Research

Works in progress…

What Drives the Changing Stock-Bond Correlation Post-Covid?

with Canlin Li and Marius Rodriguez

When bonds prices and stock prices move in opposite directions, it signals that investors can hedge for growth-focused assets (stocks) with inflation-focused assets (bonds). While the stock-bond correlation was negative for virtually the entire 21st century, it shifts positive during Covid, and remains there today. This indicates a changing correlation between investor perceptions of growth and inflation news. We document structural shifts in the underlying factors of the stock-bond correlation that help explain why: changing investor sensitivity to incoming news data, and changes in perception of monetary policy.

Short- and Long-run Uncertainty and Growth

with Marcelo Ochoa

Do short-run and long-run uncertainty affect macroeconomic growth in different ways? Exploiting the horizon-dimension of treasuries, we note that treasury market volatility at different horizons are associated with future output and employment in different ways. We construct an endowment economy model with both persistent and transitory shocks to volatility of consumption. We calibrate our model to the data to understand the different relationships between uncertainty horizons and the economy.

Underestimating the Fed

with Anthony Diercks and Eric Swanson

One way to measure how investors perceive monetary policy’s reaction to inflation news would be to estimate a version of the Taylor rule using high-frequency changes in inflation and US Treasuries markets. However, we note that these observed Taylor rule coefficients can be biased, since when markets ingest news that updates their inflation expectations they are endogenously updating their expectations for the strength of monetary policy. We provide narrative evidence of this behavior, show empirically that it suppresses market-based estimates of Taylor rule coefficients, and uncover using a DSGE model the conditions needed to create this bias in estimation.