Abstract: CDX spreads and corporate leverage comove strongly and more intensely during crises. Existing CDX pricing models cannot reproduce this because they assume exogenous default and leverage. We develop a consumption-based model where firms optimally choose default and leverage while an Epstein–Zin representative agent learns about crisis risk. The agent's perceived crisis probability, her fear, is self-reinforcing, raising default boundaries and leverage through a fear-driven financing channel that accounts for time variation in CDX spreads. We estimate the model to match the 5-year CDX rate, equity returns, and leverage. The model replicates the CDX term structure and physical default probabilities.
Discussant: Luca Benzoni, Federal Reserve Bank of Chicago
Abstract: This paper develops a new method to extract exchange rate expectations from investment positions. I use relative allocations between otherwise identical exchange-traded funds (ETFs) offered with and without a currency hedge to measure investors’ pure currency demand and infer a distribution of currency return expectations. These portfolioimplied expectations predict future exchange rates more accurately than survey-basedexpectations or expectations derived from macroeconomic models or currency pricing factors. Dispersion in portfolio-implied expectations accounts for 27% of exchange rate volatility, consistent with models of heterogeneous beliefs.
Robert Rogers, London School of Economics and Political Science
Abstract: I develop a method to extract interest-rate expectations from options markets by connecting interest-rate risk premia to interest-rate variance risk premia, with no assumptions on interest-rate stationarity. I find first that historical excess bond returns mostly reflected risk premia, not forecast errors. Second, risk-based forecasts outperform surveys and term-structure models out of sample. Third, risk-neutral variance drops sharply around FOMC announcements, suggesting a risk-premium explanation for the FOMC-announcement decline in long-term rates. Fourth, the recent positive stock-yield correlation is driven by expectations and not risk premia.
Abstract: Collecting market outlooks of asset managers, I study short-term expectations that summarize the relative risk and return attractiveness across asset classes. These tactical asset allocation views are reflected in positioning data from a survey of fund managers, in the time-series asset allocations of mutual funds, and in futures positioning. Allocation mutual funds' equity portfolio weights are two to three percentage points lower when managers' are ``underweight'' rather than ``overweight'' equities relative to their strategic asset allocations. Prompting a large-language model to infer expectations about macroeconomic fundamentals from the text-based outlooks, such a repositioning happens whenever the perceived growth outlook deteriorates.
Discussant: Federico Bastianello, London Business School
