We present a rational theory of SEOs that explains a pre-issuance price run-up, a negative announcement effect, and long-run post-issuance underperformance. When SEOs finance investment in a real ...options framework, expected returns decrease endogenously because growth options are converted into assets in place. Regardless of their risk, the new assets are less risky than the options they replace. Although both size and book-to-market effects are present, standard matching procedures fail to fully capture the dynamics of risk and expected return. We calibrate the model and show that it closely matches the primary features of SEO return dynamics.
We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999), but we introduce to the ...investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book-to-market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data.
Multifrequency news and stock returns Fisher, Adlai Julian; Calvet, Laurent E
Journal of financial economics,
10/2007, Letnik:
86, Številka:
1
Journal Article
Recenzirano
Odprti dostop
Equity prices are driven by shocks with persistence levels ranging from intraday horizons to several decades. To accommodate this diversity, we introduce a parsimonious equilibrium model with regime ...shifts of heterogeneous durations in fundamentals, and estimate specifications with up to 256 states on daily aggregate returns. The multifrequency equilibrium has higher likelihood than the Campbell and Hentschel 1992. No news is good news: an asymmetric model of changing volatility in stock returns. Journal of Financial Economics 31, 281-318 specification, while producing volatility feedback 10 to 40 times larger. Furthermore, Bayesian learning about volatility generates a novel trade-off between skewness and kurtosis as information quality varies, complementing the uncertainty channel e.g., Veronesi, 1999. Stock market overreaction to bad news in good times: a rational expectations equilibrium model. Review of Financial Studies 12, 975-1007. Economies with intermediate information best match daily returns. PUBLICATION ABSTRACT
This paper specifies term structure dynamics by a recursive cascade of heterogeneously persistent factors. The cascade naturally orders economic shocks by their adjustment speeds, and generates ...smooth interest-rate curves in closed form. For a class of specifications, the number of parameters is invariant to the size of the state space, and the term structure converges to a stochastic limit as the state dimension goes to infinity. High-dimensional specifications fit observed term structure almost perfectly, match the observed low correlation between movements in different maturities, and produce stable interest-rate forecasts that outperform lower-dimensional specifications.
We introduce a tractable class of multi-factor price processes with regime-switching stochastic volatility and jumps, which flexibly adapt to changing market conditions and permit fast option ...pricing. A small set of structural parameters, whose dimension is invariant to the number of factors, fully specifies the joint dynamics of the underlying asset and options implied volatility surface. We develop a novel particle filter for efficiently extracting the latent state from joint S&P 500 returns and options data. The model outperforms standard benchmarks in- and out-of-sample, and remains robust even in the wake of seemingly large discontinuities such as the recent financial crisis.
We implement a multifrequency volatility decomposition of three exchange rates and show that components with similar durations are strongly correlated across series. This motivates a bivariate ...extension of the Markov-Switching Multifractal (MSM) introduced in Calvet and Fisher (J. Econ. 105 (2001) 27, J. Financ. Econ. 2 (2004) 49). Bivariate MSM is a stochastic volatility model with a closed-form likelihood. Estimation can proceed by maximum likelihood for state spaces of moderate size, and by simulated likelihood via a particle filter in high-dimensional cases. We estimate the model and confirm its main assumptions in likelihood ratio tests. Bivariate MSM compares favorably to a standard multivariate GARCH both in- and out-of-sample. A parsimonious multifrequency factor structure is finally proposed for multivariate settings with potentially many assets.
This paper develops analytical methods to forecast the distribution of future returns for a new continuous-time process, the Poisson multifractal. The process captures the thick tails, volatility ...persistence, and moment scaling exhibited by many financial time series. It can be interpreted as a stochastic volatility model with multiple frequencies and a Markov latent state. We assume for simplicity that the forecaster knows the true generating process with certainty but only observes past returns. The challenge in this environment is long memory and the corresponding infinite dimension of the state space. We introduce a discretized version of the model that has a finite state space and an analytical solution to the conditioning problem. As the grid step size goes to zero, the discretized model weakly converges to the continuous-time process, implying the consistency of the density forecasts.
This paper investigates the multifractal model of asset returns (MMAR), a class of continuous-time processes that incorporate the thick tails and volatility persistence exhibited by many financial ...time series. The simplest version of the MMAR compounds a Brownian motion with a multifractal time-deformation. Prices follow a semi-martingale, which precludes arbitrage in a standard two-asset economy. Volatility has long memory, and the highest finite moments of returns can take any value greater than 2. The local variability of a sample path is highly heterogeneous and is usefully characterized by the local Hölder exponent at every instant. In contrast with earlier processes, this exponent takes a continuum of values in any time interval. The MMAR predicts that the moments of returns vary as a power law of the time horizon. We confirm this property for Deutsche mark/U.S. dollar exchange rates and several equity series. We develop an estimation procedure and infer a parsimonious generating mechanism for the exchange rate. In Monte Carlo simulations, the estimated multifractal process replicates the scaling properties of the data and compares favorably with some alternative specifications.
We study the distinct impacts of own and rival actions on risk and return when firms strategically compete in the product market. Contrary to simple intuition, a competitor’s options to adjust ...capacity reduce own-firm risk. For example, if a rival possesses a growth option, an increase in industry demand directly enhances profits but also encourages value-reducing competitor expansion. The rival option thus acts as a natural hedge. Within the industry, we obtain endogenous differences in expected returns. In a leader-follower equilibrium, own-firm and competitor risks and required returns move together through contractions and oppositely during expansions, providing testable new predictions.
When a corporation issues debt with a fixed nominal coupon, the real value of future payments decreases with the price level. Forward-looking corporate default decisions therefore depend on monetary ...policy through its impact on expected inflation. We build a general equilibrium economy with deadweight bankruptcy costs that demonstrates how nominal rigidities in corporate debt create an important role for monetary policy even in the absence of standard nominal frictions such as staggered price setting in the output market. Under a passive nominal interest rate peg, the direct effects of a negative productivity shock combine with deflation to produce strong incentives for corporate default. A debt-deflationary spiral results when there are real costs of financial distress. Inflation targeting eliminates this amplification mechanism but full inflation targeting requires permitting the nominal interest rate to depend explicitly on credit market conditions.
► We build a general equilibrium economy with corporate default. ► Corporation issues long-term debt with a fixed nominal coupon. ► Corporate default decisions depend on monetary policy through its impact on expected inflation. ► Deadweight bankruptcy costs provide an important role for monetary policy. ► A debt-deflationary spiral results when there are real costs of financial distress.
PDF
