Essays on macro-finance
This thesis on topics in macro-ﬁnance, considers the relationship between the macro economy and also ﬁnancial marets. We examine the key predictors, including macro determinants and technical indicators, of returns to the US stock market. Moreover, we investigate the links between ﬁnancial markets internationally. We also study the importance of ﬁnancial factors for monetary policy. In more detail, Chapter 2 constructs a ﬂexible Bayesian framework to predict the equity premium, allowing for abrupt or gradual or even no changes in forecasting models and in coefﬁcients. This approach has out-of-sample predictive power statistically and economically. Moreover, this model dominates its nested combination methods, including equal-weighted models, Bayesian and dynamic model averaging. By decomposing the prediction variance, we ﬁnd that our approach precisely identiﬁes the locally appropriate time variation in coefﬁcients and the forecasting model over time, leading to mitigation of estimation risk. We then go on in Chapter 3 to model and predict ﬁnancial integration, given the rapidly evolving nature of ﬁnancial globalization. Importantly, this chapter allows national exposure to the global ﬁnancial factors and the process driving volatility to vary over time. The obtained results show that ﬁnancial integration is highly predictable, which has implications for international diversiﬁcation, risk management and policy making. The CBOE volatility index (VIX) is identiﬁed as a strong predictor of ﬁnancial integration, reﬂecting the vulnerability of ﬁnancial markets to uncertainty. Our third main chapter, Chapter 4 studies how the impact of monetary policy shocks interact with the ﬁnancial environment, in particular with ﬁnancial uncertainty. The work identiﬁes that monetary shocks have stronger, but less persistent, effects during periods of elevated ﬁnancial uncertainty compared to more tranqil periods. These differences in effects among the uncertainty dependent states suggest that nonlinearities in the credit channel are stronger in the short run, whereas in the long run nonlinearities in the interest rate channel dominate.