Emanuel MönchEmanuel Mönch

JOURNAL PUBLICATIONS

Journal Publications

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Equity Premium Predictability over the Business Cycle (with Tobias Stein), CEPR Discussion Paper No. 16357, April 2025, forthcoming, Journal of Financial and Quantitative Analysis

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Abstract 

Equity returns follow a pronounced V-shape pattern around the onset of recessions. They sharply drop into negative territory just before business cycle peaks and then strongly recover as the recession unfolds. Recessions are typically preceded by a flat yield curve. Probit models relying on the term spread as a predictor therefore time the beginning of recessions well. We show that model-implied recession probabilities based on the term spread strongly improve equity premium prediction in- and out- of-sample and outperform several benchmark predictors. Correcting for a structural break in the mean of the term spread in 1982 further strengthens the forecast performance. 

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@article{ Moench_Stein_JFQA2025, title={Equity Premium Predictability over the Business Cycle}, author={ Moench, Emanuel and Stein, Tobias}, journal={Journal of Financial and Quantitative Analysis}, volume={forthcoming}, pages={}, year={2025}, publisher={Cambridge University Press} }
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OTC Discount (with Calebe de Roure, Loriana Pelizzon and Michael Schneider), SAFE Working Paper No. 298, August 2024, forthcoming, Management Science

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Abstract 

We document a pecking order of transaction costs in the interdealer market for German sovereign bonds, where three trading protocols coexist. Dealers can trade over-the-counter, either bilaterally or via brokers, as well as on an exchange. Trading on the exchange is more expensive than OTC, and broker-intermediated are more costly than bilateral OTC trades. The existence of an OTC discount isdifficult to square with theories centred around search-and-bargaining frictions, but is in line with models of hybrid markets based on information frictions. Consistently, we show that dealers' information impacts their choice of trading protocol and that the pecking order of transaction costs is aligned with the informational content of order flows across protocols. Search-and-bargaining as well as information proxies explain differences in OTC discount within protocols. A realistic description ofhybrid markets thus requires both types of frictions.

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@article{DeRoure_Moench_Pelizzon_Schneider_MS2025, title={OTC Discount}, author={DeRoure, Calebe and Moench, Emanuel and Pelizzon, Loriana and Schneider, Michael}, journal={Management Science}, volume={forthcoming}, pages={}, year={2025}, publisher={INFORMS} }
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Natural Disasters as Macroeconomic Tail Risks (with Sulkhan Chavleishvili), Journal of Econometrics, Vol. 247, January 2025

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Abstract 

We introduce quantile and moment impulse response functions for structural quantile vector autoregressive models. We use them to study how climate-related natural disasters affect the predictive distribution of output growth and inflation. Disasters strongly shift the forecast distribution, particularly in the tails. They result in an initial sharp increase of the downside risk for growth, followed by a temporary rebound. Upside risk to inflation increases markedly for a few months and then subsides. As a result, natural disasters have a persistent impactor in the conditional variance and skewness of macroeconomic aggregates, which standard linear models estimating conditional mean dynamics fail to match. We perform a scenario analysis to evaluate the hypothetical effects of more frequent large disasters on the macroeconomy due to increased atmospheric carbon concentration. Our results indicate a substantially higher conditional volatility of growth and inflation, as well as increased upside risk to inflation, particularly in a scenario where only currently pledged climate policies are implemented.

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@article{Moench_Chavleishvili_JoE2025, title={Natural disasters as macroeconomic tail risks}, author={Chavleishvili, Sulkhan and Moench, Emanuel}, journal={Journal of Econometrics}, volume={247}, pages={105914}, year={2025}, publisher={Elsevier} }
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Anchored Inflation Expectations (with Carlos Carvalho, Stefano Eusepi, and Bruce Preston), American Economic Journal: Macroeconomics, Vol. 15(1), Lead Article, January 2023.

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Abstract 

We develop a theory of low-frequency movements in inflation expectations, and use it to interpret joint dynamics of inflation and inflation expectations for the United States and other countries over the postwar period. In our theory, long-run inflation expectations are endogenous. They are driven by short-run inflation surprises, in a way that depends on recent forecasting performance and monetary policy. This distinguishes our theory from common explanations of low-frequency properties of inflation. The model, estimated using only inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations and identifies episodes of unanchored expectations.

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@article{Carvalho_Eusepi_Moench_Preston_AEJMacro2023, title={Anchored inflation expectations}, author={Carvalho, Carlos and Eusepi, Stefano and Moench, Emanuel and Preston, Bruce}, journal={American Economic Journal: Macroeconomics}, volume={15}, number={1}, pages={1--47}, year={2023}, publisher={American Economic Association 2014 Broadway, Suite 305, Nashville, TN 37203-2425} }
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What moves Treasury Yields? (with Soroosh Soofi Siavash), Journal of Financial Economics, Vol. 146(3), December 2022.

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Abstract 

We identify a yield news shock as an innovation that does not move Treasury yields contemporaneously but explains a maximum share of their future variation. Yields do not immediately respond to the news shock as the initial reaction of term premiums and expected short rates offset each other. While the impact on term premiums fades quickly, expected short rates and thus yields decline persistently. As a result, the shock explains a staggering 50% of Treasury yield variation several years out. A positive yield news shock is associated with a coincident sharp increase in stock and bond market volatility, a contemporaneous response of leading economic indicators, and is followed by a persistent decline of real activity and inflation which is accommodated by the Federal Reserve. Identified shocks to realized stock market volatility and business cycle news imply similar impulse responses and together capture the bulk of variation of the yield news shock.

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@article{Moench_Soofi-Siavash_JFE2022, title={What moves treasury yields?}, author={Moench, Emanuel and Soofi-Siavash, Soroosh}, journal={Journal of Financial Economics}, volume={146}, number={3}, pages={1016--1043}, year={2022}, publisher={Elsevier} }
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The Term Structure of Expectations (with Richard K. Crump, Stefano Eusepi, and Bruce Preston), Chapter 17 in Handbook of Economic Expectations, Elsevier, November 2022.

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@incollection{Crump_Eusepi_Moench_Preston_HB2023, title={The term structure of expectations}, author={Crump, Richard K and Eusepi, Stefano and Moench, Emanuel and Preston, Bruce}, booktitle={Handbook of economic expectations}, pages={507--540}, year={2023}, publisher={Elsevier} }
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Would Households Understand Average Inflation Targeting? (with Mathias Hoffmann, Lora Pavlova and Guido Schultefrankenfeld), Journal of Monetary Economics, Vol 129(S), July 2022.

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Abstract 

We identify a yield news shock as an innovation that does not move Treasury yields contemporaneously but explains a maximum share of their future variation. Yields do not immediately respond to the news shock as the initial reaction of term premiums and expected short rates offset each other. While the impact on term premiums fades quickly, expected short rates and thus yields decline persistently. As a result, the shock explains a staggering 50% of Treasury yield variation several years out. A positive yield news shock is associated with a coincident sharp increase in stock and bond market volatility, a contemporaneous response of leading economic indicators, and is followed by a persistent decline of real activity and inflation which is accommodated by the Federal Reserve. Identified shocks to realized stock market volatility and business cycle news imply similar impulse responses and together capture the bulk of variation of the yield news shock.

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@article{Hoffmann_Moench_Pavlova_Schultefrankenfeld_JME2022, title={Would households understand average inflation targeting?}, author={Hoffmann, Mathias and Moench, Emanuel and Pavlova, Lora and Schultefrankenfeld, Guido}, journal={Journal of Monetary Economics}, volume={129}, pages={S52--S66}, year={2022}, publisher={Elsevier} }
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Comment on Monetary Policy Communication, Policy Slope, and the Stock Market by Andreas Neuhierl and Michael Weber (with Tobias Stein), Journal of Monetary Economics, Vol. 108, December 2019.

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This note discusses the article “Monetary Policy Communication, Policy Slope, and the Stock Market”by Andreas Neuhierl and Michael Weber. The authors document that the slope of the fed funds futures curve predicts stock returns one week ahead and is corre- lated with the tone of Fed Board member speeches over the period 1994–2007. We show that this return predictability is restricted to the subsample from 1999 to 2001, with no evidence of predictability outside of this period. We further point out some issues with the proposed measure of monetary policy tone and show that the positive correlation be- tween tone and the fed funds futures slope is driven by two speeches that, when analyzed in detail, do not appear particularly hawkish.

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@article{Moench_Stein_JMEcomment_2019, title={Comment on “Monetary Policy Communication, Policy Slope, and the Stock Market” by Andreas Neuhierl and Michael Weber}, author={Moench, Emanuel and Stein, Tobias}, journal={Journal of Monetary Economics}, volume={108}, pages={156--161}, year={2019}, publisher={Elsevier} }
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Forecasting through the Rear-view Mirror: Data Revisions and Bond Return Predictability (with Eric Ghysels and Casidhe Horan), Review of Financial Studies, Vol. 31 No. 2, February 2018.

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A previous literature has documented that bond returns are predicted by macroeconomic information not contained in yields contemporaneously. That literature has mostly relied on final revised, rather than real time macroeconomic data. We show that the use of real time data substantially reduces the predictive power of macro variables for future bond returns as well as the implied countercyclicality of term premiums. We discuss potential interpretations of our results.

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@article{Ghysels_Horan_Moench_RFS2018, title={Forecasting through the rearview mirror: Data revisions and bond return predictability}, author={Ghysels, Eric and Horan, Casidhe and Moench, Emanuel}, journal={The Review of Financial Studies}, volume={31}, number={2}, pages={678--714}, year={2018}, publisher={Oxford University Press} }
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Decomposing Real and Nominal Yield Curves (with Mike Abrahams, Tobias Adrian, and Richard K. Crump, and Rui Yu), Journal of Monetary Economics, Vol. 84, December 2016.

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Inflation-indexed and nominal yield curves capture investors' expectations of real shortrates and inflation as well as their required compensation for bearing liquidity, inflation,and real interest rate risk.We estimate an affine term structure model that allows us todecompose real and nominal bond yields into these components and use the model tostudy the transmission of monetary policy.The model decompositions imply that theFederal Reserve's announcements of LSAPs lowered yields primarily by reducing real termpremia. Changes in real term premia also account for the strong response oflong-termreal forward rates to federal funds rate surprises.

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@article{Abrahams_Adrian_Crump_Moench_Yue_JME2016, title={Decomposing real and nominal yield curves}, author={Abrahams, Michael and Adrian, Tobias and Crump, Richard K and Moench, Emanuel and Yu, Rui}, journal={Journal of Monetary Economics}, volume={84}, pages={182--200}, year={2016}, publisher={Elsevier} }
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Fundamental Disagreement (with Philippe Andrade, Richard K Crump, and Stefano Eusepi, Journal of Monetary Economics, Vol. 83, October 2016.

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We document a novel set of facts about disagreement among professional forecasters:(1) forecasters disagree at all horizons, including the long run;(2) the term structure ofdisagreement is downward sloping for real output growth, relatively flat for inflation, andupward sloping for the federal funds rate; (3) disagreement is time varying at all horizons.We propose a generalized model of imperfect information that can jointly explain thesefacts. We further use the term structure of disagreement to show that the monetary policyrule perceived by professional forecasters features a high degree of interest-ratesmoothing and time variation in the intercept.

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@article{Andrade_Crump_Eusepi_Moench_JME2016, title={Fundamental disagreement},lang=DE style='color:black'> author={Andrade, Philippe and Crump, Richard K and Eusepi, Stefano and Moench, Emanuel},lang=DE style='color:black'> journal={Journal of Monetary Economics},lang=DE style='color:black'> volume={83},lang=DE style='color:black'> pages={106--128},lang=DE style='color:black'> year={2016},lang=DE style='color:black'> publisher={Elsevier}lang=DE style='color:black'>}
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What Predicts U.S. Recessions? (with Weiling Liu), International Journal of Forecasting, Vol. 32 No. 4, October 2016.

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We reassess the in- and out-of-sample predictability of US recessions at horizons of three months to two years ahead for a large number of previously proposed leading indicator variables, using the Treasury term spread as a benchmark. We estimate both univariate and multivariate probit models, and evaluate the relative model performance based on the receiver operating characteristic (ROC) curve. At the three- and six-month- ahead horizons, various alternative predictor variables increase the accuracy of recession forecasts significantly relative to the term spread, with the annual return on the S&P500 index providing the strongest improvement. While the Treasury term spread is more difficult to outperform systematically at longer horizons, manufacturers’ new orders of capital goods and balances in Broker-Dealer margin accounts increase the precision of recession predictions significantly at horizons of more than one year.

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@article{Liu_Moench_INTFOR2016, title={What predicts US recessions?}, author={Liu, Weiling and Moench, Emanuel}, journal={International Journal of Forecasting}, volume={32}, number={4}, pages={1138--1150}, year={2016}, publisher={Elsevier} }
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Regression-Based Estimation of Dynamic Asset Pricing Models (with Tobias Adrian and Richard K. Crump), Journal of Financial Economics, Vol. 118 No. 2, November 2015.

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Abstract 

We propose regression-based estimators for beta representations of dynamic asset pricing models with an affine pricing kernel specification. We allow for state variables that are cross-sectional pricing factors, forecasting variables for the price of risk, and factors that are both. The estimators explicitly allow for time-varying prices of risk, time-varying betas, and serially dependent pricing factors. Our approach nests the Fama-MacBeth two- pass estimator as a special case. We provide asymptotic multistage standard errors necessary to conduct inference for asset pricing tests. We illustrate our new estimators in an application to the joint pricing of stocks and bonds. The application features strongly time-varying, highly significant prices of risk that are found to be quantitatively more important than time-varying betas in reducing pricing errors.

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@article{Adrian_Crump_Moench_JFE2015, title={Regression-based estimation of dynamic asset pricing models}, author={Adrian, Tobias and Crump, Richard K and Moench, Emanuel}, journal={Journal of Financial Economics}, volume={118}, number={2}, pages={211--244}, year={2015}, publisher={Elsevier} }
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The Pre-FOMC Announcement Drift (with David Lucca), Federal Reserve Bank of New York Staff  Reports No. 512, July 2013, Journal of Finance, Vol. 70 No. 1, January 2015, winner of the Amundi Smith Breeden First Prize for the best capital markets paper published in the Journal of Finance in 2015

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We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. These pre-FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns. While other major international equity indices experienced similar pre-FOMC returns, we find no such effect in U.S. Treasury securities and money market futures. Other major U.S. macroeconomic news announcements also do not give rise to preannouncement excess equity returns. We discuss challenges in explaining these returns with standard asset pricing theory

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@article{Lucca_Moench_JF2015, title={The pre-FOMC announcement drift}, author={Lucca, David O and Moench, Emanuel}, journal={The Journal of finance}, volume={70}, number={1}, pages={329--371}, year={2015}, publisher={Wiley Online Library} }
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Dynamic Hierarchical Factor Models (with Serena Ng and Simon Potter), Review of Economics and Statistics, Vol. 95 No. 5, December 2013.

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This paper uses multilevel factor models to characterize within and between-block variations as well as idiosyncratic noise in large dynamic panels. Block-level shocks are distinguished from genuinely common shocks, and the estimated block-level factors are easy to interprete. The framework achieves dimension reduction and yet explicitly allows for heterogeneity between blocks. The model is estimated using an MCMC algorithm that takes into account the hierarchical structure of the factors. The importance of block-level variations is illustrated in a four-level model estimated on a panel of 445 series related to different categories of real activity in the United States.

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@article{Moench_Ng_Potter_REStat2013, title={Dynamic hierarchical factor models}, author={Moench, Emanuel and Ng, Serena and Potter, Simon}, journal={Review of Economics and Statistics}, volume={95}, number={5}, pages={1811--1817}, year={2013}, publisher={The MIT Press} }
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Pricing the Term Structure with Linear Regressions (with Tobias Adrian and Richard K. Crump), Journal of Financial Economics, Vol. 110 No. 1, October 2013.

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We show how to price the time series and cross-section of the term structure of interest rates using a three-step linear regression approach. Our method allows computationally fast estimation of term structure models with a large number of pricing factors.We present specification tests favoring a model using five principal components of yields as factors. We demonstrate that this model outperforms the Cochrane and Piazzesi (2008) four-factor specification in out-of-sample exercises but generates similar in-sample term premium dynamics.Our regression approach can also incorporate unspanned factors andallows estimation of term structure models without observing a zero-coupon yield curve.

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@article{Adrian_Crump_Moench_JFE2013, title={Pricing the term structure with linear regressions}, author={Adrian, Tobias and Crump, Richard K and Moench, Emanuel}, journal={Journal of Financial Economics}, volume={110}, number={1}, pages={110--138}, year={2013}, publisher={Elsevier} }
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Term Structure Surprises: The Predictive Content of Curvature, Level, and Slope, Journal of Applied Econometrics, Vol. 27 No. 4, June/July 2012.

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This paper analyzes the predictive content of the term structure components level, slope, and curvature within a dynamic factor model of macroeconomic and interest rate data. Surprise changes of the three components are identified using sign restrictions, and their macroeconomic underpinnings are studied via impulse response analysis. The curvature factor is found to carry predictive information both about the future evolution of the yield curve and the macroeconomy. In particular, unexpected increases of the curvature factor precede a flattening of the yield curve and announce a significant decline of output more than 1 year ahead.

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@article{Moench_JAE2012, title={Term structure surprises: the predictive content of curvature, level, and slope}, author={M{\"o}nch, Emanuel}, journal={Journal of Applied Econometrics}, volume={27}, number={4}, pages={574--602}, year={2012}, publisher={Wiley Online Library} }
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The Persistent Effects of a False News Shock (with Carlos Carvalho and Nick Klagge), Journal of Empirical Finance, Vol. 18 No. 4, September 2011.

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In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company's stock price to drop by as much as 76% in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2% below the previous close. We explore this natural experiment by using a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company's stock was still trading below the two-standard-deviation band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at the level predicted by the asset-pricing model. We investigate several potential explanations for this finding, but fail to find empirical evidence supporting any of them. We also document that the false news shock had a persistent negative effect on the stock prices of other major airline companies. This is consistent with the view that contagion effects would have dominated competitive effects had the bankruptcy actually takenplace.

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@article{Carvalho_Klagge_Moench_JEF2011, title={The persistent effects of a false news shock}, author={Carvalho, Carlos and Klagge, Nicholas and Moench, Emanuel}, journal={Journal of Empirical Finance}, volume={18}, number={4}, pages={597--615}, year={2011}, publisher={Elsevier} }
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A Hierarchical Factor Analysis of US Housing Market Dynamics (with Serena Ng), Econometrics Journal, Vol. 14, February 2011.

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This paper studies the linkages between housing and consumption in the United States taking into account regional variation.We estimate national and regional housing factors from a comprehensive set of U.S. price and quantity data available at mixed frequencies and over different time spans. Our housing factors pick up the common components in the data and are less affected by the idiosyncratic noise in individual series. This allows us to get more reliable estimates of the consumption effects of housing market shocks. We find that shocks at the national level have large cumulative effects on retail sales in all regions. Though the effects of regional shocks are smaller, they are also significant. We analyse the driving forces of housing market activity by means of factor-augmented vector autoregressions. Our results show that lowering mortgage rates has a larger effect than a similar reduction of the federalfunds rate. Moreover, lower consumer confidence and stock prices can slow the recovery in the housing market.

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@article{Moench_Ng_Economj2011, title={A hierarchical factor analysis of US housing market dynamics}, author={Moench, Emanuel and Ng, Serena}, journal={The Econometrics Journal}, volume={14}, number={1}, pages={C1--C24}, year={2011}, publisher={Wiley Online Library} }
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Macro Risk Premium and Intermediary Balance Sheet Quantities (with Tobias Adrian and Hyun Song Shin), IMF Economic Review, Vol. 58 No. 1, July 2010.

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The macro risk premium measures the threshold return for real activity that receives funding from savers. The balance sheet conditions of financial intermediaries provide a window on the macro risk premium. The tightness of intermediaries’ balance sheet constraints determines their ‘‘risk appetite,’’ which in turn, determines the set of real projects that receive funding, and hence determines the supply of credit. Monetary policy affects risk appetite by changing intermediaries’ ability to leverage their capital. This paper estimates the time-varying risk appetite of financial intermediaries for the United States, Germany, United Kingdom, and Japan, and studies the joint dynamics of risk appetite with macroeconomic aggregates for the United States. The paper argues that risk appetite is an important indicator for monetary conditions.

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@article{Adrian_Moench_ShinIMFER2010, title={Macro risk premium and intermediary balance sheet quantities}, author={Adrian, Tobias and Moench, Emanuel and Shin, Hyun Song}, journal={IMF Economic Review}, volume={58}, number={1}, pages={179--207}, year={2010}, publisher={Springer} }
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Sectoral Price Data and Models of Price Setting (with Bartosz Maćkowiak and Mirko Wiederholt), Journal of Monetary Economics, Vol. 56, October 2009.

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In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price. The rational inattention model of Mackowiak and Wiederholt [2009a. Optimal sticky prices under rational inattention. American Economic Review 99, 769–803] can match this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, there is little variation across sectors in the speed of response of sectoral price indexes to sector-specific shocks. The rational inattention model matches this finding, while the Calvo model predicts too much cross-sectional variation.

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@article{Mackowiak_Moench_Wiederholt_JME2009, title={Sectoral price data and models of price setting}, author={Ma{\'c}kowiak, Bartosz and Moench, Emanuel and Wiederholt, Mirko}, journal={Journal of Monetary Economics}, volume={56}, pages={S78--S99}, year={2009}, publisher={Elsevier} }
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Forecasting the Yield Curve in a Data-Rich Environment: A No-Arbitrage Factor-Augmented VAR Approach,  Journal of Econometrics, Vol. 146 No. 1, September 2008.

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This paper suggests a term structure model which parsimoniously exploits a broad macroeconomic information set. The model uses the short rate and the common components of a large number of macroeconomic variables as factors. Precisely, the dynamics of the short rate are modeled with a Factor-Augmented Vector Autoregression and the term structure is derived using parameter restrictions impliedly no-arbitrage. The model has economic appeal and provides better out-of-sample yield forecast sat intermediate and long horizons than a number of previously suggested approaches. The forecast improvement is highly significant and particularly pronounced for short and medium-term maturities.

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@article{Moench_JoE2008, title={Forecasting the yield curve in a data-rich environment: A no-arbitrage factor-augmented VAR approach}, author={Moench, Emanuel}, journal={Journal of Econometrics}, volume={146}, number={1}, pages={26--43}, year={2008}, publisher={Elsevier} }
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Towards a Monthly Business Cycle Chronology for the Euro Area (with Harald Uhlig), Journal of Business Cycle Measurement and Analysis, Vol. 2 No. 1, May 2005.

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This paper is an exercise in dating the Euro area business cycle on a monthly basis. Using a quite flexible interpolation routine, we construct several monthly series of Euro area real GDP, and then apply the Bry-Boschan (1971) procedure. To account for the asymmetry in growth regimes and duration across business cycle phases, we propose to extend this method with a combined amplitude/phase-length criterion ruling out expansionary phases that are short and flat. Applying the extended procedure to US and Euro area data, we are able to replicate approximately the dating decisions of the National Bureau of Economic Research (NBER) and the Centre for Economic Policy Research (CEPR).

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@article{Moench_Uhlig_JBCMA2005, title={Towards a Monthly Business Cycle Chronology for the Euro Area}, author={M{\"o}nch, Emanuel and Uhlig, Harald}, journal={Journal of Business Cycle Measurement and Analysis}, pages={43}, year={2005} }
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Monetary Policy, Financial Markets, and the Macroeconomy.

Research and Advice

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Emanuel Mönch
ADDRESS & CONTACT

Frankfurt School of Finance & Management
Adickesallee 32-34
60322 Frankfurt am Main

Phone: +49 69 154008 214

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