Martin Schneider Homepage

Recursive multiple priors, with Larry Epstein
Journal of Economic Theory, 113(1), 32-50 (2003)
Axiomatizes dynamically consistent model of intertemporal decision making under ambiguity. Shows how to update sets of priors.

Learning under ambiguity, with Larry Epstein
Review of Economic Studies, 74((4), 1275-1303 (2007)
Tractable model of learning under ambiguity from iid signals. Shows that ambiguity may but need not vanish in long run. Quantitative application to portfolio choice with learning about mean returns illustrates slow convergence & 1st order effects of parameter uncertainty.

Ambiguity, information quality and asset pricing, with Larry Epstein
Journal of Finance, 63(1), 197-228 (2008)
Learning from signals with ambiguous precision induces asymmetric response to news: good news discounted, bad news taken seriously. Asset pricing model delivers negative skewness and premia for low (idiosyncractic) information quality. Quantitative application to pricing after 9/11.

Ambiguity and asset markets, with Larry Epstein
Annual Reviews of Financial Economics 2, 315-34 (2010)
Surveys models of ambiguity aversion and their applications in finance

Ambiguous Business Cycles, with Cosmin Ilut,
American Economic Review 104: 2368-2399 (2014)
Proposes a class of business cycle models with uncertainty shocks that can be analyzed by standard linear methods. In estimated medium scale New Keynesian model, ambiguity shocks play important role by generating comovement of major aggregates

Uncertainty shocks, asset supply and pricing over the business cycle with Francesco Bianchi & Cosmin Ilut,
Review of Economic Studies 85 (2), pp. 810–854, (2018)
Business cycle model with corporate sector payout and capital structure choice. Firms react to time variation in (measured) risk premia. Risk premia are driven by ambiguity. Stochastic volatility affects perceived ambiguity and thereby has 1st order effects.

Slow to hire, quick to fire: employment dynamics with asymmetric responses to news, with Cosmin Ilut & Matthias Kehrig,
Journal of Political Economy, 126(5), pages 2011-2071, (2018)
Cross sectional dispersion of employment growth ("micro volatility") and conditional volatility of aggregate employment growth ("macro volatility") are countercyclical because firms respond more strongly to bad news than to good news. Micro data on manufacturing establishments further show negative skewness in time series and cross section, and asymmetric response to TFP shocks, both consistent with the mechanism.

Credit & money

Balance Sheet Effects, Bailout Guarantees, and Financial Crises, with Aaron Tornell
Review of Economic Studies 2004, 71(3), 883-913
If borrowers cannot commit to repay, systemic bailout guarantees not only encourage (coordinated) risk taking but also alleviate underinvestment. Explains why emerging market lending booms see strong nontradable sector growth financed by foreign currency debt and eventually become vulnerable to self-fulfilling "twin crises" (widespread defaults & real devaluation).

Aggregate implications of wealth redistribution: the case of inflation, with Matthias Doepke
Journal of the European Economic Association, 4(2-3), 493-502 (2006)
OLG model where zero sum redistribution shock has persistent aggregate effects. Motivated by inflation episode, shock takes from old retired agents with high propensity to consume out of wealth and gives to young workers with low propensity to consume. Asymmetric responses decrease aggregate labor supply and increase aggregate savings, and are propagated slowly through changes in wealth distribution.

Inflation and the Redistribution of Nominal Wealth, with Matthias Doepke
Journal of Political Economy, 114(6), 1069-97 (2006)
Measures the size and duration of nominal positions for broad sectors of the US economy as well as households by age and wealth. Shows that an inflation episode entails sizeable redistribution from rich, old households and foreigners towards young middle class households and the government sector. A more gradual episode strengthens the effect as it protects short term nominal assets of the middle class.

Inflation as a redistribution shocks: effects on aggregates and welfare, with Matthias Doepke
Quantifies the aggregate and welfare effects of an inflation episode in the US economy. Inflation would benefit a broad coalition of households provided that gains from the revaluation of government debt are used to increase retirement benefits of the less well-off.

Money as a unit of account, with Matthias Doepke
Econometrica 85 (5), pp. 1537-1574 (2017)

Derives conditions for dominant unit of account in optimal system of contracts. Assumes cost of writing contingent contracts and gains of trade along credit chains formed by random matching. Common unit of account helps avoid costly mismatch of income and expenditure along chains and allows formation of longer chains.

Payments, credit and asset prices, with Monika Piazzesi; Simple monetary economy in which payments occur in two layers: endusers (households and institutional investors) use inside money to pay for goods and securities, whereas banks provide inside money and use outside money (reserves) to handle payment instructions. Works out the determination of asset prices & inflation to show how shocks to security payoffs affect inflation and monetary policy affects asset prices. Monetary policy can no longer be summarized by the nominal interest rate alone, as it affects both the return on money and the mix of securities available to banks to back inside money.

Interest rate & credit risk

Equilibrium Yield Curves with Monika Piazzesi zip file with MATLAB programs
NBER Macroeconomics Annual 2006 p. 389-442
Representative agent model with recursive utility predicts upward sloping nominal yield curve because (i) inflation forecasts low future consumption growth (ii) with recursive utility, signals of future consumption growth are priced factors and (iii) longer bonds are more sensitive to (persistent) inflation shocks. Learning about persistence and forecasting power of inflation helps account for time variation in yield curve dynamics.

Interest Rate Risk in Credit Markets with Monika Piazzesi
American Economic Review P&P, 100(2) 579-584 (2010)
Shows how to represent riskless bond positions by portfolios in a few bonds. Illustrates method by replicating position of US household sector.

Banks' risk exposures with Juliane Begenau and Monika Piazzesi (r&r Ecta)
Uses bank regulatory data to represent bank balance sheets in terms of exposures to a few factors, allowing for credit risk. Proposes estimation strategy for derivatives exposures based on position data and price histories. Shows that large banks' derivatives positions' do not hedge exposure from other business.

Trend and Cycle in Bond Premia with Monika Piazzesi and Juliana Salomao
Decomposes standard econometric measures of risk premia on long bonds into components reflecting investors' subjective expectations (inferred from survey forecasts) and subjective risk compensation. Pools information on large number of maturities and forecast horizons. Shows that cyclicality of risk premia is due to forecasting behavior, whereas risk compensation matters at lower frequencies, especially in early 1980s.

The Short Rate Disconnect in a Monetary Economy with Monika Piazzesi and Moritz Lenel

Forthcoming Journal of Monetary Economics

Housing

Housing, consumption and asset pricing, with Monika Piazzesi and Selale Tuzel
Journal of Financial Economics 83, 531-569 (2007)
Representative agent model with two trees (housing, equity) and nonseparable utility over fruit (housing services, other consumption). Composition risk of consumption basket is priced and changes over time. Share of housing in total consumption predicts excess returns on equity.

Inflation illusion, credit and asset prices, with Monika Piazzesi
in Asset Pricing and Monetary Policy, J.Y. Campbell (ed.), Chicago IL, Chicago University Press, pp. 147-181 (2007)
Whenever borrowers and lenders disagree about real interest rates, there are gains from trade, so credit and collateral values increase. Money illusion leads to more disagreement when nominal rates are unusually high or low, predicting housing booms in 1970s as well as 2000s.

Momentum traders in the housing market: survey evidence and a search model with Monika Piazzesi
American Economic Review P&P 99(2) 493-502 (2009)
Cluster analysis of Michigan survey expectations shows increase of small (20% max) cluster with extrapolative expectations in 2006-7. In search model of housing market calibrated to low turnover and large transaction costs, small inflow of exuberant traders is enough to move prices

The Housing Market(s) of San Diego, with Tim Landvoigt and Monika Piazzesi,
American Economic Review 105(4): 1371-1407
Quantitative study of assignment model for San Diego County housing market boom 2000-5. Capital gains much higher for low quality housing. Cheap credit is key; composition of housing supply also matters.

Housing assignment with restrictions: theory and evidence from Stanford campus (with Tim Landvoigt and Martin Schneider)
American Economic Review P&P 2014, pp. 67-72.
Pricing of indivisible houses when a subset of eligible investors has exclusive access to houses in a restricted area. House prices reflect the relative shapes of the distributions of quality (restricted vs other) and buyer characteristics (eligible vs other)

Inflation and the Price of Real Assets, with Monika Piazzesi
Overlapping generations model with unsinsurable nominal risk and household choice of equity, housing & bonds. Changes in demographics and inflation expectations can explain large share of movements in household net worth and negative comovement of equity & house price in postwar US

Housing and Macroeconomics, with Monika Piazzesi

Our chapter for the new Handbook of Macroeconomics edited by John Taylor and Harald Uhlig, July 2016

Segmented Housing Search (with Monika Piazzesi and Johannes Stroebel, forthcoming in the AER)
Divides SF Bay Area into housing market segments, starting from new data set on buyers' internet searches. Documents substantial heterogeneity in market activity and searcher clienteles across segments. Search model with mutliple segments infers role of moving shocks and buyer preferences.

Learning in markets

Strategic Experimentation and Disruptive Technological Change, with Fabiano Schivardi
Review of Economic Dynamics 2008, 11(2) 386-412.
Dynamic investment game with learning between incumbent and startup who operates new technology of unknown potential. Changes in market power often preceded by subpar early performance of new technology: incumbent then does not switch technologies and later gambles for resurrection by sticking with old technology.

International Equity Flows and Returns: A Quantitative Equilibrium Approach, with Rui Albuquerque and Greg Bauer
Review of Economic Studies 2007, 74/1: 1-30.
Quantitative model of equity trading with heterogeneous investors and private information applied to G7 equity markets. Accounts for volume, gross and net trades between US investors and locals as well as the correlation of US investors' trades and returns. Within country investor heterogenity is much more important than cross country heterogeneity.

Global Private Information in International Equity Markets, with Rui Albuquerque and Greg Bauer
Journal of Financial Economics 2009, 94 (1), 18-46.
Documents "global return chasing": US investors' net equity purchases comove with returns on many countries simultaneously. Model of trading on "global" private information jointly accounts for global return chasing, equity home bias and the mixed performance of foreign investors in local markets.

Asset Valuation and Trading with Uncertain Exposure, with Juan Carlos Hatchondo and Per Krusell
Learning from prices implies makes investors with higher initial exposure to a risk factor more optimistic about that risk factor. Increase in exposure by an unknown fraction of market participants does not lead to sharing of exposure, but instead to less trade, lower prices and higher risk premia.