We analyze exchange rates along with equity quotes for 3 German firms from New York (NYSE) and Frankfurt (XETRA) during overlapping trading hours to see where price discovery occurs and how stock ...prices adjust to an exchange rate shock. Findings include: (a) the exchange rate is exogenous with respect to the stock prices; (b) exchange rate innovations are more important in understanding the evolution of NYSE prices than XETRA prices; and (c) most (but not all) of the fundamental or random walk component of firm value is determined in Frankfurt.
In a parsimonious regime switching model, we find strong evidence that expected consumption growth varies over time. Adding inflation as a second variable, we uncover two states in which expected ...consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock-bond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Watcher
Wachter J (2013
) Can time-varying risk of rare disasters explain aggregate stock market volatility?
J. Finance
68(3):987–1035. implying that both the disaster and the long-run risk paradigm can be extended toward explaining movements in the stock-bond correlation.
This paper was accepted by Kay Giesecke, finance.
Funding:
We gratefully acknowledge research and financial support from the Leibniz Center for Financial Research SAFE (formerly Research Center SAFE, funded by the State of Hessen initiative for research LOEWE).
Supplemental Material:
The data files and online appendices are available at
https://doi.org/10.1287/mnsc.2022.4451
.
It has been documented that vertical customer–supplier links between industries are the basis for strong cross-sectional stock return predictability (Menzly and Ozbas, 2010). We show that robust ...predictability also arises from horizontal links between industries, i.e., from the fact that industries are competitors or offer products, which are substitutes for each other. These horizontally linked industries exhibit positively correlated fundamentals. The signal derived from this type of connectedness is the basis for significant alpha in sorted portfolio strategies, and informed investors take the related information into account when they form their portfolios. We thus provide evidence of return predictability based on a new type of economic links between industries not captured in previous studies.
•Horizontal connectedness generates robust return predictability.•A portfolio strategy based on horizontal links produces significant alpha.•Predictability is stronger for firms with lower share of institutional ownership.•Information regarding horizontal links is the basis of asset allocation decisions.
Volatility-of-Volatility Risk Huang, Darien; Schlag, Christian; Shaliastovich, Ivan ...
Journal of financial and quantitative analysis,
12/2019, Letnik:
54, Številka:
6
Journal Article
Recenzirano
Odprti dostop
We show that market volatility of volatility is a significant risk factor that affects index and volatility index option returns, beyond volatility itself. The volatility and volatility of volatility ...indices, identified model-free as the VIX and VVIX, respectively, are only weakly related to each other. Delta-hedged index and VIX option returns are negative on average and are more negative for strategies that are more exposed to volatility and volatility-of-volatility risks. Further, volatility and volatility of volatility significantly negatively predict future delta-hedged option payoffs. The evidence suggests that volatility and volatility-of-volatility risks are jointly priced and have negative market prices of risk.
Many modern macro finance models imply that excess returns on arbitrary assets are predictable via the price-dividend ratio and the variance risk premium of the aggregate stock market. We propose a ...simple empirical test for the ability of such a model to explain the cross-section of expected returns by sorting stocks based on the sensitivity of expected returns to these quantities. Models with only one uncertainty-related state variable, like the habit model or the long-run risks model, cannot pass this test. However, even extensions with more state variables mostly fail. We derive conditions under which models would be able to produce expected return patterns in line with the data and discuss various examples.
This paper was accepted by David Simchi-Levi, finance.
When estimating misspecified linear factor models for the cross-section of expected returns using GMM, the explanatory power of these models can be spuriously high when the estimated factor means are ...allowed to deviate substantially from the sample averages. In fact, by shifting the weights on the moment conditions, any level of cross-sectional fit can be attained. The mathematically correct global minimum of the GMM objective function can be obtained at a parameter vector that is far from the true parameters of the data-generating process. This property is not restricted to small samples, but rather holds in population. It is a feature of the GMM estimation design and applies to both strong and weak factors, as well as to all types of test assets.
The Leading Premium Croce, Mariano M; Marchuk, Tatyana; Schlag, Christian
The Review of financial studies,
08/2023, Letnik:
36, Številka:
8
Journal Article
Recenzirano
Abstract
In this paper, we consider conditional measures of lead-lag relations between aggregate growth and industry-level cash flow growth in the United States. Our results show that firms in ...leading industries pay an average annualized return 3.6$\%$ higher than that of firms in lagging industries. Using both time-series and cross-sectional tests, we estimate an annual pure timing premium ranging from 1.2$\%$ to 1.7$\%$. This finding can be rationalized in a model in which (a) agents price growth news shocks, and (b) leading industries provide valuable resolution of uncertainty about the growth prospects of lagging industries.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
Optimists and Pessimists in (In)Complete Markets Branger, Nicole; Konermann, Patrick; Schlag, Christian
Journal of financial and quantitative analysis,
12/2020, Letnik:
55, Številka:
8
Journal Article
Recenzirano
Odprti dostop
We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments when investors disagree about the likelihood of jumps and have recursive preferences. We ...consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters because the consumption claim resembles an insurance product against jump risk and effectively reproduces approximate spanning. In a long-run risk model with jumps in the long-run growth rate, market incompleteness affects speculation and investor survival. Jump and diffusive risks are more balanced regarding their importance, and therefore the consumption claim cannot reproduce approximate spanning.
We introduce implied volatility duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of ...stocks indicate that investors demand, on average, more than 5% return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that “late” stocks can only have higher expected returns than “early” stocks if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.
Managed portfolios that exploit positive first-order autocorrelation in monthly excess returns of equity factor portfolios produce large gains in Sharpe ratios. We document this finding for factor ...portfolios formed on the broad market, size, value, momentum, investment, profitability, and volatility. The value-added induced by factor management via short-term momentum is a robust empirical phenomenon that survives transaction costs and carries over to multi-factor portfolios. The novel strategy established in this work compares favorably to well-known timing strategies that employ e.g. factor volatility or factor valuation. For the majority of factors, our strategies appear successful especially in recessions and times of crisis.
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