Kenneth J. Singleton

Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns

This paper studies the time-series behavior of asset returns and aggregate consumption. Using a representative consumer model and imposing restrictions on preferences and the joint distribution of consumption and returns, we deduce a restricted log-linear time-series representation. Preference parameters for the representative agent are estimated and the implied restrictions are tested using postwar data.

Simulated Moments Estimation of Markov Models of Asset Prices

This paper provides a simulated moments estimator (SME) of the parameters of dynamic models in which the state vector follows a time-homogeneous Markov process. Conditions are provided for both weak and strong consistency as well as asymptotic normality. Various tradeoffs among the regularity conditions underlying the large sample properties of the SME are discussed in the context of an asset pricing model.

Specification Analysis of Affine Term Structure Models

In this paper, we explore the features of affine term structure models that are empirically important for explaining the joint distribution of yields on short and long-term interest rate swaps. We begin by showing that the family of N-factor affine models can be classified into N+1 non-nested sub-families of models. For each sub-family, we derive a maximal model with the property that every admissible member of this family is equivalent to or a nested special case of our maximal model. Second, using our classification scheme and maximal models, we show that many of the three-factor models in the literature impose potentially strong over-identifying restrictions on the joint distribution of short- and long-term rates. Third, we compute simulated method-of-moments estimates for several members of one of the four branches of three-factor models, and test the over-identifying restrictions implied by these models. We conclude that many of the extant affine models in the literature fail to describe important features of the distribution of long- and short- term rates. The source of the model misspecification is shown to be overly strong restrictions on the correlations among the state variables. Relaxing these restrictions leads to a model that passes several goodness-of-fit tests over our sample period.

Expectation puzzles, time-varying risk premia, and affine models of the term structure

Abstract Linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional “expectations theory”. This paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we match all the key empirical findings reported by Fama and Bliss ((1987) American Economic Review 77 (4), 680–692) and Campbell and Shiller ((1991) Review of Economic Studies 58, 495–514), among others, within large subclasses of affine and quadratic-Gaussian term structure models. Additionally, we show that certain “risk-premium adjusted” projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models. Key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly, and not only through factor volatilities. The risk premiums have a simple form consistent with Famas findings on the predictability of forward rates, and are also shown to be consistent with interest-rate feedback rules used by a monetary authority in setting monetary policy.

A Time Series Analysis of Representative Agent Models of Consumption and Leisure Choice Under Uncertainty

This paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime-separable. The nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked. These cross-relations are examined empirically using postwar monthly U. S. data on quantities, real wages, and the real return on the one-month Treasury bill. The estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models. Several possible explanations of these discrepancies are discussed.

Modeling the term structure of interest rates under non-separable utility and durability of goods

Abstract The term structure relations implied by a model in which preferences are non-separable functions of the service flows from two goods are investigated. The parameters characterizing preferences are estimated and restrictions on the co-movements of consumptions and Treasury bill returns are examined. Both the durability of goods and the non-separability of preferences are important factors in explaining the time paths of individual returns, but there is substantial evidence against the cross-sectional restrictions implied by our model. Differences between sample mean returns are too large relative to the sample covariances of the return differences and the marginal utility of consumption.

Investor Flows and the 2008 Boom/Bust in Oil Prices

This paper explores the impact of investor flows and financial market conditions on returns in crude oil futures markets. I argue that informational frictions and the associated speculative activity may induce prices to drift away from “fundamental” values, and may result in price booms and busts. Particular attention is given to the interplay between imperfect information about real economic activity, including supply, demand, and inventory accumulation, and speculative activity in oil markets. Furthermore, I present new evidence that there were economically and statistically significant effects of investor flows on futures prices, after controlling for returns in the United States and emerging-economy stock markets, a measure of the balance sheet flexibility of large financial institutions, open interest, the futures/spot basis, and lagged returns on oil futures. The largest impacts on futures prices were from intermediate-term growth rates of index positions and managed-money spread positions. Moreover, my findings suggest that these effects were through risk or informational channels distinct from changes in convenience yield. Finally, the evidence suggests that hedge fund trading in spread positions in futures impacted the shape of term structure of oil futures prices. This paper was accepted by Wei Xiong, finance.

Interpreting the Likelihood Ratio Statistic in Factor Models When Sample Size is Small

Abstract The use of the likelihood ratio statistic in testing the goodness of fit of the exploratory factor model has no formal justification when, as is often the case in practice, the usual regularity conditions are not met. In a Monte Carlo experiment it is found that the asymptotic theory seems to be appropriate when the regularity conditions obtain and sample size is at least 30. When the regularity conditions are not satisfied, the asymptotic theory seems to be misleading in all sample sizes considered.

Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles

This article presents and interprets some new evidence on the validity of the real business cycle (RBC) approach to business cycle analysis. The analysis is conducted in the context of a monetary business cycle model that makes explicit one potential link between monetary policy and real allocations. This model is used to interpret Granger causal relations between nominal and real aggregates. Perhaps the most striking empirical finding is that money growth does not Granger cause output growth in the context of several multivariate VARs and for various sample periods during the postwar period in the United States. Several possible reconciliations of this finding with both real and monetary business cycles models are discussed. We find that it is difficult to reconcile our empirical results with the view that exogenous monetary shocks were an important independent source of variation in output growth.

Econometric issues in the analysis of equilibrium business cycle models

Abstract This paper discusses two econometric issues in business cycle modeling: (1) the nature and sources of secular, cyclical, and seasonal fluctuations and the econometric implications of prefiltering to remove some of these components from aggregate time series, and (2) methods for solving nonlinear, dynamic stochastic business cycle models and the use of these solutions to construct moment conditions for estimating the unknown parameters.