This paper makes the following original contributions to the literature. (1) We develop a simpler analytical characterization and numerical algorithm for Bayesian inference in structural vector autoregressions that can be used for models that are overidentified, just-identified, or...

The outcome of any important macroeconomic policy change is the net effect of forces operating on different parts of the economy. A central challenge facing policy makers is how to assess the relative strength of those forces. Dynamic Stochastic General Equilibrium (DSGE) models are the leading...

We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new...

Estimated dynamic stochastic equilibrium (DSGE) models are now widely used for empirical research in macroeconomics as well as for quantitative policy analysis and forecasting at central banks around the world. This paper reviews recent advances in the estimation and evaluation of DSGE models,...

Optimal investment of firms implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of...

Extreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets. Asset pricing and trading, in these cases, are intrinsically...

In the asset pricing literature, time-variation in market expected excess return captured by financial ratios like dividend yield is typically viewed as a reflection of either changing risk, related to the business cycle, or irrational mispricing. Extending the work on asset allocation and...

A Bayesian approach is used to investigate a sample's information about a portfolio's degree of inefficiency. With standard diffuse priors, posterior distributions for measures of portfolio inefficiency can concentrate well away from values consistent with efficiency, even when the portfolio is...

This paper focuses on the specification and stability of a dynamic, stochastic, general equilibrium model of the American business cycle with sticky prices. Maximum likelihood estimates reveal that the data prefer a version of the model in which adjustment costs apply to the price level but not...

The conventional wisdom in macroeconomic modeling is to attribute business cycle fluctuations to innovations in the level of the fundamentals. Though volatility shocks could be important too, their propagating mechanism is still not well understood partly because modeling the latent volatilities...