Please see guidance from Mark at Moodys in the text below. First, are comments on Fed policy and inflation. You can see that he would like to have a literature review on the effects of high inflation and interest rates on credit (corporate bonds) and equities. What should we expect when we have high inflation and high interest rates simultaneously?
Second are his comments on the war in Ukraine. Here you can do empirical work to examine the credit and equity price impacts of the events, breaking it down by country and sector.
We can schedule a meeting with Mark after you think about your approach and any questions that you may have.
For inflationary patterns, I have a less concrete idea about what the project should be. Perhaps thinking about the effects of unanticipated shocks in the short or long rate to growth firms reliant on future revenue streams. This is less in my wheelhouse, but I have always been curious about what the market has or has not already taken into account.
• For example, based on current trends, it would seem that the Fed’s aggressive monetary actions are a surprise (as were high inflation metrics), but to be quite frank, these were actions and results that even a simpleton like myself had anticipated since the monetary stimulus of 2020 was rolled out. Why it would then be surprising to the market is bewildering.
• In addition, what are the counteracting structural forces that affect firm performance under inflation and high interest rates? Certainly, a higher discount factor places less emphasis on future revenue streams, but the revenue streams in themselves will also be higher under inflation. What happens in equilibrium should be more nuanced and dictated by some real differences between firm operations. A literature review on this would be enormously helpful.
For the Ukrainian crisis, it would be helpful to have the students looks at equity and credit responses across different country x sector combinations. In particular, it would be nice to think about the following sector breakdown:
• Companies that depend on oil and raw materials as an input (e.g., Air Transportation, Machinery, Automotives)
• Companies that procure and distribute oil and raw materials (e.g., Oil Refining, Utilities)
• Financial companies
• Benchmark companies that are the plausibly least affected by the crisis and the complement of the previous three (e.g., Entertainment, Tech, Health Care, Real Estate, Consumer Services)
In terms of the timeline, looking at changes from before the start of the Ukrainian crisis (i.e., early-mid February) to some local peak of the equity response (i.e., March 8) might be interesting and a reasonable way to filter out noise from other factors.
Ultimately, it would be good to tie these patterns back to publicly available trade data, if the students get to that stage. It would be a good confirmation of results that I’ve seen if markets in the countries and sectors most sensitive to the Ukrainian crisis were also the ones that tended to rely most (either directly or indirectly) on Russian exports.
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