This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Uncovering Uncovered Interest Parity: Exchange Rates, Yield Curves and Business Cycles (Bank Underground, 8 min read) The slope of the yield curve can help explain exchange rates (especially during shorter horizons of 0-4 years) in excess to and departure from the UIP benchmarks. It is argued that the yield curve slope reflects information about investors’ future expectation of business cycle risk, and exchange rate movement prices this in.
Macroeconomic Drivers of Bond and Equity Risks (JPE, 36 page read) Using a new consumption-based model, this paper examines why correlation between inflation and the output gap switched from negative to positive in 2001. They argue this can be explained by the fact that higher inflation lowers real bond returns and that higher output raises stock returns. Furthermore, they show risk premia amplify this change in bond-stock return co-movement.
Mortgage Design in an Equilibrium Model of the Housing Market (JOF, 70 page read) Countercyclical mortgage designs outperform mixed payment plans. For example, front-loading payment reductions in recessions is better than those plans that spread relief over the full term because it reduces default and stimulates housing demand.
Sovereign Credit and Exchange Rate Risks: Evidence From Asia-Pacific Local Currency Bonds (NBER, 24 page read) Focusing on the Twin Ds and the interaction between credit and currency risk, reflected in local currency bonds issued by sovereigns in Asia-Pacific, the paper finds (i) strong interaction between credit and currency risks, (ii) that local variables are significant in the dynamics of currency and credit risk, and (iii) local currency bonds dramatically improve the investment frontier.