A macroeconomic perspective on asset returns and liquidity premia
Creators: name: Niestroj, Benjamin
Publisher: name: TU Dortmund
Year: 2014
Subjects: subject: Macroeconomica
subject: Monetary economics
subject: Financial economics
subject: 330

description: The essays to be comprised in this thesis are approaches to the problem of modeling the notion of aggregate liquidity as a potential driver of asset returns and of macroeconomic dynamics. The main thrust of this work is empirical, using methods ranging from econometric studies of the interconnection between asset returns and their degree of liquidity to estimating dynamic stochastic general equilibrium models with Bayesian methods to establish evidence for the effectiveness of quantitative easing policies. In general, liquidity refers to the ease of trading an asset and to an asset’s ability to be sold without having to accept a considerably large drop in the price or value. Therefore, bid-ask spreads are a common measure for an asset’s degree of market liquidity. Authors like Canzoneri et al. (2013) point out that U.S. Treasuries might carry a liquidity premium which is induced by nonpecuniary returns to investors. Specifically, U.S. Treasuries are used to facilitate transactions in a number of ways: they serve as collateral in financial markets, banks hold them to manage the liquidity of their portfolios, individuals hold them in money market accounts that offer checking services, and importers and exporters hold them as transaction balances. Krishnamurthy and Vissing-Jorgensen (2012) formalize the notion that the investors obtain such liquidity services by assuming that holding U.S. Treasury securities directly contributes to their utility. The essays presented in Chapter 2 and Chapter 3 of this thesis investigate whether there is empirical evidence for household preferences where liquidity services are gained not only from U.S. Treasuries but from a variety of liquid assets. Chapter 2 investigates whether an asset pricing model which is based on such investors’ preferences can contribute to explain observed corporate-U.S. Treasury yield spreads. Chapter 3 seeks to provide a complete specification and parameterization of a utility function with liquidity services. This is done by providing a set of microfoundations, ranging from nonparametric hypothesis tests of revealed preference conditions for utility maximization, to parameter estimates for suitable specifications of utility functions. Chapter 4 (coauthored with Andreas Schabert and Roland Winkler) employs a monetary dynamic stochastic general equilibrium (DSGE) model to identify the effects of the U.S. Federal Reserve’s (Fed) large-scale longer-term Treasury purchase program (LSAP 2) on the U.S. economy. In this model a bank sector relies on liquidity services which are gained from holdings of government bonds when providing financial intermediation between households and firms. Chapter 5 investigates whether liquidity premia can explain deviations from uncovered interest parity (UIP). For that purpose forward premium regression models are modified by assuming that investors value U.S. Treasuries’ liquidity services which are induced by the U.S. dollar’s role as a key currency. Chapter 6 concludes the thesis.