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Thesis advisor: Peter Ireland / Upon reaching the effective end of conventional monetary policy, the Zero-Lower Bound, the Federal Reserve Board began to utilize a non-conventional expansionary monetary policy involving Large Scale Asset Purchases. Under this policy, large quantities of agency and federal debt is purchased using the reserves of the Federal Reserve Bank’s balance sheet. This policy is frequently referred to as Quantitative Easing or, more simply, QE. This paper considers the effects and sustainability of the Federal Open Market Committee’s use of Large Scale Asset Purchases on the prices and yields of financial assets within the U.S. Financial Markets. Our analysis presents evidence that while QE was initially effective in lowering the yields of agency and federal debt, the downward pressure on yields was not sustainable over time. Additionally, we find that the effects of QE spilled-over into additional asset classes within the financial markets including corporate fixed-income and equities. / Thesis (BA) — Boston College, 2018. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: Departmental Honors. / Discipline: Economics.

Of the many analytical methods collectively referred to as Modern Portfolio Theory (MPT), the Capital Asset Pricing Model (CAPM) is the most familiar to today’s generation of students of finance. The popularity of the CAPM arises from its success in expressing a powerful theoretical insight in a simple, usable form. The primary use of the CAPM is to determine minimum required rates of return from investment in risky assets. The variable in the CAPM is called ‘beta’, a statistical measure of risk which has become familiar to all finance professionals. Over the past decade, beta has become the most widely recognised and applied measure of risk in the investment community. The model has been extensively tested in the developed capital markets, mainly in the United States of America. But the model has not been extensively tested in other developed and developing countries, often due to the size of the capital market and the lack of the data in these countries. This study attempts to fill this vacuum and tries to update the earlier tests done on the Stock Exchange of Singapore. On addition, a review of the validity of the CAPM over time, as proxied by the stationarity of the beta, is performed. Also, tests regarding heteroskedasticity and its implications have been undertaken. / Master of Commerce (Hons)

abstract: This paper studies the dynamic relationship between the pricing of Alternative Asset Management products and macroeconomic variables. It does so using an index of Alternative Asset Management products, employing a VAR framework and examining the implied impulse response functions. I find a bivariate causal relation between the expected rate of return on Alternative Asset Management products and the growth rate of industrial value added. I also find that the CPI, the yield on one-year national debt, the weighted average yield of bond repurchases in interbank bond market, and the one-year loan interest rate can influence the expected return rate of Alternative Asset Management products. An analysis of the variance decomposition suggests that macroeconomic variables have a different impacts on forecast errors variance. / Dissertation/Thesis / Doctoral Dissertation Business Administration 2016

This dissertation examines the role of asset prices to act as a transmission and amplification mechanism. Specifically, it looks at how changes in asset prices can help transmit and amplify technology shocks through the credit channel by changing the supply of loanable funds, or changing the supply of deposits, or both. Using a modified version of the Kiyotaki-Moore credit cycles model with concave utility and decreasing returns to scale production function, the dissertation illustrates that asset prices can as a credible amplification and transmission mechanism. Using concave utility and decreasing returns to scale production function allows the incorporation risk aversion into the credit cycles model. The model can help explain the gap between observed magnitude of shocks, and the corresponding changes in economic activity. The behavior of a heterogeneous agent economy in response to a technology shock is simulated using computer programs. The simulations show that a one percent technology shock translates into a more than four percent change in capital held by the constrained agents by moving capital from one agent type to the other. This moves the economy away from a first-best equilibrium. If the technology shock is positive there is an increased demand of capital from the more productive agents, and thus a more than proportionate increase in output. If the technology shock is negative, the opposite path is followed, and economic activity falls more than proportionately. There are credit constraints built into the model. Agents' access to credit is determined by the value of collateral on oer, which in turn depends on asset prices. Technology shocks change demand for assets, their prices, their value as collateral, and hence agents' access to credit. Further, since prices are forward looking, a shock in one period propagates through time. These simulations show that the effects of the shock can be felt up to 13 periods after it has hit. An event analysis with housing price data from 18 countries spanning a period of more than four decades is also performed. It shows that there is strong co-movement of housing prices and economic activity. In particular, larger changes in housing prices have been accompanied by qualitatively similar changes in economic activity. The period leading up to the peak of a real estate cycle is accompanied by a more than proportionate increase in private sector lending, and once the peak has been crested, there is a more than proportionate fall in nominal private sector lending. This evidence is in sync with the earlier observation that changes in asset prices influence agents' access to credit and contribute to the persistence of the effects of the shock far into the future. Further, the preferred measure of economic health, the rate of inflation, sees no measurable change in periods leading up to a real estate peak, and beyond. This throws up the need for some other measure of economic health that is better able to capture the events in asset markets. Policy makers have been paying more attention to this channel in the aftermath of the sub-prime mortgage crisis in the United States. There have been multiples changes in regulatory policy across the world, and specific steps are being taken to dampen exuberance in the real estate market. Only time can tell if these measures turn out to be effective, but at least a step has been taken towards realizing that housing market can lead to a wider economic and banking crisis. / Economics

A dynamic IS-LM model including stocks and houses as additional assets will be analyzed in this paper. Providing also housing services, a major consumption item for most households, houses create an additional link between the monetary and the real sector of the economy. The adjustment path of output, house prices and stock prices after exogenous policy shocks will be derived within a rational expectation setup. This will show how different reaction patterns of asset prices are related to different elasticities of housing services demand. These general analytical results are contrasted with relevant empirical work, particularly Lastrapes [2002], leading to the identification of plausible elasticity ranges. The particular results for those shed new light upon the ongoing discussion about demand effects from real estate wealth and about determinants of house price fluctuations. (author's abstract) / Series: Department of Economics Working Paper Series

Thesis advisor: Peter Ireland / With interest rates stuck near zero for the foreseeable future, the Federal Reserve has had to employ numerous unconventional monetary policy measures in an attempt to stimulate an economy in the after math of the worst economic downturn since the Great Depression. I assess the usefulness of market-based measures of expectations in gauging the effects of these seemingly extreme policy actions undertaken in an environment of unprecedented fear and uncertainty. I use a principal component analysis to combine a number of asset prices that indicate different types of market expectations; by combining these variables into one single variable indicator, this principal component variable filters out the variance among these similar variables and focuses on the common movements among the variables that can be attributed to a specific market force such as investors’ inflation expectations, overall market risk appetite, and economic growth expectations. / Thesis (BA) — Boston College, 2012. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: College Honors Program. / Discipline: Economics.

Nesta tese analisamos a influência dos preços dos ativos na condução da política monetária nos países emergentes no período de 1990 a 2006. Primeiramente, investigamos a presença de bolhas racionais nos preços das ações dos países emergentes através de testes de cointegração linear e não linear. Os resultados indicam a presença de bolhas racionais em pelo menos um dos testes realizados para cada um dos países estudados. Todavia, nossos resultados permitem concluir que as bolhas tendem a ser provocadas por fatores extrínsecos e não pela relação não linear intrínseca entre os preços das ações e os dividendos. Estudamos também a relação entre os retornos de mercado, inflação esperada e crescimento/hiato do produto, através de testes individuais e em conjunto utilizando modelos em painel linear e não linear. Em ambos verificamos que as variáveis financeiras carregam informações úteis, tanto direta como indireta, a respeito da inflação e do crescimento do produto, dentro ou fora da amostra. Por fim, investigamos se os preços dos ativos devem exercer um papel central nas decisões de política monetária, através de modelos GMM (individuais e em painel) e de otimização dinâmica. Os resultados indicam que a razão dividendo-preço e a taxa de câmbio real são bons instrumentos na função de reação dos bancos centrais dos países emergentes, porém não podemos concluir que estas variáveis devam ser utilizadas como argumentos nestas funções de reação. Os resultados também indicam que, nos países que optaram pelo regime de metas de inflação estrita, a melhor opção seria não considerar explicitamente os retornos das ações em suas funções de reação. Para bancos centrais atuando em regimes de metas de inflação com política monetária acomodatícia ou outro tipo de regime, a melhor opção seria considerar os preços das ações em suas funções de reação. / We examine the relationship (if any) between stock prices and monetary policy in 22 emerging countries over the period 1990-2006. First, we investigate whether rational stock price bubbles are present in such countries using linear and nonlinear cointegration. Bubbles were found in at least one out of the six tests considered. These were likely to be caused by extrinsic factors, rather than by the intrinsic nonlinear relation between the stock prices and dividends. Secondly, we evaluate the link between market returns, expected inflation and output gap and growth by employing both individual and joint tests of linear and nonlinear panel models. We find that the stock prices convey useful information about inflation and output growth in-sample and out-of-the-sample Finally, we ask whether the stock prices are to be given a central role in monetary policy decisions using both (individual and panel) GMM models and dynamic optimization. We find that though the dividend-price ratio and the real exchange rate can provide useful information for monetary policy decisions, we should not jump to the conclusion that they have to be considered as arguments of the central banks' reaction functions. For the central banks with explicit inflation targeting, the best choice is not to consider the stock returns in their reaction functions. However, for the other regimes the best choice is to consider the stock returns in the reaction functions.

Nesta tese analisamos a influência dos preços dos ativos na condução da política monetária nos países emergentes no período de 1990 a 2006. Primeiramente, investigamos a presença de bolhas racionais nos preços das ações dos países emergentes através de testes de cointegração linear e não linear. Os resultados indicam a presença de bolhas racionais em pelo menos um dos testes realizados para cada um dos países estudados. Todavia, nossos resultados permitem concluir que as bolhas tendem a ser provocadas por fatores extrínsecos e não pela relação não linear intrínseca entre os preços das ações e os dividendos. Estudamos também a relação entre os retornos de mercado, inflação esperada e crescimento/hiato do produto, através de testes individuais e em conjunto utilizando modelos em painel linear e não linear. Em ambos verificamos que as variáveis financeiras carregam informações úteis, tanto direta como indireta, a respeito da inflação e do crescimento do produto, dentro ou fora da amostra. Por fim, investigamos se os preços dos ativos devem exercer um papel central nas decisões de política monetária, através de modelos GMM (individuais e em painel) e de otimização dinâmica. Os resultados indicam que a razão dividendo-preço e a taxa de câmbio real são bons instrumentos na função de reação dos bancos centrais dos países emergentes, porém não podemos concluir que estas variáveis devam ser utilizadas como argumentos nestas funções de reação. Os resultados também indicam que, nos países que optaram pelo regime de metas de inflação estrita, a melhor opção seria não considerar explicitamente os retornos das ações em suas funções de reação. Para bancos centrais atuando em regimes de metas de inflação com política monetária acomodatícia ou outro tipo de regime, a melhor opção seria considerar os preços das ações em suas funções de reação. / We examine the relationship (if any) between stock prices and monetary policy in 22 emerging countries over the period 1990-2006. First, we investigate whether rational stock price bubbles are present in such countries using linear and nonlinear cointegration. Bubbles were found in at least one out of the six tests considered. These were likely to be caused by extrinsic factors, rather than by the intrinsic nonlinear relation between the stock prices and dividends. Secondly, we evaluate the link between market returns, expected inflation and output gap and growth by employing both individual and joint tests of linear and nonlinear panel models. We find that the stock prices convey useful information about inflation and output growth in-sample and out-of-the-sample Finally, we ask whether the stock prices are to be given a central role in monetary policy decisions using both (individual and panel) GMM models and dynamic optimization. We find that though the dividend-price ratio and the real exchange rate can provide useful information for monetary policy decisions, we should not jump to the conclusion that they have to be considered as arguments of the central banks' reaction functions. For the central banks with explicit inflation targeting, the best choice is not to consider the stock returns in their reaction functions. However, for the other regimes the best choice is to consider the stock returns in the reaction functions.