Working Papers
  • Hartwig, B., Meinerding, C., Schüler, Y. (2020): Identifying Indicators of Systemic Risk
    Presented at: AFA 2020 Poster Session (San Diego), Bundesbank Spring Conference 2019, Conference on Systemic Risk and Financial Stability (University Freiburg), Workshop on Monetary and Financial Macroeconomics 2019 (Hamburg)

    Abstract: We operationalize the definition of systemic risk provided by the IMF, BIS, and FSB and derive testable hypotheses to identify indicators of systemic risk. We map these hypotheses into a two-stage hierarchical testing framework, combining insights from the early-warning literature on financial crises with recent advances on growth-at-risk. Applying this framework to a set of candidate variables, we find that the Basel III credit-to-GDP gap does not indicate systemic risk coherently across G7 countries. Credit growth and house price growth also do not pass our test in many cases. By contrast, a composite financial cycle signals systemic risk consistently for all countries except Canada. Overall, our results suggest that systemic risk may be consistently measured only once the turning points of indicators have been observed. Therefore, pre-emptive countercyclical macroprudential policy may smooth the financial cycle in boom phases, which then indirectly mitigates the amount of systemic risk in the future.
    -- Under Review --

  • Dergunov, I., Meinerding, C., Schlag, C. (2019): Extreme Inflation and Time-Varying Expected Consumption Growth
    Bundesbank Discussion Paper No. 16/2019
    Presented at: WFA 2018 (Coronado), SGF 2018 (Zurich), German Economists Abroad 2017 (Frankfurt), Paris December Finance Meeting 2017, DGF 2017 (Ulm), ESSFM 2017 (Gerzensee), MFA 2017 (Chicago), AFFI 2017 (Valence), 2017 Colloquium on Financial Markets (Cologne), Goethe University, Deutsche Bundesbank, Wharton, BI Oslo, IWH Halle, Swiss National Bank
    -- Under Review --

    Abstract: In a parsimonious regime switching model, expected consumption growth varies over time. Adding inflation as a conditioning variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock-bond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Wachter (2013), implying that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond correlation.

  • Branger, N., Konermann, P., Meinerding, C., Schlag, C. (2019): Equilibrium Asset Pricing in Directed Networks
    SAFE Working Paper No. 74, Bundesbank Discussion Paper No. 37/2018
    Presented at: SFS Cavalcade North America 2017 (Nashville), WFA 2017 (Whistler), EFA 2017 (Mannheim), DGF 2017 (Ulm), SGF 2015 (Zurich), Arne Ryde Workshop 2015 (Lund), VfS 2015 (Muenster), Finance Down Under 2016 (Melbourne), VHB 2016 (Munich), Financial Econometrics and Empirical Asset Pricing Conference 2016 (Lancaster), Young Scholars Nordic Finance Workshop (Helsinki), 4th Economic Networks and Finance Conference (London), Goethe University Frankfurt, University of Muenster, Manchester Business School, BI Norwegian Business School, HU Berlin, UNC Chapel-Hill, University of Mannheim, Deutsche Bundesbank, University of Zurich
    -- Under Review --

    Abstract: Directed links in cash flow networks affect the cross-section of risk premia through three channels. In a tractable consumption-based equilibrium asset pricing model, we obtain closed-form solutions that disentangle these channels for arbitrary directed networks. First, shocks that can propagate through the economy command a higher market price of risk. Second, shock-receiving assets earn an extra premium since their valuation ratios drop upon shocks in connected assets. Third, a hedge effect pushes risk premia down: when a shock propagates through the economy, an asset that is unconnected becomes relatively more attractive and its valuation ratio increases.

  • Laurinaityte, N., Meinerding, C., Schlag, C., Thimme, J. (2019): Elephants and the Cross-Section of Expected Returns
    The paper also includes an online appendix. The Matlab code for the paper is available on Julian's webpage.
    Presented at: Econometric Society European Winter Meeting 2019 (Rotterdam), DGF 2019 (Essen), SGF 2018 (Zurich), Frontiers of Factor Investing 2018 (Lancaster), Goethe University Frankfurt, Deutsche Bundesbank
    -- Under Revision --

    Abstract: Using GMM for cross-sectional asset pricing tests can generate spuriously high explanatory power for factor models {\cm when the moment conditions are specified such that they allow} the estimated factor means to substantially deviate from the observed sample averages. In fact, by shifting the weights on the moment conditions, any level of cross-sectional fit can be attained. This property is a feature of the GMM estimation design and applies to weak as well as strong factors, and to all sample sizes and test assets. To quantify the severity of the problem, we run tests based on simulated and empirical data.

  • Curatola, G., Donadelli, M., Grüning, P., Meinerding, C. (2019): Investment-Specific Shocks, Business Cycles and Asset Prices
    SAFE Working Paper No. 129, Bank of Lithuania Working Paper No. 36/2016
    Presented at: 11th Dynare Conference (Brussels), SGF 2016 (Zurich), 5th Annual Lithuanian Conference on Economic Research (Vilnius), 2016 World Finance Conference (New York), DGF 2016 (Bonn), University of Venice, 9th Biennial Conference of the Czech Economic Society (Prague), University of Bologna, Portsmouth Business School, University College of Dublin, 24th International Conference Computing in Economics and Finance (Milan)
    -- Under Revision --

    Abstract: We document, both theoretically and empirically, that long-run investment productivity shocks help explain the joint behavior of macroeconomic quantities and asset prices. A two-sector general equilibrium model with long-run investment shocks and wage rigidities produces both positive co-movement among key macroeconomic variables and a sizable spread in expected returns and return volatilities between the investment and consumption sector. Moreover, long-run investment shocks command a positive risk premium. We filter long-run components from US sectoral TFP time series and find empirical evidence in favor of the key model mechanisms in both macroeconomic and asset pricing data.

  • Branger, N., Grüning, P., Kraft, H., Meinerding, C., Schlag, C. (2014): Asset Pricing under Uncertainty about Shock Propagation
    SAFE Working Paper No. 34
    Presented at: SGF 2014 (Zurich), DGF 2014 (Karlsruhe), DGVFM 2014 (Berlin), Wharton School, Goethe University Frankfurt
    -- Under Revision --

    Abstract: We analyze the equilibrium in a two-tree (sector) economy with two regimes. The output of each tree is driven by a jump-diffusion process, and a downward jump in one sector of the economy can (but need not) trigger a shift to a regime where the likelihood of future jumps is generally higher. Furthermore, the true regime is unobservable, so that the representative Epstein-Zin investor has to extract the probability of being in a certain regime from the data. These two channels help us to match the stylized facts of countercyclical and excessive return volatilities and correlations between sectors. Moreover, the model reproduces the predictability of stock returns in the data without generating consumption growth predictability. The uncertainty about the state also reduces the slope of the term structure of equity. We document that heterogeneity between the two sectors with respect to shock propagation risk can lead to highly persistent aggregate price-dividend ratios. Finally, the possibility of jumps in one sector triggering higher overall jump probabilities boosts jump risk premia while uncertainty about the regime is the reason for sizeable diffusive risk premia.

These working papers represent the authors personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank or its staff.

All working papers can be downloaded from SSRN.

Articles in Refereed Journals
  • Branger, N., Kraft, H., Meinerding, C. (2016): The Dynamics of Crises and the Equity Premium, Review of Financial Studies, Vol. 29, Issue 1, January 2016, pp. 232-270

    Abstract: It is a major challenge for asset pricing models to generate a high equity premium and a low risk-free rate while imposing realistic consumption dynamics. To address this issue, our paper proposes a novel pricing channel: We allow for consumption drops that can spark an economic crisis. This new feature generates a large equity premium even if possible consumption drops are of moderate size. In turn, our model also matches the consumption data of 42 countries along several dimensions. In particular, our approach generates a realistic number of crises that have realistic durations and involve clustering of moderate consumption drops.

  • Branger, N., Kraft, H., Meinerding, C. (2014): Partial Information about Contagion Risk, Self-Exciting Processes and Portfolio Optimization, Journal of Economic Dynamics and Control, Vol. 39, Issue 1, February 2014, pp. 18-36

    Abstract: This paper compares two classes of models that allow for additional channels of correlation between asset returns: regime switching models with jumps and models with contagious jumps. Both classes of models involve a hidden Markov chain that captures good and bad economic states. The distinctive feature of a model with contagious jumps is that large negative returns and unobservable transitions of the economy into a bad state can occur simultaneously. We show that in this framework the filtered loss intensities have dynamics similar to self-exciting processes. Besides, we study the impact of unobservable contagious jumps on optimal portfolio strategies and filtering.

  • Konermann, P., Meinerding, C., Sedova, O. (2013): Asset Allocation in Markets with Contagion: The Interplay between Volatilities, Jump Intensities, and Correlations, Review of Financial Economics, Vol. 22, Issue 1, January 2013, pp. 36-46

    Abstract: We study the impact of financial contagion on the dynamic asset allocation problem of a CRRA investor facing an incomplete market with two risky assets. We apply a Markov chain regime-switching framework with state-dependent jump intensities, diffusion volatilities and diffusion correlations. The key model feature that a switch to the bad contagion regime is triggered by a loss in one of the risky assets allows for the implementation of a hedging demand against contagion risk. Moreover, a state-dependent diffusion correlation combined with heterogeneity in jump intensities and volatilities can, e.g., generate a flight to quality effect upon a systemic jump.

  • Meinerding, C. (2012): Asset Allocation and Asset Pricing in the Face of Systemic Risk: A Literature Overview and Assessment, International Journal of Theoretical and Applied Finance, Vol. 15, Issue 3, May 2012

    Abstract: This paper provides a detailed overview of the current research linking systemic risk, financial crises and contagion effects among assets on the one hand with asset allocation and asset pricing theory on the other hand. Based on the ample literature about definitions, measurement and properties of systemic risk, we derive some elementary ingredients for models of financial contagion and assess the current state of knowledge about asset allocation and asset pricing with explicit focus on systemic risk. The paper closes with a brief outlook on future research possibilities and some recommendations for the further development of capital market models incorporating financial contagion.

  • Branger, N., Kraft, H., Meinerding, C. (2009): What is the Impact of Stock Market Contagion on an Investor’s Portfolio Choice?, Insurance: Mathematics and Economics, Vol. 45, Issue 1, August 2009, pp. 94-112

    Abstract: Stocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of crashes in other stocks (or indices). Our paper explicitly takes this contagion risk into account and studies its impact on the portfolio decision of a CRRA investor both in complete and in incomplete market settings. We find that the investor significantly adjusts his portfolio when contagion is more likely to occur. Capturing the time dimension of contagion, i.e. the time span between jumps in two stocks or stock indices, is thus of first-order importance when analyzing portfolio decisions. Investors ignoring contagion completely or accounting for contagion while ignoring its time dimension suffer large and economically significant utility losses. These losses are larger in complete than in incomplete markets, and the investor might be better off if he does not trade derivatives. Furthermore, we emphasize that the risk of contagion has a crucial impact on investors' security demands, since it reduces their ability to diversify their portfolios.

Work in Progress
  • Low-Frequency VIX and Equilibrium Option Pricing (with Roberto Marfé and Christian Schlag)

  • Portfolio Choice with Commodity ETFs (with Philipp Illeditsch and Christian Schlag)

  • Identification of Shocks to Transition Risks (with Yves S. Schueler)