Yield Curves: Bridging the P-Q Modeling Divide

Check it out:

"Bridging the P-Q Modeling Divide with the Factor-HJM Modeling Framework"
by
Andrei Lyashenko and Yevgeny Goncharov.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3995533

Really nice work.

I chuckled when I noticed that it characterizes a significant part of its contribution as solving the "mystery behind the very peculiar form of the mean reversion matrices" used to produce the arbitrage-free Nelson-Siegel (AFNS) yield-curve model of Christensen, Diebold and Rudebusch (CDR:  2009, 2011).  Of course the CDR mean reversion matrices are not "peculiar" in any negative sense, but they are definitely special, delivering precisely what is needed to enforce absence of arbitrage.  Admittedly, we may have presented them as if pulled from a hat.  In fact we arrived at them by reverse engineering, that is, by the venerable (and iterative) strategy of "guess and verify".  

The new Lyashenko-Goncharovnew paper arrives at the CDR mean reversion matrices in a more constructive fashion, in an impressively broad and unifying framework that bridges dynamic factor yield curve models, Heath-Jarrow-Morton forward curve models, and Duffie-Kan affine arbitrage-free models.  In so doing, it further cements the central status of AFNS, now transcending sub-disciplines.

An RCT for the new year

Happy New Year to all!  Let's kick it off with some humor.  Here's some great RCT reading:

"Parachute use to prevent death and major trauma related to gravitational challenge: systematic review of randomised controlled trials"

Abstract

Objectives To determine whether parachutes are effective in preventing major trauma related to gravitational challenge.

Design Systematic review of randomised controlled trials.

Data sources: Medline, Web of Science, Embase, and the Cochrane Library databases; appropriate internet sites and citation lists.

Study selection: Studies showing the effects of using a parachute during free fall.

Main outcome measure Death or major trauma, defined as an injury severity score > 15.

Results We were unable to identify any randomised controlled trials of parachute intervention.

Conclusions As with many interventions intended to prevent ill health, the effectiveness of parachutes has not been subjected to rigorous evaluation by using randomised controlled trials. Advocates of evidence based medicine have criticised the adoption of interventions evaluated by using only observational data. We think that everyone might benefit if the most radical protagonists of evidence based medicine organised and participated in a double blind, randomised, placebo controlled, crossover trial of the parachute.

• Gordon C S Smith, Jill P Pell
•  https://doi.org/10.1136/bmj.327.7429.1459
• 
  

Glenn Rudebusch Leaves FRBSF

So now it's public.  Glenn Rudebusch, arguably the best researcher in a 25-year span at the Federal Reserve Bank of San Francisco (FRBSF), and indeed in the entire Federal Reserve System, is "leaving".  (Check him out on Google Scholar.)  A year and a half ago FRBSF was sponsoring a conference in his honor, yet now, inexplicably, he is departing.  Not sure what happened in the interim, except his founding and leading FRBSF's highly-influential Virtual Seminar on Climate Economics and related urgently-needed climate initiatives.  Perhaps the seminar, and his path-breaking climate research more generally, were too hot for some to handle (also see here).  I’m certain that Glenn will do more great research as a visiting scholar somewhere, continuing to integrate issues related to climate change into macroeconomics, finance, and policy.

Improved Forecasts from Imperfect Models

 Better the Devil You Know: Improved Forecasts from Imperfect Models

by Dong Hwan Oh and Andrew J. Patton

Cool paper from Oh and Patton.  https://www.federalreserve.gov/econres/feds/files/2021071pap.pdf

Interesting to me in part because, when I consider how I would approach their problem, I have some ideas that might work well, but my ideas differ from theirs (it seems).  So the paper made me think a lot, which is good.

Not unrelated, the paper introduced me to the stat literature on local likelihood, like:

Fan, J. Y. Wu and Y. Feng, 2009, Local quasi-likelihood with a parametric guide, Annals of Statistics, 37(6B), 4153-4183

         Fan, J., M. Farmen and I. Gijbels, 1998, Local maximum likelihood estimation and inference,                 Journal of the Royal Statistical Society, Series B, 60(3), 591-608

Hu, F. and J. V. Zidek, 2002, The weighted likelihood, Canadian Journal of Statistics, 30(3), 347-371

Tibshirani, R. and T. Hastie, 1987, Local likelihood estimation, Journal of the American Statistical Association, 82(398), 559-567,

which feeds into the paper's key econometrics ancestors like:

Dendramis, Y., G. Kapetanios and M. Marcellino, 2020, A similarity-based approach for macroeconomic forecasting, Journal of the Royal Statistical Society, Series A, 183(3), 801-827

Kristensen, D. and A. Mele, 2011, Adding and subtracting Black-Scholes: A new approach toapproximating derivative prices in continuous-time models, Journal of Financial Economics,102, 390-415.

Ed George Conference

Last weekend's "Ed George Conference", Perspectives in Statistical Modeling and Inference, not only celebrated Ed's myriad contributions, but also showcased some really interesting new research results.  My favorite talks were Dean Foster's and Jun Liu's.  See "Schedule" at https://jh-cai.com/edgeorge70.

NBER Environmental and Energy

Just arrived.  Looks great. 

4th Annual NBER Environmental and Energy Policy and the Economy Conference - Call for Papers / Proposals

Dear Researchers,

We are seeking papers or proposals for the 4th annual NBER
conference/publication on Environmental and Energy Policy and the
Economy. We will accept six papers for presentation at what is
intended to be an in-person conference at the National Press Club in
Washington, D.C. on May 19, 2022. The audience will include the
professional staffs of government agencies, research institutions,
and NGOs focused on energy and environmental policy. The contributed
papers will then be published in an annual volume by the University
of Chicago Press.

Papers should be relevant to current policy debates and accessible to
a professional audience. While standalone projects are specifically
encouraged, we also welcome spinoff projects where authors intend to
later submit a more extensive or technical version to a journal, or
may have already done so. While no submission should be a duplicate
of another paper, alternate versions that put results into a more
general, policy-relevant context and summarize them in a more broadly
accessible way are encouraged. This is a great opportunity to
communicate research to the policy community.

Submissions should be either 2-3 page abstracts outlining the
intended contribution, or a complete paper this is not and will not
be submitted elsewhere. Submissions are due by midnight EDT on
October 22nd, 2021, and can be uploaded at

https://urldefense.com/v3/__http://www.nber.org/confsubmit/backend/cfp?id=EEPEs22__;!!IBzWLUs!FbPwwUMJugIn66lvI45NGbEcwyb_5ML4BK2XNdvLrJEQ6VmCU858NILcaKp_vQ2CHE_G$

Submissions from researchers with and without NBER affiliations, and
from researchers who are from groups that have been historically
under-represented in the economics profession, are welcome. The
authors of each paper will share an $8,000 honorarium.

Decisions about accepted papers will be made by mid-November.
Complete drafts of papers will be due in early April 2022.

We look forward to hearing from you.

Matthew Kotchen
Tatyana Deryugina
James Stock

Global Inflation Database

Ayhan Kose and friends at the World Bank have a long history of producing useful products. This seems to be no exception. From his email:

We’ve released a new study, “One-Stop Source: A Global Database of Inflation,” that introduces a database with inflation series: (i) for a wide range of measures (headline, food, energy, and core consumer price inflation; producer price inflation; and gross domestic product deflator changes); (ii) at multiple frequencies (monthly, quarterly and annual) for an extended time period (1970-2021); and (iii) for a large number of (up to 196) countries. As it doubles the number of observations over the next-largest publicly available sources, the database constitutes a comprehensive, one-stop source for inflation. You can download the study and the database here: https://www.worldbank.org/en/research/brief/inflation-database. 

Extreme Weather and the Macroeconomy

Check out the nice new paper here, by Hee Soo Kim, Christian Matthes, and Toan Phan.  Clever and nicely-controlled use of the Actuaries Climate Index (ACI) in an Auerbach-Gorodnichenko (AG, 2012) style smooth-transition VAR. Much bigger effects of extreme weather in more recent years! I look forward to learning/thinking more about assumptions embedded in the AG framework, and the role that they may play in conjunction with the new ACI data in producing the result.

Interactive Climate Change Simulator

Check out En-ROADS.  Looks intuitive and easy to run, yet quite detailed.  Nice!  (Confusing name though.  What does it mean?)

Hsiang Chosen for National Climate Assessment

On August 18th, the U.S. Global Change Research Program announced that Climate Impact Lab Co-Director Solomon Hsiang will serve as chapter lead for the Economics chapter of the Fifth National Climate Assessment (NCA5). 

Chapter leads will be responsible for building diverse author teams and leading the development of chapter content. NCA5 is expected to be released in late 2023.

NCA5 is a very big deal, and Sol is the perfect choice.

Hsiang is the Chancellor's Professor of Public Policy and Director of the Global Policy Laboratory at the University of California, Berkeley. His research combines data with mathematical models to understand how society and the environment influence one another. In particular, he focuses on how policy can encourage economic development while managing the global climate. His research has been published in Nature, Science, and the Proceedings of the National Academy of Sciences.

Unconditional and Conditional Density Forecast Calibration

I have been reading a new paper by Tilman Gneiting and Johannes Resin (GR2021) -- deep and thought-provoking as always -- "Regression Diagnostics meets Forecast Evaluation:  Conditional Calibration, Reliability Diagrams, and Coefficient of Determination."

Their paper pushes in a variety of interesting ways toward aspects of conditional as opposed to merely unconditional (uniform probability transform, or PIT) density forecast calibration.    

That's largely what the iid part of the Diebold-Gunther-Tay (DGT 1998) result ("correct conditional calibration implies PIT ~ iid U(0,1)") is about, and DGT emphasize and illustrate that one needs to check not just the condition for correct unconditional calibration (PIT ~ U(0,1)), but rather the joint condition PIT ~ iid U(0,1).  

I want to understand more about the GR2021 results in their relation to the iid part of the DGT1998 PIT ~ iid U(0,1) result.      

Some relevant history and perspective are at https://fxdiebold.blogspot.com/2018/06/peter-christoffersen-and-density.html.

The GR2021 paper and code are at:

https://urldefense.com/v3/__https://arxiv.org/abs/2108.03210__;!!IBzWLUs!BtUAeIBxhkYOch-aPxSnALk9MfYczGKu4G37CXTTHnimafIb85ov4cY12xVEYhicRaVT$

https://urldefense.com/v3/__https://github.com/resinj/replication_GR21__;!!IBzWLUs!BtUAeIBxhkYOch-aPxSnALk9MfYczGKu4G37CXTTHnimafIb85ov4cY12xVEYsNE2Kt1$

Climate change and financial risk

 Climate change and financial risk. The SF Fed's virtual seminars on climate economics

The Intergovernmental Panel on Climate Change has just published its sixth report, warning of “unprecedented” effects and “irreversible” damage. For more than a year, the Federal Reserve Bank of San Francisco has been running its Virtual Seminar on Climate Economics to help economists estimate, model, and propose policies to mitigate the extent of the crisis. Glenn Rudebusch of the FRBSF tells Tim Phillips that “the economics profession as a whole has been slow to grapple with climate change”, and so the seminars are bringing fresh, interdisciplinary research to a wider audience.

3

Email subscriptions

My forecast here unfortunately comes true: FeedBurner is going away, so no more email subscriptions, starting soon, evidently in August.  Please follow the blog on Twitter (@FrancisDiebold), or directly at https://fxdiebold.blogspot.com.

See you soon, one way or another,

Frank

EC^2 2021: Econometrics of Climate

 EC^2 Conference 2021:  Econometrics of Climate, Energy, and Resources

Aarhus, Dec 10-11 2021

Conference web page here. 

Climate Change Research at the NBER Summer Institute

[Courtesy of Glenn Rudebusch at FRBSF.  Thanks Glenn!]

Starting next week, the NBER will host a variety of research workshops focused on different sub-fields in economics.  The issue of climate change cuts this summer's NBER Summer Institute. The list below collects presentations related to climate change from all of the various workshops. 

Fortunately, none of these presentations overlap with the July 15^th VSCE.

Master Schedule of NBER SI research presentations related to climate change

 

Times are US EDT.  All presentations will be live streamed 

Monday, July 12

4:00 pm

ME

How Unconventional is Green Monetary Policy? 

Melina Papoutsi, Columbia University

Monika Piazzesi, Stanford University and NBER

Martin Schneider, Stanford University and NBER

Wednesday, July 14

11:00 am

RISK

Banking on Carbon: Corporate Lending and Cap-and-Trade Policy  

Ivan T. Ivanov, Federal Reserve Board

Mathias Kruttli, Federal Reserve Board

Sumudu W. Watugala, Cornell University

Discussant: Patrick Bolton, Columbia University and NBER

 

11:45 am

RISK

The Rising Tide Lifts Some Interest Rates: Climate Change, Natural Disasters, and Loan Pricing  

Ricardo Correa, Federal Reserve Board

Ai He, University of South Carolina

Christoph Herpfer, Emory University

Ugur Lel, University of Georgia

Discussant: Victoria Ivashina, Harvard University and NBER

 

12:45 pm

RISK

Roundtable on Risk Management of Climate Risk at Financial Institutions
John Cochrane, Hoover Institution and NBER
Robert Engle, New York University and NBER
Robert Litterman, Kepos Capital
Kevin Stiroh, Federal Reserve Board

Thursday, July 15

12:50 pm

EFEG

Can Directed Innovation Mitigate Climate Damage? Evidence from US Agriculture  

Jacob Moscona, Massachusetts Institute of Technology

Karthik Sastry, Massachusetts Institute of Technology

Tuesday, July 20

3:20 pm

PRINN

Panel discussion

What Would it Take for Innovation to Provide a Long-Run Solution to the Climate Change Challenge?
Moderator:
Severin Borenstein, University of California, Berkeley and NBER
Panelists:
Daron Acemoglu, Massachusetts Institute of Technology and NBER
Jason Bordoff, Columbia University
Cheryl Martin, Harwich Partners

Friday, July 23

12:30 pm

HF

Panel: Climate Change and Household Finance
Moderator:
Adair Morse, University of California, Berkeley and US Dept of the Treasury
Panelists:
Harrison Hong, Columbia University and NBER
Esteban Rossi-Hansberg, University of Chicago and NBER
Johannes Stroebel, New York University and NBER

Monday, July 26

11:50 am
DEV

Coordination and Commitment in International Climate Action: Evidence from Palm Oil 

Allan J. Hsiao, Massachusetts Institute of Technology

 

noon

DEV

Holding Up Green Energy 

Nicholas Ryan, Yale University and NBER

 

1:00 pm

EEE

Incentivizing Negative Emissions Through Carbon Shares  

Derek Lemoine, University of Arizona and NBER

Discussant:  Stephie Fried, Federal Reserve Bank of San Francisco

 

1:45 pm

EEE

Overlapping Climate Policies  

Grischa Perino, University of Hamburg

Robert A. Ritz, University of Cambridge

Arthur A. van Benthem, University of Pennsylvania and NBER

Discussant: Meredith Fowlie, University of California, Berkeley and NBER

Tuesday, July 27

10:30 am

EEE

Economic impacts of tipping points in the climate system 

Simon Dietz, London School of Economics

James Rising, University of Delaware

Thomas Stoerk, London School of Economics

Gernot Wagner, New York University

Discussant: William D. Nordhaus, Yale University and NBER

 

11:15 am

EEE

The Rising Cost of Climate Change: Evidence from the Bond Market  

Michael D. Bauer, Universität Hamburg

Glenn Rudebusch, Federal Reserve Bank of San Francisco

Discussant: James H. Stock, Harvard University and NBER

 

1:30 pm

EEE

Can Directed Innovation Mitigate Climate Damage? Evidence from US Agriculture 

Jacob Moscona, Massachusetts Institute of Technology

Karthik Sastry, Massachusetts Institute of Technology

 

1:45 pm

EEE

Adaptation to Natural Disasters by Better Information: Evidence from the Home Seller Disclosure Requirement 

Seunghoon Lee, University of Chicago

 

1:50 pm

EEE

The Food Problem and the Aggregate Productivity Consequences of Climate Change 

Ishan B. Nath, Federal Reserve Bank of San Francisco

 

1:55 pm

EEE

To Beef or Not To Beef: Trade, Meat, and the Environment 

Dora Zs. Simon, University of Zurich

 

2:00 pm

EEE

Coordination and Commitment in International Climate Action: Evidence from Palm Oil 

Allan J. Hsiao, Massachusetts Institute of Technology

 

2:05 pm

EEE

Eco-Certification: Warm Glow or Cold Prickle? 

Klaas van 't Veld, University of Wyoming

 

2:10 pm

EEE

Cool Cities: The Value of Urban Trees 

Lu Han, University of Toronto

Stephan Heblich, University of Toronto

Christopher Timmins, Duke University and NBER

Yanos Zylberberg, Univeristy of Bristol

 

2:20 pm

EEE

Partisan Residential Sorting on Climate Risk 

Asaf Bernstein, University of Colorado at Boulder and NBER

Stephen B. Billings, University of Colorado

Matthew Gustafson, Penn State University

Ryan Lewis, University of Colorado at Boulder

 

Thursday, July 29

 

10:30 am

REAL / URB

Neglected No More: Housing Markets, Mortgage Lending, and Sea Level Rise 

Benjamin J. Keys, University of Pennsylvania and NBER

Philip Mulder, University of Pennsylvania

Friday, July 30

1:00 pm
URB

The Economic Geography of Global Warming 

Jose Luis Cruz Alvarez, Princeton University

Esteban Rossi-Hansberg, University of Chicago and NBER

 

2:10 pm
URB

The Local Economic Impact of Natural Disasters 

Brigitte Roth Tran, Federal Reserve Bank of San Francisco

Daniel Wilson, Federal Reserve Bank of San Francisco