Three papers on macroeconomics, asset pricing, and international trade

The first paper develops a multi-asset Intermediary Asset Pricing model. As in Haddad and Muir (2022), assets differ in their 'complexity', modeled here as an asset-specific information cost. More complex assets are more likely to be handled by intermediaries. As in Di Tella (2017), intermediaries and households are allowed to contract on observable aggregate TFP shocks, but not on idiosyncratic `uncertainty shocks'. Following Di Tella (2017), uncertainty shocks are modeled as innovations to the cross-sectional variance of firm-specific productivity shocks. The model makes two key predictions: (1) Idiosyncratic risk contributes more to risk premia than aggregate TFP shocks, and (2) Idiosyncratic risk is more important for complex assets. The second paper shows that idiosyncratic risk plays a significant role in asset pricing, particularly for more complex assets such as options, commodities, and foreign exchange. Idiosyncratic risk is measured using balance sheet data for 22 large financial intermediaries and quantified as the cross-sectional variance of the residuals from time-series regressions of individual firm equity ratios on the industry average equity ratio. I find that idiosyncratic risk varies significantly over time, jumping up during NBER recessions. Based on the work of Di Tella (2017) and Haddad and Muir (2022), I then include idiosyncratic risk as an additional pricing factor using a standard Fama-MacBeth panel data methodology. Seven asset categories are considered, ranging from the simple (e.g., stocks and bonds) to the more complex (e.g., options and CDSs). I find that idiosyncratic risk prices vary significantly over time, and are larger for more complex securities. The last paper investigates how rising geopolitical risk and the recent emphasis on reshoring and friend-sharing could change the global pattern of Foreign Direct Investment (FDI) and Portfolio Investment (FPI). A Geopolitical Risk Index and an Economic Uncertainty Index are used to measure the impact of geopolitical risk and supply chain disruptions. The results indicate that as a country's geopolitical risk increases, its inflow of FDI drops while the inflow of FPI increases slightly. This suggests that a portion of FDI withdrawn returns to the country in the form of portfolio investment, probably to take advantage of the rapid economic growth of the country.