CARLO AMBROGIO FAVERO

European Sovereign Debt Risk Management: the Role of an European Debt Agency
AMATO M., BELLONI E., FAVERO CA, GOBBI L., PRIVIERO L.

This Revision May 2023

This paper proposes the establishment of a European Debt Agency (EDA) as a tool for the efficient management of Eurozone, to address two primary risks: roll-over and sustainability risk. The proposed EDA would price its loans using a transparent formula that would anchor the price to fundamental economic factors. This approach would encourage fiscal discipline among Member States and avoid inefficient costs resulting from market price deviations from fundamentals, without resorting to debt mutualization.
In addition, the paper suggests that adopting flexible fiscal rules alongside the EDA could result in a smoother path towards debt stabilization, by mitigating the macroeconomic effects of excessive fluctuations in risk premia. The simulations indicate that this combination could offer a comprehensive strategy for managing sovereign debt in the Eurozone that would promote fiscal responsibility and stability.

JEL CODES: H12, H63, H81.
Keywords: European Debt Agency, European Safe Assets, Debt Management.

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Anomaly Predictability with the Mean-Variance Portfolio
FAVERO CARLO AMBROGIO, ALESSANDRO MELONE, ANDREA TAMONI

This Revision July 2023

According to no-arbitrage, risk-adjusted returns should be unpredictable. Using several prominent factor models and a large cross-section of anomalies, we uncover a striking fact: past pricing errors predict future risk-adjusted anomaly returns. We show that past pricing errors can be interpreted as deviations of an anomaly price from the mean-variance efficient portfolio. Price deviations constitute an anomaly-specific predictor, endogenous to the given factor model, thus providing direct evidence for conditional misspecification. A zero-cost investment strategy using price deviations generates positive alphas.
     Our findings suggest that cross-sectional models should incorporate information in prices to capture the time-series dynamics of returns.

Keywords: Factor Models, Return Predictability, Conditional Misspecification, Mean-Variance
Portfolio, SDF
JEL codes: C38, G12, G17.

 

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Macro Trends and Factor Timing
FAVERO CARLO AMBROGIO, A. MELONE and A. TAMONI

Version March 2023

This paper studies the link between macroeconomic variables and asset prices. We document two
novel empirical facts. First, the price of well-known systematic (characteristics-based) risk factors,
like SMB and HML, is anchored to macroeconomic trends related to inflation and real economic
activity. Second, factor prices temporarily deviate from their macro trends generating factor risk
premia predictability. Intuitively, future factor returns are low (high) when prices are above (below)
their level warranted by the macroeconomy. We provide evidence for this mechanism for different
factors, both in- and out-of-sample. This predictability translates into economic gains from factor
timing for investors. Finally, our approach leads to an estimated stochastic discount factor that
displays sizable time variation when benchmarked against standard long-run risk or habit models.

Keywords: Factor Models, Macro–Finance, Factor Timing, SDF, Risk Management.
JEL codes: C38, G11, G12, G17.

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Restarting the economy while saving lives under Covid-19
FAVERO CARLO AMBROGIO, ICHINO ANDREA, RUSTICHINI ALDO

ABSTRACT

We provide, calibrate and test a realistic model of the spread of SARS-Cov-2 in an
economy with different risks related to age and sectors. The model considers hospital
congestion and response of individuals adjusting their behavior to the virus' spread.
We measure precisely the size of these effects using real data for Italy on intensive care
capacity and mobility decisions; thus our claim is that the tradeoffs we estimate are
quantitatively, rather than qualitatively, approximately correct.
We characterize the policies of containment of the epidemic that are efficient with
respect to number of fatalities and GDP loss. Prudent policies of gradual return to
work may save many lives with limited economic costs, as long as they differentiate
by age group and risk sector. More careful behavior of individuals induced by the
perceived cost of infection may contribute to further reduce fatalities.

 JEL-Code: I12, I18, D6, H84

 Keywords: Covid-19,SARS-Cov-2 SEIR model, post lockdown policies.
 

Press coverage: Il Foglio; Promarket; Bloomberg;  Liberioltre; Sole24ore; Politico; Corriere della sera; Financecue

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The Network Effects of Fiscal Adjustments
BRIGANTI E., FAVERO CA and M.KARAMYSHEVA

This Version November 2022

ABSTRACT

We study the effects of fiscal consolidations in the United States and their propagation in the production network. We use a narrative approach to identify fiscal adjustments which are exogenous to output fluctuations. Then we apply spatial econometric techniques to separate the total effect of fiscal adjustments into a direct and network component. We find that fiscal adjustments based on increased taxation  are more recessionary than those based on spending cuts. Moreover, one quarter of the difference in their total output effect is explained by the stronger network propagation of taxes relative to government spending.

Keywords: industrial networks, fiscal adjustment plans, output growth, applied spatial econometrics.

JEL codes : E60, E62.

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The Effect of Fiscal Consolidations: Theory and Evidence
ALESINA A., BARBIERO O., FAVERO CA, F.GIAVAZZI and M.PARADISI

This revision July 2018

Abstract: We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.

 

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Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns
Carlo A. Favero
(2005)

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The Predictive Power of the Yield Spread: further Evidence and a Structural Interpretation (Favero C.A., I.Kamynska and U.Soderstrom)
Carlo A. Favero with I. Kaminska and U.Soderstrom
(Jan 2005)

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Monetary-Fiscal Mix and Inflation Performance: Evidence from the U.S. (C.A. Favero and T.Monacelli)
Carlo A. Favero with Tommaso Monacelli
(revised January 2005)

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