Aytek Malkhozov

Senior Economist,
Federal Reserve Board of Governors
Email: aytek.malkhozov.research@gmail.com

Curriculum Vitae

The views expressed here are my own and do not reflect those of the Federal Reserve Board of Governors.


Mortgage Risk and the Yield Curve with P. Mueller, A. Vedolin, and G. Venter
Review of Financial Studies, 2016, 29(5), 1220-1253

We study feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate supply shocks resulting from changes in MBS duration into a parsimonious equilibrium dynamic term structure model and derive three predictions that are strongly supported in the data: (1) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (2) the predictive power of MBS duration is transitory in nature; and (3) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.

Does Variance Risk Have Two Prices? with L. Barras
Journal of Financial Economics, 2016, 212(1), 79-92
online appendix

We formally compare two versions of the market variance risk premium (VRP) measured in the equity and option markets. Both VRPs follow common patterns and respond similarly to changes in volatility and economic conditions. However, we reject the null hypothesis that they are identical and find that their difference is strongly related to measures of the financial standing of intermediaries. These results shed new light on the information content of the VRP, suggest the presence of market frictions between the two markets, and are consistent with the key role played by intermediaries in setting option prices.

How Have Central Banks Implemented Negative Policy Rates?
with M. Bech
BIS Quarterly Review, March 2016, 31-44
Press coverage: FT, FT, WSJ, WSJ, Bloomberg, CNNMoney

Since mid-2014, four central banks in Europe have moved their policy rates into negative territory. These unconventional moves were by and large implemented within existing operational frameworks. Yet the modalities of implementation have important implications for the costs of holding central bank reserves. The experience so far suggests that modestly negative policy rates transmit through to money markets and other interest rates for the most part in the same way that positive rates do. A key exception is retail deposit rates, which have remained insulated so far, and some mortgage rates, which have perversely increased. Looking ahead, there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.

Asset Prices in Affine Real Business Cycle Models
Journal of Economic Dynamics and Control, 2014, 45, 180-193

I describe a tractable way to study macroeconomic quantities and asset prices in a large class of dynamic stochastic general equilibrium models. The proposed approximate solution is analytical, log-linear, and adjusted for risk. Therefore, it is well suited to investigate economic mechanisms, describe the time series properties or estimate the model, and deal with stochastic volatility. I explain the pitfalls encountered by previous attempts to use simple approximation techniques, in particular with models featuring recursive preferences. Finally, I show the theoretical relationship between my solution and higher-order perturbation methods.

Working Papers

International Illiquidity with P. Mueller, A. Vedolin, and G. Venter
R&R Review of Financial Studies
FRB International Finance Discussion Papers 2017-1201
online appendix

We build a parsimonious international asset pricing model in which deviations of government bond yields from a fitted yield curve of a country measure the tightness of investors' capital constraints. We compute these measures at daily frequency for six major markets and use them to test the model-predicted effect of funding conditions on asset prices internationally. Global illiquidity lowers the slope and increases the intercept of the international security market line. Local illiquidity helps explain the variation in alphas, Sharpe ratios, and the performance of betting-against-beta (BAB) strategies across countries.

Market Integration and Global Crashes with S. Malamud
CEPR Discussion Papers 11468

We develop an equilibrium model of real and financial market integration in which real firms and financial actors independently decide on their investment into different locations (countries). We show that, in the presence of financial frictions, firms' real investment choices may become strategic complements, leading to multiple, self-fulfilling equilibria, as well as to real fragility, whereby a small change in one country's fundamentals triggers a large large change in real investment everywhere. This fragility may lead to a global crash in which severe underinvestment into countries with under-developed financial markets spills over all other countries. We show that such global crashes are particularly severe when frictions are sufficiently symmetric across countries. By contrast, with enough asymmetry, the economy is likely to end up in a local crash equilibrium in which countries with low real investment barriers suffer the most.

Reversals in Global Market Integration and Funding Liquidity with A. Akbari and F. Carrieri
FRB International Finance Discussion Papers 2017-1202

This paper looks at the reversals in global financial integration through the funding liquidity lens. First, we construct a segmentation indicator based on differences in funding liquidity across countries as measured by the performance of betting-against-beta strategies. Second, we find that funding liquidity shocks help explain recent reversals in integration in the absence of explicit foreign investment barriers. These findings are consistent with tighter limits to arbitrage and increased home bias during funding distress periods. Our empirical analysis is guided by a margin-CAPM model generalized to an international setting.

News Shocks and Asset Prices with A. Tamoni

We study the importance of anticipated shocks (news) for understanding the comovement between macroeconomic quantities and asset prices. We find that four-quarter anticipated investment shocks are an important source of fluctuations for macroeconomic variables: they account for about half of the variance in hours and investment. However, it is the four-quarter anticipated productivity shock that is driving a large fraction of consumption and most of the price-dividend ratio fluctuations. These productivity news are key for the model to reproduce the empirical tendency for stock-market valuations and excess returns to lead the business cycle. Importantly, a model that does not use asset price information in the estimation would downplay the role of productivity news; in this case, the model implies that return moves (almost) completely contemporaneously with the economic activity, counterfactually with the data.