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on International Finance |
| By: | Guanhao Feng; Jingyu He; Nicholas G. Polson |
| Abstract: | Deep learning searches for nonlinear factors for predicting asset returns. Predictability is achieved via multiple layers of composite factors as opposed to additive ones. Viewed in this way, asset pricing studies can be revisited using multi-layer deep learners, such as rectified linear units (ReLU) or long-short-term-memory (LSTM) for time-series effects. State-of-the-art algorithms including stochastic gradient descent (SGD), TensorFlow and dropout design provide imple- mentation and efficient factor exploration. To illustrate our methodology, we revisit the equity market risk premium dataset of Welch and Goyal (2008). We find the existence of nonlinear factors which explain predictability of returns, in particular at the extremes of the characteristic space. Finally, we conclude with directions for future research. |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1804.09314&r=ifn |
| By: | Luca Fornaro; Federica Romei |
| Abstract: | This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy cannot stabilize the economy because it is frequently constrained by the zero lower bound. Now imagine that governments complement monetary policy with prudential financial and fiscal policies, because they perceive that limiting private and public borrowing during booms will help stabilize the economy by reducing the risk of financial crises and by creating space for fiscal interventions during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In a financially integrated world, in fact, prudential policies generate a rise in the global supply of savings, or equivalently a drop in global aggregate demand. In turn, weaker global aggregate demand depresses output in countries whose monetary policy is constrained by the zero lower bound. Due to this effect, the world might paradoxically experience a fall in output and welfare following the implementation of well-intended prudential policies. |
| Keywords: | E32, E44, E52, F41, F42 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1039&r=ifn |