Robert Hodrick | Columbia University (original) (raw)

Papers by Robert Hodrick

This paper develops an open-economy model of the business cycle. The nominal prices in the model ... more This paper develops an open-economy model of the business cycle. The nominal prices in the model are flexible and monetary nonneutrality is developed using information confusion about the sources of disturbances to demand coupled with differential persistence of demand shocks. Firms use inventories to smooth their production, and consumers follow a stochastic permanent income expenditure function. The major implication of the model is that unperceived monetary disturbances improve the terms of trade and increase real output in contrast to sticky price models in which the terms of trade deteriorates. This implication of the model is examined empirically.

In this paper we study the determination of forward foreign exchange rates. An exchange rate is t... more In this paper we study the determination of forward foreign exchange rates. An exchange rate is the price of one currency in terms of another currency, and a forward rate is a contractual exchange rate established at a point in time for a transaction that will take place at the maturity date on the contract in the future. Well-organized forward markets exist for all major currencies of the world for various maturities, with the most active contract lengths being one, three, six, and twelve months.

Several recent studies have attributed a large part of asset price volatility to self-fulfilling ... more Several recent studies have attributed a large part of asset price volatility to self-fulfilling expectations. Such an explanation is unattractive to many since it allows allocations that need bear no particular relation to those implied by the economist's standard kit of market fundamentals. We examine the evidence presented in some of these studies and find (i) that all of the bubble evidence can equally well be interpreted as evidence of model misspecification and (ii) that a slight extension of standard econometric methods points very strongly toward model misspecification as the actual reason for the failure of simple models of market fundamentals to explain asset price volatility.

This paper presents a dynamic model to demonstrate that, when di¤erences-of-opinion over individu... more This paper presents a dynamic model to demonstrate that, when di¤erences-of-opinion over individual securities have a common component, the valuation of the aggregate market can be higher than its fundamental even if all investors agree on the market fundamental, and the common disagreement drives discount rate news. Using analyst forecast dispersion to measure disagreement, I …nd empirical evidence that individual stock disagreements co-move and the common component mean-reverts, the common disagreement has substantial explanatory power for the time-series variation of equity premium, and the common disagreement correlates with discount-rate news rather than cash-ow news and has explanatory power for the time-series variation of value premium.

SSRN Electronic Journal, 2000

ABSTRACT We examine carry trade returns formed from the G10 currencies. Performance attributes de... more ABSTRACT We examine carry trade returns formed from the G10 currencies. Performance attributes depend on the base currency. Dynamically spread-weighting and risk-rebalancing positions improves performance. Equity, bond, FX, volatility, and downside equity risks cannot explain profitability. Dollar-neutral carry trades exhibit insignificant abnormal returns, while the dollar exposure part of the carry trade earns significant abnormal returns with little skewness. Downside equity market betas of our carry trades are not significantly different from unconditional betas. Hedging with options reduces but does not eliminate abnormal returns. Distributions of drawdowns and maximum losses from daily data indicate the importance of time-varying autocorrelation in determining the negative skewness of longer horizon returns.

We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using vari... more We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies, and we find no evidence of upward trends when we extend the sample until 2008. Instead, idiosyncratic volatility appears to be well described by a stationary autoregressive process that occasionally switches into a higher-variance regime that has relatively short duration. We also document that idiosyncratic volatility is highly correlated across countries. Finally, we examine the determinants of the time-variation in idiosyncratic volatility. In most specifications, the bulk of idiosyncratic volatility can be explained by a growth opportunity proxy, total (U.S.) market volatility, and in most but not all specifications, the variance premium, a business cycle sensitive risk indicator.&lt;br&gt;&lt;br&gt;Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at &lt;a href=&quot;http://www.&amp;#110;ber.org/papers/&amp;#119;16058&quot; TARGET=&quot;_blank&quot;&gt;www.nber.org.&lt;/a&gt;&lt;br&gt;

SSRN Electronic Journal, 2000

ABSTRACT Asset pricing models such as the conditional CAPM are typically estimated with MLE using... more ABSTRACT Asset pricing models such as the conditional CAPM are typically estimated with MLE using a monthly or quarterly horizon with data sampled to match the horizon even though daily data are available. We develop an overlapping data inference methodology (ODIN) that uses all of the data while maintaining the monthly or quarterly forecasting period, and we apply it to the conditional CAPM. Our approach recognizes that the first order conditions of MLE can be used as orthogonality conditions of GMM. We simulate from GARCH and MIDAS models and examine the substantial reductions in standard errors and increases in power that arise from our methodology. Using historical data, we find considerable differences in the estimates from the non-overlapping samples that begin on different days. Using our overlapping data inference, we find a significant risk-return trade-off in the monthly data from 1955 to 2011 with a symmetric GARCH model.

The Quarterly Journal of Economics, 1985

This paper devf lops an open-economy macroeconomic model which can be used to interpret the obser... more This paper devf lops an open-economy macroeconomic model which can be used to interpret the observed fluctuations in output, inventories, prices, and exchange rates in the medium-sized economies of the world. The model is consistent with the major empirical regularities that have been discovered in studies of business cycles as closed-economy phenomena arid in empirical studies of prices and exchange rates. The empirical regularities are (i) changes in the nominal money supply cause real output fluctuations, (ii) deviations of output from a "natural rate" show persistence, (iii) exchange rates are more volatile than nominal prices of goods, and (iv) depreciations of the currency coincide with deteriorations of the terms of trade. A controversial aspect of the model is that only unperceived money has real effects. The channel through which these effects arise involves a misperception by rational maximizing firms of the true demand that they will face after having set prices. The firms learn about their environment from equilibrium asset prices, and the dynamics of the model reflect the optimal response of inventory-holding firms rather than ad hoc price dynamics.

SSRN Electronic Journal, 2000

The Quarterly Journal of Economics, 1985