Evert B. Vrugt

Fundamental uncertainty and stock market volatility

We provide empirical evidence on the link between stock market volatility and macroeconomic uncertainty. We show that US stock market volatility is significantly related to the dispersion in economic forecasts from participants in the Survey of Professional Forecasters over the period 1969 to 1996. This link is much stronger than that between stock market volatility and the more traditional time-series measures of macroeconomic volatility, but disappears from 1997 onwards. This coincides with a previously documented regime shift in stock volatility. Macroeconomic uncertainty is also able to explain and forecast the volatilities of the Fama and French factors SMB, HML and UMD.

Firm Size, Industry Mix and the Regional Transmission of Monetary Policy in Germany

Abstract This paper estimates the impact of interest rate shocks on regional output in Germany over the period from 1970 to 2000. We use a vector autoregression (VAR) model to obtain impulse responses, which reveal differences in the output responses to monetary policy shocks across ten German provinces. Next, we investigate whether these differences can be related to structural features of the regional economies, such as industry mix, firm size, bank size and openness. An additional analysis of the volatility of real GDP growth for the period 1992-2000 includes the Eastern provinces. We also present evidence on the interrelationship between firm size and industry, and compare our measure of firm size with those used in previous studies. We conclude that the differential regional effects of monetary policy are related to industrial composition, but not to firm size or bank size.

Treasury Bond Volatility and Uncertainty about Monetary Policy

We show that dispersion-based uncertainty about the future course of monetary policy is the single most important determinant of Treasury bond volatility across all maturities. The link between Treasury bond volatility and uncertainty about macroeconomic variables is much stronger than for the more traditional time series measures of macroeconomic volatility and adds beyond the information contained in lagged bond market volatility. Uncertainty about monetary policy subsumes the uncertainty about future inflation (consumer price index and the deflator) and economic activity (unemployment, real and nominal gross domestic product and industrial production). In addition, causality clearly runs one way: from monetary policy uncertainty to Treasury bond volatility.

Estimating Implied Default Probabilities and Recovery Valuesfrom Sovereign Bond Prices

This article develops a tractable framework to simultaneously estimate default probabilities and implied recovery values from sovereign bond prices. The model is simple and parsimonious yet allows for a term structure of default probabilities and provides an implicit recovery value. The latter is especially valuable in the context of sovereign credit risk where historical default rates are both rare and country specific. The model is applied to analyze the Greek debt crisis in 2010. In April and May, the probability of a Greek default quickly rose from 5% to 40%. After the €750 billion EU-wide rescue package is announced, the default probability instantaneously drops below 10%. The implied recovery value remains between 40 and 60 cents on the euro throughout this period.

Stock Market Volatility and Macroeconomic Uncertainty: Evidence from Survey Data

This paper provides empirical evidence on the link between stock market volatility and macroeconomic uncertainty. We show that US stock market volatility is significantly related to the dispersion in economic forecasts from SPF survey participants over the period from 1969 to 1996. This link is much stronger than that between stock market volatility and the more traditional time-series measures of macroeconomic volatility, but disappears after 1996.

Estimating Implied Default Probabilities and Recovery Values: The Case of Greece During the 2010 European Debt Crisis

This paper develops a framework to estimate implied recovery values and risk-neutral default probability term-structures from sovereign bond prices. The model is applied to Greek bonds during the European debt crisis of 2010. In April and May 2010, the probability of a Greek default quickly rises from 5% to 40%. On Monday 10 May 2010, after EU finance ministers, the ECB and the IMF agree on a EUR 750 billion EU-wide rescue package, the default probability drops instantaneously below 10%. The implied recovery value remains between 40 and 60 cents on the euro and does not get revised materially during this period.

Forecasting with the Taylor rule

This article uses the Survey of Professional Forecasters (SPF) to investigate the added value of the Taylor rule in interest rate forecasting. We interpret the Taylor rule as a set of macroeconomic restrictions that can be imposed on each individual professional forecasters predictions of interest rates, inflation and economic activity. We study whether conforming to these restrictions improves forecast accuracy. We find that using the Taylor rule improves forecasts four quarters ahead and conclude that the Taylor rule is a useful tool in forming expectations about future monetary policy.