Pierluigi Balduzzi | Boston College (original) (raw)
Papers by Pierluigi Balduzzi
Social Science Research Network, Jun 1, 1994
Journal of Financial and Quantitative Analysis, Oct 1, 2017
We use high-frequency data to precisely estimate bond price reactions to macroeconomic announceme... more We use high-frequency data to precisely estimate bond price reactions to macroeconomic announcements and the associated compensation for macro risks. We find evidence of a single factor summarizing the reaction of bond prices to different announcements. Before the financial crisis, the factor risk premium is substantial, significant, and mainly earned before announcement releases. After the crisis, the stock–bond covariance becomes negative and the preannouncement factor risk premium becomes insignificant. Our empirical results are consistent with information leakages that take place ahead of announcement releases and with the implications of a long-run risks model of bond risk premia.
Social Science Research Network, 2006
The risk premia assigned to economic (nontraded) risk factors can be decomposed into three parts:... more The risk premia assigned to economic (nontraded) risk factors can be decomposed into three parts: (i) the risk premia on maximum-correlation portfolios mimicking the factors; (ii) (minus) the covariance between the nontraded components of the candidate pricing kernel of a given model and the factors; and (iii) (minus) the mispricing assigned by the candidate pricing kernel to the maximumcorrelation mimicking portfolios. The first component is the same across asset-pricing models and is typically estimated with little (absolute) bias and high precision. The second component, on the other hand, is essentially arbitrary and can be estimated with large (absolute) biases and low precisions by multi-beta models with nontraded factors. This second component is also sensitive to the criterion minimized in estimation. The third component is estimated reasonably well, both for models with traded and nontraded factors. We conclude that the economic risk premia assigned by multi-beta models with nontraded factors can be very unreliable. Conversely, the risk premia on maximum-correlation portfolios provide more reliable indications of whether a nontraded risk factor is priced. These results hold for both the constant and the time-varying components of the factor risk premia.
Social Science Research Network, 2013
We test whether adverse changes to banks' market valuations during the financial and sovereign de... more We test whether adverse changes to banks' market valuations during the financial and sovereign debt crises affected firms' real decisions. Using new data linking over 5,000 non-financial Italian firms to their bank(s), we find that increases in banks' CDS spreads, and decreases in their equity valuations, resulted in lower investment, employment, and bank debt for younger and smaller firms. These effects dominate those of banks' balance-sheet variables. Moreover, CDS spreads matter more than equity valuations. Finally, higher CDS spreads led to lower aggregate investment and employment, and to less efficient resource allocations, especially during the sovereign debt crisis.
RePEc: Research Papers in Economics, Oct 22, 1998
RePEc: Research Papers in Economics, 2019
This publication is a Technical report by the Joint Research Centre (JRC), the European Commissio... more This publication is a Technical report by the Joint Research Centre (JRC), the European Commission's science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication.
Social Science Research Network, 2000
The authors thank State Street Global Advisors for providing the 401(k) plan data and Stefan Boko... more The authors thank State Street Global Advisors for providing the 401(k) plan data and Stefan Bokor for his great help in organizing the data. The authors also thank Jim Gilkeson, Alicia Munnell, Brian Surette, and seminar participants at the 2000 FMA in Seattle for useful comments. Especially userful were the comments from an anonymous referee and Ed Kane. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions are solely those of the author(s) and should not be construed as representing the opinions or policy of SSA or any agency of the Federal Government or the Center for Retirement Research at Boston College. This version of the paper was completed in December 2000 and represents a revised version of the paper originally released in May 2000.
Review of Financial Studies, May 2, 2018
The use of target date funds (TDFs) as default options in 401(k) plans increased sharply followin... more The use of target date funds (TDFs) as default options in 401(k) plans increased sharply following the Pension Protection Act of 2006. We document large differences in the realized returns and ex ante risk profiles of TDFs with similar target retirement dates. Analyzing fund-level data, we find evidence that this heterogeneity reflects strategic risk-taking by families with low market share, especially those entering the TDF market after 2006. Analyzing plan-level data, we find little evidence that 401(k) plan sponsors consider, to any economically meaningful degree, the risk profiles of their firms when choosing among TDFs. Received June 13, 2013; editorial decision March 20, 2018 by Editor Laura Starks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
This paper reviews the existing empirical evidence on the time-series behavior of the U.S. Treasu... more This paper reviews the existing empirical evidence on the time-series behavior of the U.S. Treasury markets at high frequency: daily and intra-day data. The use of high-frequency data in econometric analyses is a major recent development in the study of the fixed income markets: the response of prices to scheduled and unscheduled news, conditional-volatility dynamics, and jump and diffusion behavior, can all be examined much more precisely with high-frequency data. High-frequency data are also important for the characterization of the trading environment as they allow us to examine the immediate impact of trading on prices and how this impact is affected by the presence of macro news. Lastly, the presence and impact of high-frequency trading can only be studied by analyzing high-frequency data.
Social Science Research Network, 2005
This paper considers two alternative formulations of the linear factor model (LFM) with nontraded... more This paper considers two alternative formulations of the linear factor model (LFM) with nontraded factors. The first formulation is the traditional LFM, where the estimation of risk premia and alphas is performed by means of a cross-sectional regression of average returns on betas. The second formulation (LFM*) replaces the factors with their projections on the span of excess returns. This formulation requires only time-series regressions for the estimation of risk premia and alphas. We compare the theoretical properties of the two approaches and study the small-sample properties of estimates and test statistics. Our results show that when estimating risk premia and testing multi-beta models, the LFM* formulation should be considered in addition to, or even instead of, the more traditional LFM formulation.
The Economic Journal
We study the financial and real effects of political risk shocks for Italy, Spain, Ireland, Portu... more We study the financial and real effects of political risk shocks for Italy, Spain, Ireland, Portugal and Greece between 2008 and 2019. We build an instrument for these shocks using the changes of the sovereign yield spread around political and policy dates, and estimate their effects in the context of local projection. We show that adverse political risk shocks have negative effects on domestic financial markets and in some countries generate spillovers on the spreads of other eurozone economies. Moreover, in Italy populism-related political risk shocks have a larger effect on financial markets and they harm the real economy.
Social Science Research Network, 1995
SSRN Electronic Journal, 2021
The scaled bond Greeks, i.e., the absolute values of the price-scaled derivatives of bond prices ... more The scaled bond Greeks, i.e., the absolute values of the price-scaled derivatives of bond prices with respect to yield, are the relevant characteristics for bond pricing. Two factors---the exposures to which are duration and convexity---explain 99.5% of the total variation in bond yields. A duration (convexity) factor earns a positive (negative) and highly significant premium. The corresponding Sharpe ratios on each factor are comparable in absolute value to that of the equity market. The convexity factor is negatively related to the term structure slope, and its premium can be interpreted as compensation for protection against an increased probability of a recession. Our results also provide an interpretation for the well-known inverse relation between bond Sharpe ratios and time to maturity as well as the concave shape of the term structure of bond risk premia.
SSRN Electronic Journal, 2020
We study the time-varying dependence of sovereign credit default swap (CDS) spreads on real-time,... more We study the time-varying dependence of sovereign credit default swap (CDS) spreads on real-time, country-specific macro indicators during the eurozone sovereign debt crisis. Macro fundamentals explain 66% of the time-series variance of CDS spreads, but the time variation in macro sensitivities is also important, explaining close to 30% of the variance. Hence, while CDS spreads reflect macro fundamentals, they also display volatility unrelated to fundamentals. We identify distinct "regimes" of variation, consistent with a multiple-equilibrium view of the sovereign debt markets. Our estimated macro sensitivities predict the VSTOXX European equity volatility index out of sample.
Social Science Research Network, Jun 1, 1994
Journal of Financial and Quantitative Analysis, Oct 1, 2017
We use high-frequency data to precisely estimate bond price reactions to macroeconomic announceme... more We use high-frequency data to precisely estimate bond price reactions to macroeconomic announcements and the associated compensation for macro risks. We find evidence of a single factor summarizing the reaction of bond prices to different announcements. Before the financial crisis, the factor risk premium is substantial, significant, and mainly earned before announcement releases. After the crisis, the stock–bond covariance becomes negative and the preannouncement factor risk premium becomes insignificant. Our empirical results are consistent with information leakages that take place ahead of announcement releases and with the implications of a long-run risks model of bond risk premia.
Social Science Research Network, 2006
The risk premia assigned to economic (nontraded) risk factors can be decomposed into three parts:... more The risk premia assigned to economic (nontraded) risk factors can be decomposed into three parts: (i) the risk premia on maximum-correlation portfolios mimicking the factors; (ii) (minus) the covariance between the nontraded components of the candidate pricing kernel of a given model and the factors; and (iii) (minus) the mispricing assigned by the candidate pricing kernel to the maximumcorrelation mimicking portfolios. The first component is the same across asset-pricing models and is typically estimated with little (absolute) bias and high precision. The second component, on the other hand, is essentially arbitrary and can be estimated with large (absolute) biases and low precisions by multi-beta models with nontraded factors. This second component is also sensitive to the criterion minimized in estimation. The third component is estimated reasonably well, both for models with traded and nontraded factors. We conclude that the economic risk premia assigned by multi-beta models with nontraded factors can be very unreliable. Conversely, the risk premia on maximum-correlation portfolios provide more reliable indications of whether a nontraded risk factor is priced. These results hold for both the constant and the time-varying components of the factor risk premia.
Social Science Research Network, 2013
We test whether adverse changes to banks' market valuations during the financial and sovereign de... more We test whether adverse changes to banks' market valuations during the financial and sovereign debt crises affected firms' real decisions. Using new data linking over 5,000 non-financial Italian firms to their bank(s), we find that increases in banks' CDS spreads, and decreases in their equity valuations, resulted in lower investment, employment, and bank debt for younger and smaller firms. These effects dominate those of banks' balance-sheet variables. Moreover, CDS spreads matter more than equity valuations. Finally, higher CDS spreads led to lower aggregate investment and employment, and to less efficient resource allocations, especially during the sovereign debt crisis.
RePEc: Research Papers in Economics, Oct 22, 1998
RePEc: Research Papers in Economics, 2019
This publication is a Technical report by the Joint Research Centre (JRC), the European Commissio... more This publication is a Technical report by the Joint Research Centre (JRC), the European Commission's science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication.
Social Science Research Network, 2000
The authors thank State Street Global Advisors for providing the 401(k) plan data and Stefan Boko... more The authors thank State Street Global Advisors for providing the 401(k) plan data and Stefan Bokor for his great help in organizing the data. The authors also thank Jim Gilkeson, Alicia Munnell, Brian Surette, and seminar participants at the 2000 FMA in Seattle for useful comments. Especially userful were the comments from an anonymous referee and Ed Kane. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions are solely those of the author(s) and should not be construed as representing the opinions or policy of SSA or any agency of the Federal Government or the Center for Retirement Research at Boston College. This version of the paper was completed in December 2000 and represents a revised version of the paper originally released in May 2000.
Review of Financial Studies, May 2, 2018
The use of target date funds (TDFs) as default options in 401(k) plans increased sharply followin... more The use of target date funds (TDFs) as default options in 401(k) plans increased sharply following the Pension Protection Act of 2006. We document large differences in the realized returns and ex ante risk profiles of TDFs with similar target retirement dates. Analyzing fund-level data, we find evidence that this heterogeneity reflects strategic risk-taking by families with low market share, especially those entering the TDF market after 2006. Analyzing plan-level data, we find little evidence that 401(k) plan sponsors consider, to any economically meaningful degree, the risk profiles of their firms when choosing among TDFs. Received June 13, 2013; editorial decision March 20, 2018 by Editor Laura Starks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
This paper reviews the existing empirical evidence on the time-series behavior of the U.S. Treasu... more This paper reviews the existing empirical evidence on the time-series behavior of the U.S. Treasury markets at high frequency: daily and intra-day data. The use of high-frequency data in econometric analyses is a major recent development in the study of the fixed income markets: the response of prices to scheduled and unscheduled news, conditional-volatility dynamics, and jump and diffusion behavior, can all be examined much more precisely with high-frequency data. High-frequency data are also important for the characterization of the trading environment as they allow us to examine the immediate impact of trading on prices and how this impact is affected by the presence of macro news. Lastly, the presence and impact of high-frequency trading can only be studied by analyzing high-frequency data.
Social Science Research Network, 2005
This paper considers two alternative formulations of the linear factor model (LFM) with nontraded... more This paper considers two alternative formulations of the linear factor model (LFM) with nontraded factors. The first formulation is the traditional LFM, where the estimation of risk premia and alphas is performed by means of a cross-sectional regression of average returns on betas. The second formulation (LFM*) replaces the factors with their projections on the span of excess returns. This formulation requires only time-series regressions for the estimation of risk premia and alphas. We compare the theoretical properties of the two approaches and study the small-sample properties of estimates and test statistics. Our results show that when estimating risk premia and testing multi-beta models, the LFM* formulation should be considered in addition to, or even instead of, the more traditional LFM formulation.
The Economic Journal
We study the financial and real effects of political risk shocks for Italy, Spain, Ireland, Portu... more We study the financial and real effects of political risk shocks for Italy, Spain, Ireland, Portugal and Greece between 2008 and 2019. We build an instrument for these shocks using the changes of the sovereign yield spread around political and policy dates, and estimate their effects in the context of local projection. We show that adverse political risk shocks have negative effects on domestic financial markets and in some countries generate spillovers on the spreads of other eurozone economies. Moreover, in Italy populism-related political risk shocks have a larger effect on financial markets and they harm the real economy.
Social Science Research Network, 1995
SSRN Electronic Journal, 2021
The scaled bond Greeks, i.e., the absolute values of the price-scaled derivatives of bond prices ... more The scaled bond Greeks, i.e., the absolute values of the price-scaled derivatives of bond prices with respect to yield, are the relevant characteristics for bond pricing. Two factors---the exposures to which are duration and convexity---explain 99.5% of the total variation in bond yields. A duration (convexity) factor earns a positive (negative) and highly significant premium. The corresponding Sharpe ratios on each factor are comparable in absolute value to that of the equity market. The convexity factor is negatively related to the term structure slope, and its premium can be interpreted as compensation for protection against an increased probability of a recession. Our results also provide an interpretation for the well-known inverse relation between bond Sharpe ratios and time to maturity as well as the concave shape of the term structure of bond risk premia.
SSRN Electronic Journal, 2020
We study the time-varying dependence of sovereign credit default swap (CDS) spreads on real-time,... more We study the time-varying dependence of sovereign credit default swap (CDS) spreads on real-time, country-specific macro indicators during the eurozone sovereign debt crisis. Macro fundamentals explain 66% of the time-series variance of CDS spreads, but the time variation in macro sensitivities is also important, explaining close to 30% of the variance. Hence, while CDS spreads reflect macro fundamentals, they also display volatility unrelated to fundamentals. We identify distinct "regimes" of variation, consistent with a multiple-equilibrium view of the sovereign debt markets. Our estimated macro sensitivities predict the VSTOXX European equity volatility index out of sample.