're welcome! (Glad I haven't lost my typo-spotting touch!)Neal Reynoldsnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76050272006270783782014-06-06T10:51:00.367-05:002014-06-06T10:51:00.367-05:00Also, under which scenario do you realize a higher...Also, under which scenario do you realize a higher nominal profit?<br /><br />1. Short rate starts at 5%, long rate starts at 8%. Short rate rises to 6 1/2%, long rate falls to 6 1/2%.<br /><br />2. Short rate starts at 1%, long rate starts at 4%. Short rate rises to 2 1/2%, long rate falls to 2 1/2%.<br /><br />Your capital gain from 8% long interest rate to 6 1/2% long interest rate is 8/6.5 - 1 = 23%. Your capital gain from 4% long interest rate to 2 1/2% long interest rate is 4/2.5 - 1 = 60%. Frank Restlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44749648189726278262014-06-06T10:03:11.601-05:002014-06-06T10:03:11.601-05:00If its "Sugar Mountain" by Neil Young, I...If its "Sugar Mountain" by Neil Young, I know it very well from the Live Rust movie of the 1980's ... and I got my PhD in 1993.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-75484771350275578152014-06-06T09:16:39.800-05:002014-06-06T09:16:39.800-05:00Someday I'll learn to type. Thanks.Someday I'll learn to type. Thanks. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32185455070426236282014-06-06T00:46:04.012-05:002014-06-06T00:46:04.012-05:00"OK, I'm a bit defensive because "by..."OK, I'm a bit defensive because "by force of habit" with John Cambpell was all about producing that correlation."<br /><br />OK, maybe I'm a bit biased because of Joseph, but shouldn't that be "Campbell"?<br />Neal Reynoldsnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67530744853218734642014-06-05T23:28:05.323-05:002014-06-05T23:28:05.323-05:00I've always thought that reduced nominal retur...I've always thought that reduced nominal returns (and hence reach for yield) should only matter for entities with zero cost of funds - i.e. investors whose funds are not borrowed. Reach for yield is likely when the entity has 'fixed' liabilities, especially if they are nominal or sticky. In order to meet the liabilities the entity needs a minimum nominal yield. Since cost of funds is zero, only the nominal yield matters. If nominal yield drops below the liabilities, then the entity will 'reach for yield'. <br /><br />In English that means retiree's living on savings (which is nominal yield and not a spread) have monthly bills to meet. If the savings yield drops far enough, they either reach for yield or fail to pay the rent. Which do we suspect they will do?<br /> <br />Banks on the other hand borrow their funds. The earnings for a bank is the net-interest-margin (go read a 10-K for evidence; the key figure is not nominal rate, the key figure is always NIM). For a bank the yield needed is some minimum spread. Of course if spreads compressed at ZLB -- revenue yield dropping more than cost of funds -- there could be an issue. <br /><br />Squeeky Wheelhttp://seekingalpha.com/author/squeeky-wheelnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89497020305230159822014-06-05T21:19:18.898-05:002014-06-05T21:19:18.898-05:00You are describing processes of adjustment, while ...You are describing processes of adjustment, while Prof. Cochrane's equations attempt to describe the equilibrium that results, and how it is determined by parameters beta and gamma. But he is willing to look at more complex models, such as those proposed by the Macro-Finance Society. I wonder what he thinks of the "Money View" advanced by Perry Mehrling, especially since we are talking about the effect of central bank actions. Mehrling got his Ph.D. before 1990, which makes him ineligible for the Macro-Finance Society, but we should also be attentive to people with seasoned perspectives!Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3744467645146279312014-06-05T20:39:22.453-05:002014-06-05T20:39:22.453-05:00How about credit risk premiums and Fed policy are ...How about credit risk premiums and Fed policy are determined by the same thing, namely the state of the economy. Generally the Fed cuts interest rates when the economy is sick. When the economy is sick, so are firms. Credit risk should be high. After a while, the Fed gets ahead of the curve and policy is easy. Economy gets better. Firms get better. Credit risk goes down. I guess this is a story and I have no idea how to put it in fancy equations, but it would seem more parsimonious than inventing things that don't exist (reserve requirements) just to build out a fancy model, but hey, you got to pay the bills somehow, right? You might want to build in some endogenous beauty contest into the whole investment cycle thing too. Gonna be hard to model, but that's the thing, people aren't equations and fortunately markets aren't either.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79488035430113391452014-06-05T10:57:41.024-05:002014-06-05T10:57:41.024-05:00Yeah, I was trying to find some long time series o...Yeah, I was trying to find some long time series on credit spread purged of term spread, and Baa-10 year has some term. So does Fed funds - T bill. Better measures welcome. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-36497432962881093602014-06-04T22:46:32.837-05:002014-06-04T22:46:32.837-05:00Found it:
http://credittrends.moodys.com/chartroo...Found it:<br /><br />http://credittrends.moodys.com/chartroom.asp?c=3<br /><br />The corporate BAA rate used in John's graph is for securities with a term to maturity of 20 years or longer. The spread that you are seeing is part term premium and part risk premium.<br /><br />http://research.stlouisfed.org/fred2/series/BAA<br />http://research.stlouisfed.org/fred2/series/DGS30<br /><br />Combine these two graphs to come up with a rough 30 year risk premium. What you should notice is that 30 year risk premiums rose significantly in two periods - 1978-1982 and 2007-2008.<br /><br />30 year treasury bonds were introduced in 1977, discontinued in 2002, and re-continued in 2007. And so there is a fiscal element to the risk premium - how can there not be. Shortly after 30 year bonds were introduced / re-introduced, risk premiums rose sharply.Frank Restlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57078524791077101942014-06-04T21:41:46.200-05:002014-06-04T21:41:46.200-05:00I would like to see a post on the paper John Cochr...I would like to see a post on the paper John Cochrane presented at Stanford, the one in which the virtues of a large Fed balance sheet are extolled. I read the paper online. However, I took calculus at Berkeley, and I even passed, but that was almost 40 years ago not sure I can wend my way through your paper. A dumbed down version would be appreciated. Benjamin Cohenhttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32295743502607762942014-06-04T19:20:20.749-05:002014-06-04T19:20:20.749-05:00I'm going to venture into this discussion, eve...I'm going to venture into this discussion, even though it is a bit technical and I am somewhat lacking in credentials. But can we consider the effect of missing markets? Let's say I want a return of g from my liquid assets, but there is no asset on the market that pays exactly that. I need to synthesize a return of g using stocks and bonds. How do I maintain my position after a shift in monetary policy? If the risk-free rate is lowered, I bid up the price of stocks, raising the risk premium. I don't have a problem with your Euler equations, but am trying to suggest the effect of frictions.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77468251684094859432014-06-04T18:16:18.561-05:002014-06-04T18:16:18.561-05:00"The level of nominal interest rates and the ..."The level of nominal interest rates and the risk premium are two totally different phenomena. Borrowing at 5% and making a risky investment at 8%, or borrowing at 1% and making a risky investment at 4% is exactly the same risk-reward tradeoff. "<br /><br />INCORRECT. When you borrow at a 5% short rate and make a risky investment at 8%, you have a chance of seeing the short rate reduced from 5% to less than 1% - your nominal interest rate spread has a higher upside.Frank Restlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-425369556195436102014-06-04T17:30:39.572-05:002014-06-04T17:30:39.572-05:00"Does monetary policy, by controlling the lev..."Does monetary policy, by controlling the level of short term rates, substantially affect risk premiums? If so, how?"<br /><br />No, but monetary policy by controlling the rate of change in the short term rates can substantially affect risk premiums.<br /><br />Supposed you are a leveraged buyer of a 30 year bond with a 6% annual rate of return. Suppose you buy the bond using borrowed money at a short rate of 1%. You roll over that short term debt and the central bank starts raising your cost of financing.<br /><br />Depending on how quickly the fed raises the short term rate up from 1% will determine whether that will be a profitable investment over its time horizon.<br /><br />Also, it is unclear from the first graph what maturity of BAA corporate bonds is being used. Obviously, when discerning a risk premium, you need to compare bonds having a similar term to maturity - otherwise you are looking at a mix of term premium and risk premium.Frank Restlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66204021015200508742014-06-04T16:15:59.636-05:002014-06-04T16:15:59.636-05:00Yes. Will fix ASAP . ThanksYes. Will fix ASAP . ThanksJohn H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-8011189408685694712014-06-04T16:07:10.180-05:002014-06-04T16:07:10.180-05:00I think it should be R^f_t outside the bracket I think it should be R^f_t outside the bracket Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74074535938471257462014-06-04T15:21:06.307-05:002014-06-04T15:21:06.307-05:00I think there is a typo in the 2nd equation. Shoul...I think there is a typo in the 2nd equation. Shouldn't R_{t+1} be inside the expectation? In which case we have the familiar 1=E[M R].Albert Alex Zevelevnoreply@blogger.com