In a model with heterogeneous-risk-aversion agents facing margin constraints, we show how securities' required returns increase in both their betas and their margin requirements. Negative shocks to ...fundamentals make margin constraints bind, lowering risk-free rates and raising Sharpe ratios of risky securities, especially for high-margin securities. Such a funding-liquidity crisis gives rise to "bases," that is, price gaps between securities with identical cash-flows but different margins. In the time series, bases depend on the shadow cost of capital, which can be captured through the interest-rate spread between collateralized and uncollateralized loans and, in the cross-section, they depend on relative margins. We test the model empirically using the credit default swap—bond bases and other deviations from the Law of One Price, and use it to evaluate central banks' lending facilities.
When a product of uncertain quality is first introduced, consumers may choose to strategically delay their purchasing decisions in anticipation of the product reviews of their peers. This paper ...investigates how the presence of social learning affects the strategic interaction between a dynamic-pricing monopolist and a forward-looking consumer population, within a simple two-period model. Our analysis yields three main insights. First, we find that the presence of social learning has significant structural implications for optimal pricing policies: In the absence of social learning, decreasing price plans are always preferred by the firm; by contrast, in the presence of social learning we find that (i) if the firm commits to a price path ex ante (preannounced pricing), an increasing price plan is typically announced, whereas (ii) if the firm adjusts price dynamically (responsive pricing), prices are initially low and may either rise or decline over time. Second, we establish that under both preannounced and responsive pricing, even though the social learning process exacerbates strategic consumer behavior (i.e., increases strategic purchasing delays), its presence results in an increase in expected firm profit. Third, we illustrate that, contrary to results reported in existing literature on strategic consumer behavior, in settings where social learning is significantly influential, preannounced pricing policies are generally not beneficial for the firm.
This paper was accepted by Yossi Aviv, operations management
.
We examine the pricing of both aggregate jump and volatility risk in the cross-section of stock returns by constructing investable option trading strategies that load on one factor but are orthogonal ...to the other. Both aggregate jump and volatility risk help explain variation in expected returns. Consistent with theory, stocks with high sensitivities to jump and volatility risk have low expected returns. Both can be measured separately and are important economically, with a two-standard-deviation increase in jump (volatility) factor loadings associated with a 3.5% to 5.1% (2.7% to 2.9%) drop in expected annual stock returns.
While much research uses multivariate GARCH to model volatility dynamics and risk measures, one particular type of multivariate GARCH model, GO-GARCH, has been underutilized. This paper uses DCC, ...ADCC and GO-GARCH to model volatilities and conditional correlations between emerging market stock prices, oil prices, VIX, gold prices and bond prices. A rolling window analysis is used to construct out-of-sample one-step-ahead forecasts of dynamic conditional correlations and optimal hedge ratios. In most of the situations we study, oil is the best asset to hedge emerging market stock prices. Hedge ratios from the ADCC model are preferred (most effective) for hedging emerging market stock prices with oil, VIX, or bonds. Hedge ratios estimated from the GO-GARCH are most effective for hedging emerging market stock prices with gold in some instances. These results are reasonably robust to choice of model refits, forecast length and distributional assumptions.
•Data on emerging market stock prices, oil, gold, VIX, and bonds•Compare GO-GARCH with DCC-GARCH•Compare dynamic conditional correlations•Compare hedge ratios•Oil best for hedging emerging market stock prices
Choosing factors Fama, Eugene F.; French, Kenneth R.
Journal of financial economics,
05/2018, Letnik:
128, Številka:
2
Journal Article
Recenzirano
Our goal is to develop insights about the maximum squared Sharpe ratio for model factors as a metric for ranking asset pricing models. We consider nested and non-nested models. The nested models are ...the capital asset pricing model, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (1) cash profitability versus operating profitability as the variable used to construct profitability factors, (2) long-short spread factors versus excess return factors, and (3) factors that use small or big stocks versus factors that use both.
Advancing digitisation has both welfare enhancing and welfare reducing effects. The increase in market transparency, the reduction of transaction costs and technologically induced reductions in costs ...of production have price reducing and welfare increasing consequences. Monopoly tendencies and high switching costs, on the other hand, can increase market prices and reduce social welfare. Hence, one of the central economic policy challenges is to find proper instruments of competition policy in order to prevent the exploitation of market power and to realise the price reducing and welfare increasing effects of ongoing digitisation. JEL Classification: D41, L12, O30 Das theoretische Ideal der Volkswirtschaftslehre ist das Modell der vollstandigen Konkurrenz. Wegen der hohen Anforderungen an dieses Modell gibt es in der Realitat nur wenige Markte, die diesem Ideal entsprechen. Die Digitalisierung kann die okonomische Realitat durch eine hohere Markttransparenz und verringerte Transaktionskosten naher an dieses idealtypische Konzept heranfuhren und damit die Wohlfahrt erhohen. Es ist aber auch denkbar, dass die Digitalisierung zu Monopolen oder neuen Informationsasymmetrien fuhrt, die eine starkere Abweichung von der vollstandigen Konkurrenz mit Wohlfahrtsverlusten bedeutet.
To attenuate an inherent errors-in-variables bias, portfolios are widely employed to test asset pricing models; but portfolios might mask relevant risk- or return-related features of individual ...stocks. We propose an instrumental variables approach that allows the use of individual stocks as test assets, yet delivers consistent estimates of ex post risk premiums. This estimator also yields well-specified tests in small samples. The market risk premium under the capital asset pricing model (CAPM) and the liquidity-adjusted CAPM, premiums on risk factors under the Fama–French three- and five-factor models, and the Hou et al. (2015) four-factor model are all insignificant after controlling for asset characteristics.
The ratio of gold to platinum prices (GP) reveals persistent variation in risk and proxies for an important economic state variable. GP predicts future stock returns in the time series, explains ...stock return variation in the cross-section, and is significantly correlated with option-implied tail risk measures. Contrary to conventional wisdom, gold prices fall in recessions, albeit by less than platinum prices. A model featuring recursive preferences, time-varying tail risk, and preference shocks for gold and platinum can account for asset pricing dynamics of equity, gold, and platinum markets, rationalize the return predictability, and explain why gold prices fall in bad times.
Asset pricing: A tale of night and day Hendershott, Terrence; Livdan, Dmitry; Rösch, Dominik
Journal of financial economics,
12/2020, Letnik:
138, Številka:
3
Journal Article
Recenzirano
The capital asset pricing model (CAPM) performs poorly overall, as market risk (beta) is weakly related to 24-h returns. This is because stock prices behave very differently with respect to their ...sensitivity to beta when markets are open for trading versus when they are closed. Stock returns are positively related to beta overnight, whereas returns are negatively related to beta during the trading day. These day-night relations hold for beta-sorted portfolios and individual stocks in the US and internationally as well as for industry and book-to-market portfolios and cash flow and discount rate beta-sorted portfolios. In addition to the change in slope of returns with respect to beta, the implied risk-free rate differs significantly between night and day. Consistent with this, returns on US Treasury futures differ significantly between night and day.
Betting against beta Frazzini, Andrea; Pedersen, Lasse Heje
Journal of financial economics,
January 2014, 2014-01-00, 20140101, Letnik:
111, Številka:
1
Journal Article
Recenzirano
Odprti dostop
We present a model with leverage and margin constraints that vary across investors and time. We find evidence consistent with each of the model's five central predictions: (1) Because constrained ...investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for US equities, 20 international equity markets, Treasury bonds, corporate bonds, and futures. (2) A betting against beta (BAB) factor, which is long leveraged low-beta assets and short high-beta assets, produces significant positive risk-adjusted returns. (3) When funding constraints tighten, the return of the BAB factor is low. (4) Increased funding liquidity risk compresses betas toward one. (5) More constrained investors hold riskier assets.
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