Annette Vissing-Jorgensen

The Aggregate Demand for Treasury Debt

Investors value the liquidity and safety of US Treasuries. We document this by showing that changes in Treasury supply have large effects on a variety of yield spreads. As a result, Treasury yields are reduced by 73 basis points, on average, from 1926 to 2008. Both the liquidity and safety attributes of Treasuries are driving this phenomenon. We document this by analyzing the spread between assets with different liquidity (but similar safety) and those with different safety (but similar liquidity). The low yield on Treasuries due to their extreme safety and liquidity suggests that Treasuries in important respects are similar to money.

The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy

We evaluate the effect of the Federal Reserves purchase of long-term Treasuries and other long-term bonds (QE1 in 2008-09 and QE2 in 2010-11) on interest rates. Using an event-study methodology, we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target, because quantitative easing works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and a mortgage-backed securities (MBS) prepayment channel and a corporate bond default risk channel for QE1 only. Second, effects on particular assets depend critically on which assets are purchased. The event study suggests that MBS purchases in QE1 were crucial for lowering MBS yields as well as corporate credit risk and thus corporate yields for QE1, and Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and agency bonds relative to MBSs and corporate bonds, with yields on the latter falling primarily through the markets anticipation of lower future federal funds rates.

Stock-Market Participation, Intertemporal Substitution, and Risk-Aversion

Many of the empirical rejections of the consumption CAPM can be explained by the fact that the marginal rate of substitution between present and future consumption, which in the standard model functions as the pricing kernel for all assets for which a consumer is not at a corner, seems to vary too little to be consistent with sensible values of the parameters. Moreover, when one considers more than one asset at a time, one typically gets strong rejections of the overidentifying restrictions implied by the model. The failure seems to be both in terms of unconditional and conditional moments. Two recent papers Attanasio et al., 2002 [henceforth ABT]; Vissing-Jorgensen, 2002 [henceforth VJ] have shown that, if one focuses on the consumption of individuals participating in the stock market, one does not reject some implications of the model. In particular, both VJ and ABT find that, using the consumption of stockholders, conditional Euler equations lead to sensible preference parameters and, in the case of ABT, fail to reject the overidentifying restrictions even when considering two assets (stocks and bonds) at the same time. While these results constitute a first empirical success, they do not necessarily constitute a solution to the equity premium puzzle. As argued by Robert E. Hall (1988) and Attanasio and Guglielmo Weber (1989), the estimates of the coefficient on the interest rate in a loglinearized Euler equation should be interpreted as the elasticity of intertemporal substitution (EIS) and can only be informative about the degree of risk-aversion under more restrictive assumptions (CRRA utility). In this paper we argue that considering the consumption growth of stockholders and two asset returns not only yields values of the EIS that are plausible, but also helps explain the equity premium puzzle. The evidence we have on the consumption, income, and portfolios of stockholders is consistent with fairly plausible values of the coefficient of relative risk-aversion when using the preference specification of Larry G. Epstein and Stanley E. Zin (1991). We use three Euler equations, one for each of the two assets considered, and one for the household’s total wealth portfolio, whose return will be denoted as Rm. Rm is, in principle, an unobservable variable in that it depends on the returns on all assets an individual consumer holds, including human capital. In this paper, we specify the conditional expected return to human capital as a linear function of the conditional expected returns to stocks and bonds. We suggest a novel approach to estimating the coefficients in this function based on conditional Euler equations for stockholders with two asset returns on the right-hand side. Then, considering unconditional moments, we estimate the risk-aversion of stockholders using the log-linearized equation for the equity premium from Epstein-Zin utility also explored by John Y. Campbell (1996). Unlike Campbell, our preferred approach does not substitute out consumption. Furthermore, we emphasize the importance of allowing for bonds in households’ portfolios as well as not restricting the conditional expected human-capital return to equal that of stocks.

Long-Run Stockholder Consumption Risk and Asset Returns

We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting micro-level household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or non-stockholder consumption risk, and provides more plausible economic magnitudes. We find that risk aversion estimates around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French size and value portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks.

The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares

We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the United States, since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile our findings with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality.

Why Do Entrepreneurs Hold Large Ownership Shares? Testing Agency Theory Using Entrepreneur Effort and Wealth

We augment the standard principal-agent model to accommodate an entrepreneurial setting, where effort, ownership, and firm size are determined endogenously. We test the models predictions (some novel) using new data on entrepreneurial effort and wealth. Accounting for unobserved firm heterogeneity using instrumental variables, we find entrepreneurial ownership shares increase with outside wealth, decrease with firm risk, and decrease with firm size; effort increases with ownership and size; and both ownership and effort increase firm performance. The magnitutde of the effects in the cross-section of firms suggests that agency theory is important for explaining the large average ownership shares of entrepreneurs.

The Impact of Treasury Supply on Financial Sector Lending and Stability

We present a theory in which the key driver of short-term debt issued by the financial sector is the portfolio demand for safe and liquid assets by the nonfinancial sector. This demand drives a premium on safe and liquid assets that the financial sector exploits by owning risky and illiquid assets and writing safe and liquid claims against them. The central prediction of the theory is that safe and liquid government debt should crowd out financial sector lending financed by short-term debt. We verify this prediction with US data from 1875 to 2014. We take a series of approaches to rule out standard crowding out via real interest rates and to address potential endogeneity concerns.

Consumer Credit: Learning Your Customer's Default Risk from What (S)He Buys

Using a novel panel data set covering half a million customers of a large Mexican retail chain I study determinants of consumer credit default. I document that information about which products a customer buys provides substantial information about potential default losses on a given loan. Differences in default losses across product categories are robust to controlling for characteristics of the loan contract, demographics and more standard measures of credit risk and do not diminish substantially with how long the borrower has been a customer. The differential loss rates across product categories are driven mainly by which types of individuals buy particular products, as opposed to being product-specific features. High loss products tend to be luxuries and tend to be purchased by individuals who consume abnormally large fractions of luxuries given their income. I discuss how differences across consumers in their desire for indulgence or their degree of self-control may explain why loans to people who consume more luxuries incur higher loss rates. I propose that providers of consumer credit could benefit from adjusting credit terms (down-payment requirements, interest rates, or credit limits) as a function of product mix purchased to date, and thus that product mix should be an important component of credit scoring.

The Economics of the Fed Put

Since the mid-1990s, low stock returns predict accommodating policy by the Federal Reserve. This fact emerges because, over this period, negative stock returns comove with downgrades to the Feds growth expectations. Textual analysis of the FOMC documents reveals that policymakers pay attention to the stock market, and their negative stock-market mentions predict federal funds rate cuts. The primary mechanism why policymakers find the stock market informative is via its effect on consumption, with a smaller role for the market viewed as predicting the economy.