Thomas Nitschka

Securitization of Mortgage Debt, Asset Prices and International Risk Sharing

We explore the impact of mortgage securitization on the international diversification of macroeconomic risk. By making mortgage-related risks internationally tradeable, securitization contributes considerably to better international consumption risk sharing: we find that countries with the most highly developed markets for securitized mortgage debt have consumption responses to a typical idiosyncratic business cycle shock that are 20-30 percent less volatile than those experienced by countries that do not allow for mortgage securitization. Our results are based on quarterly data from a panel of 16 industrialized countries and cover the sample period 1985-2008Q1. They are robust to a range of controls for other aspects of financial globalization, international differences in the structure of housing markets and the financial system etc. Against the backdrop of the subprime crisis, these findings inevitably raise the question whether securitization could not just facilitate risk sharing in tranquil times but that it actually fails to provide international insurance in severe crisis periods. Indeed, we find that international risk sharing decreases in global asset price downturns and increases in booms. But we do not find evidence that countries with more developed securitization markets are systematically more exposed to these fluctuations in the extent to which risk can be shared across national boundaries.

International Evidence for Return Predictability and the Implications for Long-Run Covariation of the G7 Stock Markets: Return Predictability and the Implications for Long-Run Covariation of the G7 Stock Markets

Abstract We analyze the behavior of investors in the Berlin rental apartment house market over the years 1980-2004. Using constant-quality multipliers ( price- rent ratios), we reject the hypothesis that multipliers in the market were set in a rational manner. Supported by narrative evidence, we conjecture that investors misjudged the economic effects of the German reunification. To examine this, we employ a stylized structural economic model and analyze the effects of shocks on rational multipliers. It seems that investors confused the reunification with a permanent supply side shock to the economy. By basing their investment decisions on this misjudgement, investors behaved irrationally, but in a very uncertain and unprecedented environment.

Securitization of mortgage debt, domestic lending, and international risk sharing

Securitization makes mortgage‐related risks internationally tradeable and thus contributes considerably to the international diversification of macroeconomic risk: in the years 2003–2008, the increase in international cross‐holdings of securitized mortgage debt has lowered industrialized countries’ conditional consumption volatility (relative to the United States) by about 10–15 percentage points. We turn to the role of domestic credit in explaining this result. Domestic credit leads to better international risk sharing only if debt is securitized and traded internationally. Conversely, the risk‐sharing benefits from securitization seem to evaporate if credit dries up – as it did in the recent financial crisis. La titrisation fait que les risques attaches aux hypotheques peuvent etre transiges internationalement. Voila qui contribue de maniere significative a la diversification internationale des risques macroeconomiques : dans les annees 2003–2008, l’accroissement dans la dette hypothecaire titrisee detenue dans d’autres pays a reduit la volatilite de la consommation relative (par rapport aux Etats‐Unis) des pays industrialises de 10–15 points de pourcentage. On examine le role du credit domestique dans l’explication de ce resultat. On montre que le credit domestique entraine un meilleur partage international du risque seulement si la dette est titrisee et negociee internationalement. A contrario, les avantages de la titrisation semblent s’evaporer si le credit s’asseche – comme ce fut le cas dans la recente crise financiere.

What News Drive Variation in Swiss and US Bond and Stock Excess Returns

SummaryBased on a vector autoregressive model (VAR), this paper shows that time variation in monthly excess returns on Swiss government bonds and stocks is predominantly driven by news of inflation and dividends, respectively. This finding is in marked contrast to US evidence which points to a more prominent role of excess return news. Variance decompositions based on estimates from threshold VARs show that US stock market evidence is consistent with the view that market participants put more weight on news of macroeconomic, i.e. cash-flow, risks in periods of exceptionally low real interest rates than in normal times.

Securitization of Mortgage Debt, Domestic Lending, and International Risk Sharing - Titrisation De La Dette Hypothécaire, Crédit Domestique Et Partage International Du Risque

Securitization makes mortgage‐related risks internationally tradeable and thus contributes considerably to the international diversification of macroeconomic risk: in the years 2003–2008, the increase in international cross‐holdings of securitized mortgage debt has lowered industrialized countries’ conditional consumption volatility (relative to the United States) by about 10–15 percentage points. We turn to the role of domestic credit in explaining this result. Domestic credit leads to better international risk sharing only if debt is securitized and traded internationally. Conversely, the risk‐sharing benefits from securitization seem to evaporate if credit dries up – as it did in the recent financial crisis. La titrisation fait que les risques attaches aux hypotheques peuvent etre transiges internationalement. Voila qui contribue de maniere significative a la diversification internationale des risques macroeconomiques : dans les annees 2003–2008, l’accroissement dans la dette hypothecaire titrisee detenue dans d’autres pays a reduit la volatilite de la consommation relative (par rapport aux Etats‐Unis) des pays industrialises de 10–15 points de pourcentage. On examine le role du credit domestique dans l’explication de ce resultat. On montre que le credit domestique entraine un meilleur partage international du risque seulement si la dette est titrisee et negociee internationalement. A contrario, les avantages de la titrisation semblent s’evaporer si le credit s’asseche – comme ce fut le cas dans la recente crise financiere.

Momentum in stock market returns: implications for risk premia on foreign currencies

Momentum in foreign stock market returns signals currency excess returns. Portfolios of currencies from past stock market winner countries offer higher risk premia than past stock market loser currency portfolios. This pattern is unrelated to the currencies’ forward discounts. While recently proposed asset-pricing models for currency returns work reasonably well in explaining the time variation in the stock market momentum-sorted currency portfolio returns, rationalizing the average excess returns on these portfolios remains a challenge. Only the introduction of an ad-hoc motivated factor, extracted from the stock market momentum-sorted currency portfolio returns, helps in this respect.

Semi-Parametric Estimates of Taylor Rules for a Small, Open Economy – Evidence from Switzerland

Abstract This article estimates the policy reaction function of the Swiss National Bank (SNB) using real-time internal inflation forecasts and output gap estimates from 2000 to 2012. We analyze potential nonlinearities of policy rate responses to economic fundamentals using a novel semiparametric approach. We find a linear response of the SNB’s policy rate to inflation forecasts but a strong nonlinear response of the policy rate to the output gap and exchange rate changes. This finding suggests that the SNB reacts to extreme movements of these variables if they become a concern for price stability and economic activity.

The Size Effect in Value and Momentum Factors: Implications for the Cross-section of International Stock Returns

We document a consistent and robust relation between expected equity premia and common risk factors constructed on the basis of small stocks. Empirically, we show that (i) small-stock components of traditional value and momentum factors capture patterns in returns on regional and global portfolios of stocks; (ii) size-effect models substantially outperform benchmark models in finance; (iii) global small-stock value and momentum components are priced but regional models lead to more accurate asset evaluations; (iv) funding liquidity risk is a partial explanation of these findings.