On October 31, 2018 at 4:15 pm in Pettengill G21, Thomas Cosimano, Professor Emeritus of Finance at Universtiy of Notre Dame presented his talk on “Discount Rates and Monetary Policy.”

Talk Topic:
> Do financial market participants hedge interest rate risk by taking long or short positions in financial instruments of different maturities?

Abstract:

Paper co-authored by Ralph Chami (Institute for Capacity Development, International Monetary Fund), Celine Rochon (Strategy, Policy and Review Department, International Monetary Fund) and Julieta Yung (Federal Reserve Bank of Dallas, Research Department and Department of Economics, Bates College).

We study the impact of monetary policy tightening on the discount rate through the term structure of interest rates. Investors maximize expected utility over a terminal wealth by investing in various Treasury securities, and the expected excess returns satisfies the no arbitrage condition. This behavior leads to a non-linear stochastic discount factor, so that the impact of monetary policy on the discount rate varies with changes in the yield curve factors. In addition, tightening of monetary policy leads to a larger (smaller) capital loss by more (less) risk averse investors so that their absolute risk aversion becomes larger (smaller).

Sponsored by The Casey Lecture Fund