Essays on Macro-Finance Relationships

In my dissertation, I study relationships between macroeconomics and financial markets. In particular, I empirically investigate the links between key macroeconomic indicators, such as output, inflation, and the business cycle, and the pricing of financial assets. The dissertation comprises three essays. The first essay investigates how the entire term structure of interest rates is influenced by regime-shifts in monetary policy. To do so, we develop and estimate an arbitrage-free dynamic term-structure model which accounts for regime shifts in monetary policy, volatility, and the price of risk. Our results for U.S. data from 1985-2008 indicate that: i) the Fed\u27s reaction to inflation has changed over time, switching between more active and less active monetary policy regimes,: ii) the yield curve in the more active regime was considerably more volatile than in the less active regime, and: iii) on average, the slope of the yield curve in the more active regime was steeper than in the less active regime. The steeper yield curve in the more active regime reflects higher term premia that result from the risk associated with a more volatile future short-term rate given a more sensitive response to inflation. The second essay examines the predictive power of the entire yield curve for aggregate output. Many studies find that yields for government bonds predict real economic activity. Most of these studies use the yield spread, defined as the difference between two yields of specific maturities, to predict output. In this paper, I propose a different approach that makes use of information contained in the entire term structure of U.S. Treasury yields to predict U.S. real GDP growth. My proposed dynamic yield curve model produces better out-of-sample forecasts of real GDP than those produced by the traditional yield spread model. The main source of this improvement is in the dynamic approach to constructing forecasts versus the direct forecasting approach used in the traditional yield spread model. Although the predictive power of yield curve for output is concentrated in the yield spread, there is also a gain from using information in the curvature factor for the real GDP growth prediction. The third essay investigates time variation in CAPM betas for book-to-market and momentum portfolios across stock market volatility regimes. For our analysis, we jointly model market and portfolio returns using a two-state Markov-switching process, with beta and the market risk premium allowed to vary between low and high volatility regimes. Our empirical findings suggest strong time variation in betas across volatility regimes in most of the cases for which the unconditional CAPM can be rejected. Although the regime-switching conditional CAPM can still be rejected in many cases, the time-varying betas help explain portfolio returns much better than the unconditional CAPM, especially when market volatility is high

Application of system safety framework in hybrid socio-technical environment of Eurasia

Thesis (S.M. in Engineering and Management)--Massachusetts Institute of Technology, Engineering Systems Division, System Design and Management Program, 2011.Cataloged from PDF version of thesis.Includes bibliographical references (p. 91-93).The political transformation and transition of post-Soviet societies have led to hybrid structures in political, economic and technological domains. In such hybrid structures the roles of government, state enterprise, private business and civil society are not clearly defined. These roles shift depending on formal and informal interests, availability and competition for limited resources, direct and indirect financial benefits, internal and external agendas. In an abstract sense, a hybrid is "anything derived from heterogeneous sources, or composed of elements of different or incongruous kinds" (Hybrid). If transition is a process from one state to another, hybrid is a state unto itself. In the context of this thesis Hybrid Socio-Technical Environment means the co-existence of different institutions and policies, state and private business entities, old and new technologies, managerial models and practices of planning and market economies, collectivist and individualist value systems. Rapid technological progress, coupled with shifts in political and economic structures, may produce long-lasting disturbances in a society. Such disturbances are result of the hybrid society's contradictory nature. Some of these disturbances appear in the form of large-scale systemic accidents, such as the Sayano-Shushenskaya Hydroelectric Power Station accident. The rigid and outdated Soviet socio-technical system was broken down into multiple independent systems and subsystems to increase operational flexibility, with very limited capital investment. A twenty-year transition period (1990-2010), proved the survivability of the Soviet system, which was able to perform its primary functions even with partial capacity. However, recent large-scale accidents are clear signs that the system is stretching beyond its limits. Changes in the socio-technical landscape (multiple stakeholders and variety of interests) suggest that the traditional approaches of Reliability Theory, with its inward focus, may not be an effective tool in identifying emerging challenges. The outward-focused System theory approach takes into consideration key characteristics of the changing hybrid socio-technical landscape, as well as motivations of multiple stakeholders. The research concludes that insufficient capital investment and backlog in maintenance shifts are key systemic factors that allow migration of organizational behavior from a safe to an unsafe state. Additional analysis has to be conducted to prove this conclusion.by Azamat Abdymomunov.S.M.in Engineering and Managemen

Human Impacts on Forest Biodiversity in Protected Walnut-Fruit Forests in Kyrgyzstan

We used a spatially explicit model of forest dynamics, supported by empirical field data and socioeconomic data, to examine the impacts of human disturbances on a protected forest landscape in Kyrgyzstan. Local use of 27 fruit and nut species was recorded and modeled. Results indicated that in the presence of fuelwood cutting with or without grazing, species of high socioeconomic impor- tance such as Juglans regia, Malus spp., and Armeniaca vulgaris were largely eliminated from the landscape after 50–150 yr. In the absence of disturbance or in the presence of grazing only, decline of these species occurred at a much lower rate, owing to competi- tive interactions between tree species. This suggests that the current intensity of fuelwood harvesting is not sustainable. Conversely, cur- rent grazing intensities were found to have relatively little impact on forest structure and composition, and could potentially play a positive role in supporting regeneration of tree species. These results indicate that both positive and negative impacts on biodiversity can arise from human populations living within a protected area. Potentially, these could be reconciled through the development of participatory approaches to conservation management within this reserve, to ensure the maintenance of its high conservation value while meeting human needs

does prudential regulation contribute to effective measurement and management of interest rate risk evidence from italian banks

This paper contributes to prior literature and to the current debate concerning recent revisions of the regulatory approach to measuring bank exposure to interest rate risk in the banking book by focusing on assessment of the appropriate amount of capital banks should set aside against this specific risk. We first discuss how banks might develop internal measurement systems to model changes in interest rates and measure their exposure to interest rate risk that are more refined and effective than are regulatory methodologies. We then develop a backtesting framework to test the consistency of methodology results with actual bank risk exposure. Using a representative sample of Italian banks between 2006 and 2013, our empirical analysis supports the need to improve the standardized shock currently enforced by the Basel Committee on Banking Supervision. It also provides useful insights for properly measuring the amount of capital to cover interest rate risk that is sufficient to ensure both financial system functioning and banking stability