J. Benson Durham | Georgetown University (original) (raw)
Papers by J. Benson Durham
Financial Analysts Journal
SSRN Electronic Journal
This paper examines the first three moments of investors' expectations for the housing sector. Th... more This paper examines the first three moments of investors' expectations for the housing sector. That is, first, what do financial markets imply about expected future home prices? Second, how much confidence do investors have in their forecast? And, third, do market participants see more downside than upside risk? Housing futures and options, which trade on the Chicago Mercantile Exchange (CME), are not yet deep and liquid, and derivatives on homebuilders' shares reflect considerable idiosyncratic information and are therefore an imperfect proxy. Nonetheless, prices suggest that investors currently expect some mild depreciation in home values within the next year. Also, uncertainty has increased, but, generally inconsistent with the perception of a "bubble," the implied risks do not seem particularly tilted to the downside. Probability density functions derived from options on homebuilders' stocks are not appreciably skewed to the left in general, vis-à-vis the broader market, or with respect to recent history.
SSRN Electronic Journal
Affine term structure models in which the short rate follows a jump-diffusion process are difficu... more Affine term structure models in which the short rate follows a jump-diffusion process are difficult to solve, and the parameters of such models are hard to estimate. Without analytical answers to the partial difference differential equation (PDDE) for bond prices implied by jumpdiffusion processes, one must find a numerical solution to the PDDE or exactly solve an approximate PDDE. Although the literature focuses on a single linearization technique to estimate the PDDE, this paper outlines alternative methods that seem to improve accuracy. Also, closed-form solutions, numerical estimates, and closed-form approximations of the PDDE each ultimately depend on the presumed distribution of jump sizes, and this paper explores a broader set of possible densities that may be more consistent with intuition, including a bi-modal Gaussian mixture. GMM and MLE of one-and two-factor jump-diffusion models produce some evidence for jumps, but sensitivity analyses suggest sizeable confidence intervals around the parameters. * With no implication whatsoever, the author thanks Sanjiv Das, Henrik Rasmussen, and seminar participants at the Federal Reserve Board for helpful comments and suggestions on this project. The views presented are solely those of the author and do not necessarily represent those of the Federal Reserve Board or its staff.
SSRN Electronic Journal
This paper decomposes nominal Treasury yields into expected real rates, expected inflation rates,... more This paper decomposes nominal Treasury yields into expected real rates, expected inflation rates, real risk premiums, and inflation risk premiums by separately calibrating a threefactor affine term structure model to the nominal Treasury and TIPS yield curves. Although this particular application seems to produce expected real short rates and inflation rates that are somewhat static, there are theoretical advantages to calibrating the model to nominal and real yields separately. Moreover, the estimates correlate positively with back-of-the-envelope measures of the inflation risk premium. With respect to the current environment, monetary policy uncertainty does not seem to have contributed to the apparent increase in the inflation risk premium since the beginning of 2006. Also, in purely nominal terms, the increase in term premiums thus far this year might be just as much a global as a domestic phenomenon, given that nominal term premiums have also increased in Germany and the United Kingdom. * The author thanks Don Kim, Brian Madigan, and Jonathan Wright. Any remaining errors are exclusively his own. The views presented are solely those of the author and do not necessarily represent those of the Federal Reserve Board or its staff.
Financial Analysts Journal
SSRN Electronic Journal
A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treas... more A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model, extends the cross-section to Germany and France, averages across multiple observablefactor and market prices of risk specifications, and considers alternative samples for parameter estimation. The results produce intuitive trajectories for both sets of premiums given standard samples starting from July 1993. However, the decomposition of nominal U.S. Treasury yields, but not long-run equity risk premiums, is sensitive to data beyond 2008, which raises some questions about the net effects of unconventional monetary policy measures. Nonetheless, the rotation from sharp inversion during the financial crisis to an upward-sloping term structure of equity risk premiums more recently, with modest readings at the front end, is not inconsistent with some net moderation in required compensation for equity risk in the United States.
SSRN Electronic Journal
A vast literature reports excess returns to momentum strategies across many financial asset class... more A vast literature reports excess returns to momentum strategies across many financial asset classes. However, no study examines trading rules based on price history along individual government-bond term structures-that is, with respect to duration buckets across the curve-as opposed to across sovereign markets or individual term structures as a whole over time. Under duration-neutral and long-only constraints as well as low trading costs, this paper reports excess annualized returns of up to 120 basis points and information ratios as high as 0.79 using U.S. Treasury total return data from December 1996 through July 2013. Given a corresponding longshort strategy with no absolute duration risk, excess returns and information ratios are up to 207 basis points and 1.01, respectively. Unlike momentum strategies in some other asset classes, the excess return distributions are positively skewed, and momentum loads, if in any way, favorably on broad risk factors. Returns correlate to a degree with portfolios based on instantaneous forward term premium estimates, in turn derived from a set of Gaussian arbitrage-free affine term structure models. However, substantial variance remains unexplained, the betas are less than one, and the alphas are meaningfully positive. A caveat is that underlying behavioral explanations for momentum are lacking in the context of the U.S. Treasury market.
SSRN Electronic Journal
A growing empirical literature addresses the determinants of the sacrifice ratio, an imperfect me... more A growing empirical literature addresses the determinants of the sacrifice ratio, an imperfect measure of the tradeoff between inflation and aggregate output. This study endeavors to advance previous studies in three ways. First, the literature does not satisfactorily examine key fiscal and monetary policy practices that arguably affect policymaking credibility. These include the stock (and flow) of government debt, the issuance of inflation-indexed bonds, and the existence of explicit inflation targets. Second, previous studies unfortunately exclude non-OECD countries. Third, the literature is divided with respect to research design, and therefore this study produces sensitivity analyses of previous results. Given these addenda, the results generally suggest that credibility proxies are largely sensitive to research design. However, some data do support the hypothesis that governments with an incentive, rather than perhaps a publicized objective, to lower inflation achieve lower sacrifice ratios.
Financial Analysts Journal
The Journal of Fixed Income, 2015
The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of th... more The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as to net flight-to-quality flows after 2007. However, two strands of evidence raise questions about this story. First, a purely survey-based expected forward term premium measure, as opposed to an approximate spot estimate, has increased rather than decreased in recent years. Second, with respect to the time-series dynamics of factors underlying affine term structure models, simple econometrics of recent data produce not only a more persistent level of the term structure but also a depressed long-run mean, which in turn implies an implausibly low expected short rate path. Strong caveats aside, an implication for central bankers is that unconventional monetary policy measures may have worked in more conventional ways, and an inference for investors is that longer-dated yields embed meaningful compensation for bearing duration risk.
The Journal of Investing, 2002
Http Dx Doi Org 10 3905 Jfi 2006 627840, Feb 22, 2009
Http Dx Doi Org 10 3905 Jpm 2000 319749, Feb 27, 2009
ABSTRACT Studies of emerging stock market anomalies are based on underspecified models. Extreme b... more ABSTRACT Studies of emerging stock market anomalies are based on underspecified models. Extreme bound analysis (EBA), a technique to remedy specification bias, indicates that no anomaly is robust, given panel data covering sixteen countries from March 1988 through January 1995. Only under a relaxed decision rule does the author fund thar five of the fifteen factors studied are sturdy: price/book long-run lagged returns, population demographics, country risk, and relative market size. What is move sobering, time series EBA produces no sturdy aggregate determinants.
Financial Analysts Journal
SSRN Electronic Journal
This paper examines the first three moments of investors' expectations for the housing sector. Th... more This paper examines the first three moments of investors' expectations for the housing sector. That is, first, what do financial markets imply about expected future home prices? Second, how much confidence do investors have in their forecast? And, third, do market participants see more downside than upside risk? Housing futures and options, which trade on the Chicago Mercantile Exchange (CME), are not yet deep and liquid, and derivatives on homebuilders' shares reflect considerable idiosyncratic information and are therefore an imperfect proxy. Nonetheless, prices suggest that investors currently expect some mild depreciation in home values within the next year. Also, uncertainty has increased, but, generally inconsistent with the perception of a "bubble," the implied risks do not seem particularly tilted to the downside. Probability density functions derived from options on homebuilders' stocks are not appreciably skewed to the left in general, vis-à-vis the broader market, or with respect to recent history.
SSRN Electronic Journal
Affine term structure models in which the short rate follows a jump-diffusion process are difficu... more Affine term structure models in which the short rate follows a jump-diffusion process are difficult to solve, and the parameters of such models are hard to estimate. Without analytical answers to the partial difference differential equation (PDDE) for bond prices implied by jumpdiffusion processes, one must find a numerical solution to the PDDE or exactly solve an approximate PDDE. Although the literature focuses on a single linearization technique to estimate the PDDE, this paper outlines alternative methods that seem to improve accuracy. Also, closed-form solutions, numerical estimates, and closed-form approximations of the PDDE each ultimately depend on the presumed distribution of jump sizes, and this paper explores a broader set of possible densities that may be more consistent with intuition, including a bi-modal Gaussian mixture. GMM and MLE of one-and two-factor jump-diffusion models produce some evidence for jumps, but sensitivity analyses suggest sizeable confidence intervals around the parameters. * With no implication whatsoever, the author thanks Sanjiv Das, Henrik Rasmussen, and seminar participants at the Federal Reserve Board for helpful comments and suggestions on this project. The views presented are solely those of the author and do not necessarily represent those of the Federal Reserve Board or its staff.
SSRN Electronic Journal
This paper decomposes nominal Treasury yields into expected real rates, expected inflation rates,... more This paper decomposes nominal Treasury yields into expected real rates, expected inflation rates, real risk premiums, and inflation risk premiums by separately calibrating a threefactor affine term structure model to the nominal Treasury and TIPS yield curves. Although this particular application seems to produce expected real short rates and inflation rates that are somewhat static, there are theoretical advantages to calibrating the model to nominal and real yields separately. Moreover, the estimates correlate positively with back-of-the-envelope measures of the inflation risk premium. With respect to the current environment, monetary policy uncertainty does not seem to have contributed to the apparent increase in the inflation risk premium since the beginning of 2006. Also, in purely nominal terms, the increase in term premiums thus far this year might be just as much a global as a domestic phenomenon, given that nominal term premiums have also increased in Germany and the United Kingdom. * The author thanks Don Kim, Brian Madigan, and Jonathan Wright. Any remaining errors are exclusively his own. The views presented are solely those of the author and do not necessarily represent those of the Federal Reserve Board or its staff.
Financial Analysts Journal
SSRN Electronic Journal
A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treas... more A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model, extends the cross-section to Germany and France, averages across multiple observablefactor and market prices of risk specifications, and considers alternative samples for parameter estimation. The results produce intuitive trajectories for both sets of premiums given standard samples starting from July 1993. However, the decomposition of nominal U.S. Treasury yields, but not long-run equity risk premiums, is sensitive to data beyond 2008, which raises some questions about the net effects of unconventional monetary policy measures. Nonetheless, the rotation from sharp inversion during the financial crisis to an upward-sloping term structure of equity risk premiums more recently, with modest readings at the front end, is not inconsistent with some net moderation in required compensation for equity risk in the United States.
SSRN Electronic Journal
A vast literature reports excess returns to momentum strategies across many financial asset class... more A vast literature reports excess returns to momentum strategies across many financial asset classes. However, no study examines trading rules based on price history along individual government-bond term structures-that is, with respect to duration buckets across the curve-as opposed to across sovereign markets or individual term structures as a whole over time. Under duration-neutral and long-only constraints as well as low trading costs, this paper reports excess annualized returns of up to 120 basis points and information ratios as high as 0.79 using U.S. Treasury total return data from December 1996 through July 2013. Given a corresponding longshort strategy with no absolute duration risk, excess returns and information ratios are up to 207 basis points and 1.01, respectively. Unlike momentum strategies in some other asset classes, the excess return distributions are positively skewed, and momentum loads, if in any way, favorably on broad risk factors. Returns correlate to a degree with portfolios based on instantaneous forward term premium estimates, in turn derived from a set of Gaussian arbitrage-free affine term structure models. However, substantial variance remains unexplained, the betas are less than one, and the alphas are meaningfully positive. A caveat is that underlying behavioral explanations for momentum are lacking in the context of the U.S. Treasury market.
SSRN Electronic Journal
A growing empirical literature addresses the determinants of the sacrifice ratio, an imperfect me... more A growing empirical literature addresses the determinants of the sacrifice ratio, an imperfect measure of the tradeoff between inflation and aggregate output. This study endeavors to advance previous studies in three ways. First, the literature does not satisfactorily examine key fiscal and monetary policy practices that arguably affect policymaking credibility. These include the stock (and flow) of government debt, the issuance of inflation-indexed bonds, and the existence of explicit inflation targets. Second, previous studies unfortunately exclude non-OECD countries. Third, the literature is divided with respect to research design, and therefore this study produces sensitivity analyses of previous results. Given these addenda, the results generally suggest that credibility proxies are largely sensitive to research design. However, some data do support the hypothesis that governments with an incentive, rather than perhaps a publicized objective, to lower inflation achieve lower sacrifice ratios.
Financial Analysts Journal
The Journal of Fixed Income, 2015
The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of th... more The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as to net flight-to-quality flows after 2007. However, two strands of evidence raise questions about this story. First, a purely survey-based expected forward term premium measure, as opposed to an approximate spot estimate, has increased rather than decreased in recent years. Second, with respect to the time-series dynamics of factors underlying affine term structure models, simple econometrics of recent data produce not only a more persistent level of the term structure but also a depressed long-run mean, which in turn implies an implausibly low expected short rate path. Strong caveats aside, an implication for central bankers is that unconventional monetary policy measures may have worked in more conventional ways, and an inference for investors is that longer-dated yields embed meaningful compensation for bearing duration risk.
The Journal of Investing, 2002
Http Dx Doi Org 10 3905 Jfi 2006 627840, Feb 22, 2009
Http Dx Doi Org 10 3905 Jpm 2000 319749, Feb 27, 2009
ABSTRACT Studies of emerging stock market anomalies are based on underspecified models. Extreme b... more ABSTRACT Studies of emerging stock market anomalies are based on underspecified models. Extreme bound analysis (EBA), a technique to remedy specification bias, indicates that no anomaly is robust, given panel data covering sixteen countries from March 1988 through January 1995. Only under a relaxed decision rule does the author fund thar five of the fifteen factors studied are sturdy: price/book long-run lagged returns, population demographics, country risk, and relative market size. What is move sobering, time series EBA produces no sturdy aggregate determinants.