Peter Va­pora­kis

The macroeconomy and financial markets

My research explores how the broader economy and financial markets are connected. I’m especially interest in how the macroeconomy affect stock prices, and what happens to financial markets when investors deviate from having rational expectations about the macroeconomy.

Hidden forces behind markets

Much like dark matter in physics, the economy and prices on financial assets are driven by forces that can’t be directly observed. We can only hope to detect these forces by how they influences things we can observe. In physics terms, macroeconomic and financial variables are shaped by “dark matter” that reveals itself only through its gravitational pull on observable data. I study how financial markets react to these unseen trends - and how people misjudge them.  

Inflation, economic activity and interest rates are influenced by slow-moving, unobserved trends. Making accurate forecasts of these variables is therefore  nearly impossible. My research shows how financial markets are shaped by distorted beliefs that stems from errors in detecting these unobservable forces. This helps investors identify where their forecasts go wrong.

In theory, stocks that are more sensitive to economic conditions should offer higher returns. But when we test this idea using real-world data it doesn’t hold. In response, economists have built more complex models that include factors we can’t observe directly. To these models, we rely on “proxies” for the hidden variables.  If those proxies are wrong, our tests give misleading results. My work shows when and why this happens, helping investors choose assets that are better protected against economic booms and busts.