Backus @ NYU (research)

David Backus

Miscellaneous research papers

"Pareto weights as wedges in two-country models," with Coleman, Ferriere, and Lyon, paper, slides. We explore the properties of a two-agent Pareto problem in which the agents have recursive preferences and consume different goods. The Pareto weight acts like a wedge from the perspective of a model with additive preferences. We show how its dynamics are affected by risk aversion, intertemporal substitution, and substitutability between foreign and domestic goods. Among other things, the Pareto weight increases the persistence of real exchange rate movements.
"Term structures of asset prices and returns," with Boyarchenko and Chernov, paper, slides. We look at term structures for a range of cash flows: currencies, equity indexes and dividends, consumer prices, and so on. Their term structures reflect properties of the dollar pricing kernel and of the growth rate of the cash flow. We use the KLV model to illustrate how interaction of the two components can deliver term structures with a wide range of levels and shapes.
"Risk and ambiguity in models of business cycles," with Ferriere and Zin, paper, AF conference slides, DB slides. Published JME 2014 (CRN conference volume). Carnegie-Rochester-NYU conference draft of a paper that puts variations in aggregate uncertainty into a streamlined business cycle model. We explore the possibility that increases in uncertainty might account for the magnitude and persistence of the last recession. We get neither in this model, but point to alternatives that might do better. A byproduct is a loglinear approximation that illustrates how the model works.
"Identifying Taylor rules in macro-finance models," with Chernov and Zin, paper, slides. A short paper that characterizes the structure needed to identify a Taylor rule in a macro-finance model.
"Demography and low-frequency capital flows," with Cooley and Henriksen, conference draft, slides, earlier CMSG slides, R code for data work. Published JIE 2014. We've been interested in low-frequency movements in capital flows (they're extremely persistent) and consider demography as a possible driving force.
"Sources of entropy in representative agent models," with Chernov and Zin, paper, slides. Published JF 2014. The paper is part methodology and part intuitive explanation for how popular representative agent models work. We propose two metrics for summarizing the properties of asset pricing models and apply them to representative agent models with recursive preferences, habits, and jumps. The metrics describe the pricing kernel's dispersion (the entropy of the title) and dynamics (horizon dependence, a measure of how entropy varies over different time horizons). Most popular models generate lots of entropy, but several have difficulty doing it without also producing too much horizon dependence. The paper also includes a dummies guide to influential related work by Alvarez-Jermann and Hansen-Scheinkman.
"Monetary policy and the uncovered interest rate parity puzzle," with Gavazzoni, Telmer, and Zin, paper. There's a longstanding issue in international finance, that high interest rate currencies tend to rise in value. That gives investors a double kick (high rate, appreciation on average): what people have come to call the carry trade. Presumably the excess return from this strategy reflects risk of some sort. We build a relatively simple macro model in which the risk can be traced to monetary policy. It's an example more than a complete explanation, but suggests where you might look for a solution.
"Disasters implied by equity index options," with Chernov and Martin, paper, slides, Matlab programs. Published JF 2011. The possibility of large adverse events -- "disasters" -- can generate much larger risk premiums than you would get with normal (Gaussian) risks. The question is how much of this kind of thing is plausible. If you believe, as we do, that most risk reflects the economy as a whole, the difficulty in assessing the probabilities of extreme events is that they don't happen often enough to allow precise estimates. We back the probabilities out of equity index options, which value such risks whether or not they occur in our sample. The resulting disaster probabilities are much smaller than those calculated by Barro and his coauthors.
"Cyclical component of US asset returns," with Routledge and Zin, paper, slides. We look at two old facts -- the stock market and the yield spread both lead the economy -- and note that they imply excess returns lead the cycle. We construct an exchange economy with similar features, a close relative of the Bansal-Yaron model in which changes in risk lead directly to changes in expected growth.
"Asset prices in business cycle analysis," with Routledge and Zin, paper, slides. First step toward a quasi-analytic solution of a business cycle model with recursive preferences. We know more now than we did then, will fix this up in some form in the near future.
"Taxes and the global allocation of capital," with Henriksen and Storesletten, paper, slides. Published JME, 2008. We see significant differences across countries in investment rates (ratio of investiment to GDP) and capital intensity (ratio of capital to GDP). We attribute some of this to differences in capital taxes. The main issue, here, is explaining why taxes based on revenue data are so different from those derived from the tax code.
"Cracking the conundrum," with Wright, paper. Published Brookings Papers, 2007. We interpret movements at the long end of the yield curve as reflecting, in large part, movements in risk premiums. It's an old story, but we bring some new evidence to bear on it.
"Current account fact and fiction," with Henriksen, Lambert, and Telmer, paper, slides, updated figures (US net worth, saving, investment). We never did anything with this, but it makes a useful point: that we're not really sure what international capital flows are telling us. Inflows could be signs of good news or they could be portents of disaster. As it turns out, disaster did occur, but in our view for much different reasons.
"Exotic preferences for macroeconomists," with Routledge and Zin, ms, published, slides, Matlab programs. Published in the 2004 NBER Macro Annual, but the link above has some corrections that were made after publication. The idea is to review recent advances in the theory of recursive preferences in user-friendly terms. Later papers with Zin and others developed loglinear approximations further.
"Discrete time models of bond pricing," with Foresi and Telmer, paper, NBER version, Matlab files - Self-Extracting. Published in a volume edited by former NYU colleague Bruce Tuckman that seems to have disappeared from sight. Bruce's fixed income textbook is available, though, and very good. Our paper is a review and synthesis of bond pricing models, including Vasicek, CIR, HJM, and many others. The idea is to describe these models in common language and simple terms, which we take to mean pricing kernels in discrete time.
"Oil prices and the terms of trade," with Crucini, NBER version. Published in JIE, 2000. A model of the impact of oil prices on business cycles, exchange rates, and capital flows. Mario is responsible for the novel parts, including the treatment of oil exporters.
"Accounting for biases in Black-Scholes," with Foresi, Li, and Wu, paper. We never got around to revising this one, but it has a nice result, mostly due to Liuren: that the slope and curvature of volatility smiles has a simple connection to the skewness and kurtosis, respectively, of the risk-neutral distribution. Based on a Gram-Charlier approximation.

Informal notes