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Tests of conditional asset pricing models in the Brazilian stock market

Bonomo, Marco Antônio Cesar; Garcia, René
Fonte: Escola de Pós-Graduação em Economia da FGV Publicador: Escola de Pós-Graduação em Economia da FGV
Tipo: Relatório
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In this paper, we test a version of the conditional CAPM with respect to a local market portfolio, proxied by the Brazilian stock index during the period 1976-1992. We also test a conditional APT modeI by using the difference between the 3-day rate (Cdb) and the overnight rate as a second factor in addition to the market portfolio in order to capture the large inflation risk present during this period. The conditional CAPM and APT models are estimated by the Generalized Method of Moments (GMM) and tested on a set of size portfolios created from individual securities exchanged on the Brazilian markets. The inclusion of this second factor proves to be important for the appropriate pricing of the portfolios.

Constructing Common-Factor Portfolios

Carrasco-Gutierrez, Carlos Enrique; Issler, João Victor
Fonte: Escola de Pós-Graduação em Economia da FGV Publicador: Escola de Pós-Graduação em Economia da FGV
Tipo: Relatório
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In this paper we construct common-factor portfolios using a novel linear transformation of standard factor models extracted from large data sets of asset returns. The simple transformation proposed here keeps the basic properties of the usual factor transformations, although some new interesting properties are further attached to them. Some theoretical advantages are shown to be present. Also, their practical importance is confi rmed in two applications: the performance of common-factor portfolios are shown to be superior to that of asset returns and factors commonly employed in the finance literature.

Leverage, Derivatives, and Asset Markets

Yang, David Cherngchiun
Fonte: Harvard University Publicador: Harvard University
Tipo: Thesis or Dissertation; text Formato: application/pdf
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This dissertation consists of three independent essays on the relationship between leverage, derivatives (especially, option securities), and asset markets. Chapter 1, "Does the Tail Wag the Dog? How Options Affect Stock Price Dynamics," demonstrates empirically that the existence and trading of financial options affects the price movements of their underlying assets, due to the implicit leverage in options and the hedging behavior of options sellers. These empirical results contrast with classical asset pricing where options instead derive their value from their underlying assets. Chapter 2, "Disagreement and the Option Stock Volume Ratio," examines a variable known as the option stock volume ratio, which prior work has documented to be a negative predictor of stock returns in the cross section. I propose an alternate explanation based on the behavioral finance literature on belief disagreement between investors. I show how my disagreement model makes predictions in line with prior empirical findings and can also better explain other stylized facts, which I document. Chapter 3, "Bond Fire Sales and Government Interventions," analyzes how a government should intervene in response to a fire sale in the bond market. I contrast the policies of the government directly purchasing financial securities vs the government offering leverage to the private sector to purchase securities.; Business Economics

Concentrated Capital Losses and the Pricing of Corporate Credit Risk

Siriwardane, Emil Nuwan
Fonte: Harvard University Publicador: Harvard University
Tipo: Research Paper or Report
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Using proprietary credit default swap (CDS) data from 2010 to 2014, I show that capital fluctuations for sellers of CDS protection are an important determinant of CDS spread movements. I first establish that markets are dominated by a handful of net protection sellers, with five sellers accounting for nearly half of all net selling. In turn, a reduction in their total capital increases CDS spreads. Capital fluctuations of the largest five sellers account for over 10 percent of the time-series variation in spread changes, a significant amount given that observable firm and macroeconomic factors account for less than 17 percent of variation during this time period. I then demonstrate that the concentration of sellers creates fragility — higher concentration results in more volatile risk premiums. I also employ a number of complementary approaches to address identification, such as using the 2011 Japanese tsunami as an exogenous shock to the risk bearing capacity of CDS traders. My findings are consistent with asset pricing models with limited investment capital, but also suggest that both the level and distribution of capital are crucial for accurately describing price dynamics.

An Equilibrium Model of Rare Event Premia

Liu, Jun; Pan, Jun; Wang, Tan
Fonte: MIT - Massachusetts Institute of Technology Publicador: MIT - Massachusetts Institute of Technology
Formato: 185651 bytes; application/pdf
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In this paper, we study the asset pricing implication of imprecise knowledge about rare events. Modeling rare events as jumps in the aggregate endowment, we explicitly solve the equilibrium asset prices in a pure-exchange economy with a representative agent who is averse not only to risk but also to model uncertainty with respect to rare events. Our results show that there are three components in the equity premium: the diffusive-risk premium, the jump-risk premium, and the "rare event premium." While the first two premia are generated by risk aversion, the last one is driven exclusively by uncertainty aversion. To dis-entangle the "rare event premium" from the standard risk-based premia, we examine the equilibrium prices of options with varying degree of moneyness. We consider models with different levels of uncertainty aversion -- including the one with zero uncertainty aversion, and calibrate all models to the same level of equity premium. Although observationally equivalent with respect to the equity market, these models provide distinctly different predictions on the option market. Without incorporating uncertainty aversion, the standard model cannot explain the extent of the premia implicit in options, particularly the prevalent "smirk" patterns documented in the index options market. In contrast...

A test of the capital asset pricing model on European stock markets

Fonte: MIT] Publicador: MIT]
Formato: 20 leaves; 1152669 bytes; application/pdf
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[by] Franco Modigliani, Gerald A. Pogue and Bruno H. Solnik.; Bibliography: leaf 19-20.

Asset Pricing in a Production Economy with Chew–Dekel Preferences

CASTRO, Rui; CAMPANALE, Claudio; CLEMENTI, Gian Luca
Fonte: Université de Montréal, Département de sciences économiques Publicador: Université de Montréal, Département de sciences économiques
Tipo: Artigo de Revista Científica
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In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew–Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein–Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model.

Exit and Save : Migration and Saving under Violence

Grun, Rebekka E.
Fonte: Banco Mundial Publicador: Banco Mundial
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This paper examines how households trade off migration and savings when subject to exogenous violence. The authors propose that households under violence decide jointly on migration and saving, because a higher asset-stock is more difficult to carry to a new place. When confronted with exogenous violence, households are expected to consider migration, and reduce their assets, both in order to reduce their exposure to violence, and to make migration easier. In some cases, after a migration decision has been taken, savings can increase as a function of violence to ensure a minimum bundle to carry. Empirical evidence from rich Colombian micro-data supports the conceptual framework for violence that carries a displacement threat, such as guerrilla attacks.

A class of non-expected utility risk measures and implications for asset allocations

van der Hoek, John; Sherris, Michael
Fonte: Elsevier Publicador: Elsevier
Tipo: Artigo de Revista Científica
Publicado em //2001 Português
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This paper discusses a class of risk measures developed from a risk measure recently proposed for insurance pricing. This paper reviews the distortion function approach developed in the actuarial literature for insurance risk. The proportional hazards transform is a particular case. The relationship between this approach to risk and other approaches including the dual theory of choice under risk is discussed. A new class of risk measures with suitable properties for asset allocation based on the distortion function approach to insurance risk is developed. This measure treats upside and downside risk differently. Properties of special cases of the risk measure and links to conventional portfolio selection risk measures are discussed.; http://www.elsevier.com/wps/find/journaldescription.cws_home/505554/description#description; John van der Hoek and Michael Sherris; Copyright © 2001 Elsevier Science B.V. All rights reserved.

A general equilibrium approach to the stock returns and real activity relationship

Rodríguez, Rosa; Restoy, Fernando; Peña Sánchez de Rivera, Juan Ignacio
Fonte: Universidade Carlos III de Madrid Publicador: Universidade Carlos III de Madrid
Tipo: Trabalho em Andamento Formato: application/pdf
Publicado em /08/1997 Português
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This paper brings together two separate and important topics in finance: the predictability of aggregated stock returns and the intertemporal asset pricing models. We present empirical evidence about the predictability of stock returns with a sample of OECD economies and investigate whether such evidence is consistent with a simple general equilibrium model. Our framework allow us to formalize the extensively documented empirical relationship between asset returns and real activity. The principal parameters in this relationship are the relative risk aversion and the elasticity of intertemporal substitution for the first moment of the returns and only the elasticity of substitution for the second moments. Except for the United States annual case, the puzzle of volatility remains in our model.

Managers, Investors, and Crises : Mutual Fund Strategies in Emerging Markets

Kaminsky, Graciela; Lyons, Richard; Schmukler, Sergio
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Policy Research Working Paper; Publications & Research
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The authors address the trading strategies of mutual funds in emerging markets. The data set they develop permits analyses of these strategies at the level of individual portfolios. A methodologically novel feature of their analysis: they disentangle the behavior of fund managers from that of investors. For both managers and investors, they strongly reject the 0 hypothesis of no momentum trading. Funds' momentum trading is positive: they systematically buy winners and sell losers. Contemporaneous momentum trading (buying current winners and selling current losers) is stronger during crises, and stronger for fund investors than for fund managers. Lagged momentum trading (buying past winners and selling past losers) is stronger during noncrises, and stronger for fund managers. Investors also engage in contagion trading-selling assets from one country when asset prices fall in another. These findings are based on data about mutual funds that represent only 10 percent of the market capitalization in the countries considered. Were it a larger share of the market...

Learning, dynamics of beliefs, and asset pricing

Adrian, Tobias, 1971-
Fonte: Massachusetts Institute of Technology Publicador: Massachusetts Institute of Technology
Tipo: Tese de Doutorado Formato: 139 p.; 4647112 bytes; 4646916 bytes; application/pdf; application/pdf
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In the first chapter, I study the impact of statistical arbitrage on equilibrium asset prices. Arbitrageurs have to learn about the long-run behavior of the stock price process. They condition their investment strategy on the observation of price and volume. The learning process of the statistical arbitrageurs leads to an optimal trading strategy that can be upward sloping in prices. The presence of privately informed investors makes the equilibrium price dependent on the history of trading volume. The response of prices to news is nonlinear, and little news can have large effects in some ranges of the prices. In the second chapter, together with Francesco Franzoni, we develop an equilibrium model of learning about time-varying risk factor loadings. In the model, CAPM holds from investors' ex-ante perspective. However, positive mispricing can be observed when investors' expectations of beta are above ex-post realizations. This model is used to explain the 'value premium'. In a learning framework, the fact that value stocks used to be more risky in the past leads to investors' expectations of beta that exceed the estimates from more recent samples. We propose an empirical methodology that takes investors' expectations of the factor loadings explicitly into account when estimating betas. With the adjusted estimates of beta...

Asset Pricing and Earnings Fluctuations in a Dynamic Corporate Economy

Ritter, William Gordon
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 07/04/2004 Português
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We give a new predictive mathematical model for macroeconomics, which deals specifically with asset prices and earnings fluctuations, in the presence of a dynamic economy involving mergers, acquisitions, and hostile takeovers. Consider a model economy with a large number of corporations $C_1, C_2, ..., C_n$ of different sizes. We ascribe a degree of randomness to the event that any particular pair of corporations $C_i, C_j$ might undergo a merger, with probability matrix $p_{ij}$. Previous random-graph models set $p_{ij}$ equal to a constant, while in a real-world economy, $p_{ij}$ is a complicated function of a large number of variables. We combine techniques of artificial intelligence and statistical physics to define a general class of mathematical models which, after being trained with past market data, give numerical predictions for certain quantities of interest including asset prices, earnings fluctuations, and merger/acquisition likelihood. These new models might reasonably be called ``cluster-size models.'' They partially capture the complicated dependence of $p_{ij}$ on economic factors, and generate usable predictions.

A new look at short-term implied volatility in asset price models with jumps

Mijatović, Aleksandar; Tankov, Peter
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
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We analyse the behaviour of the implied volatility smile for options close to expiry in the exponential L\'evy class of asset price models with jumps. We introduce a new renormalisation of the strike variable with the property that the implied volatility converges to a non-constant limiting shape, which is a function of both the diffusion component of the process and the jump activity (Blumenthal-Getoor) index of the jump component. Our limiting implied volatility formula relates the jump activity of the underlying asset price process to the short end of the implied volatility surface and sheds new light on the difference between finite and infinite variation jumps from the viewpoint of option prices: in the latter, the wings of the limiting smile are determined by the jump activity indices of the positive and negative jumps, whereas in the former, the wings have a constant model-independent slope. This result gives a theoretical justification for the preference of the infinite variation L\'evy models over the finite variation ones in the calibration based on short-maturity option prices.

Pricing options in illiquid markets: optimal systems, symmetry reductions and exact solutions

Bordag, Ljudmila A.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 03/02/2010 Português
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We study a class of nonlinear pricing models which involves the feedback effect from the dynamic hedging strategies on the price of asset introduced by Sircar and Papanicolaou. We are first to study the case of a nonlinear demand function involved in the model. Using a Lie group analysis we investigate the symmetry properties of these nonlinear diffusion equations. We provide the optimal systems of subalgebras and the complete set of non-equivalent reductions of studied PDEs to ODEs. In most cases we obtain families of exact solutions or derive particular solutions to the equations.; Comment: 14 pages

Homogeneously Saturated Model for Development in Time of the Price of an Asset

Cassidy, Daniel T.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 18/01/2013 Português
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The time development of the price of a financial asset is considered by constructing and solving Langevin equations for a homogeneously saturated model, and for comparison, for a standard model and for a logistic model. The homogeneously saturated model uses coupled rate equations for the money supply and for the price of the asset, similar to the coupled rate equations for population inversion and power density in a simple model of a homogeneously broadened laser. Predictions of the models are compared for random numbers drawn from a Student's t-distribution. It is known that daily returns of the DJIA and S&P 500 indices are fat tailed and are described well by Student's t-distributions over the range of observed values. The homogeneously saturated model shows returns that are consistent with daily returns for the indices (in the range of -30% to +30%) whereas the standard model and the logistic model show returns that are far from consistent with observed daily returns for the indices.; Comment: 24 pages, 6 figures

A fast Fourier transform method for Mellin-type option pricing

Manuge, D. J.; Kim, P. T.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
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Analytical pricing formulas and Greeks are obtained for European and American basket put options using Mellin transforms. We assume assets are driven by geometric Brownian motion which exhibit correlation and pay a continuous dividend rate. A novel approach to numerical Mellin inversion is achieved via the fast Fourier transform, enabling the computation of option values at equidistant log asset prices. Numerical accuracy is verified among existing methods for American call options.; Comment: 12 pages, 1 table

Asset pricing with partial-moments

Anthonisz, Sean
Fonte: Elsevier Publicador: Elsevier
Tipo: Artigo de Revista Científica
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I bridge the current pricing kernel framework with the early partial-moment pricing models of the beta framework, thereby reconciling and clarifying these bodies of literature. I argue for the inclusion of powers of min and max functions within a generalized kernel, and form a generalized beta model. Polynomial kernels and the kernel underpinning the partial-moment analogue of the Sharpe-Lintner CAPM are nested. I derive the partial-moment analogue to the Black CAPM, thus completing a theoretical parallelism, and compare the kernel-implied and canonical risk-neutral probabilities. A new model involving both lower and upper partial-moments, accommodating various kernel shapes present in the literature, is developed in the context of preference regularity conditions.

THE ADDITION OF THE MOMENT RISK FACTOR FOR THREE FACTORS ASSET PRICING MODEL, DEVELOPED BY FAMA & FRENCH, APPLIED TO THE BRAZILIAN STOCK MARKET; A ADIÇÃO DO FATOR DE RISCO MOMENTO AO MODELO DE PRECIFICAÇÃO DE ATIVOS DOS TRÊS FATORES DE FAMA & FRENCH APLICADO AO MERCADO ACIONÁRIO BRASILEIRO

Mussa, Adriano; Famá, Rubens; Santos, José Odálio dos
Fonte: Universidade de São Paulo. Faculdade de Economia, Administração e Contabilidade Publicador: Universidade de São Paulo. Faculdade de Economia, Administração e Contabilidade
Tipo: info:eu-repo/semantics/article; info:eu-repo/semantics/publishedVersion; ; ; ; ; ; Formato: application/pdf
Publicado em 14/01/2013 Português
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The objective of this article is to investigate the validity of the “four factors assets pricing model ”in theBrazilian stock market. This model is defined by the addition of the risk moment factor to the famous threefactors developed by Fama and French. Therefore, the four factors are: the market, as indicated by CapitalAsset Pricing Model (CAPM); the size of the enterprise, defined by the value of its net equity; the Book-toMarket rate (defined by the relation between the book value and market value); and the Moment, that is defined by the stocks valorization within a certain period of time. During this investigation it has utilized thesame methodology adopted by Fama and French (1993). Such survey focused on the shares traded throughthe Sao Paulo Stock Exchange (BOVESPA) between 1995 and 2006. The signification of each factor wastested using to statistic T of Student. The model e ectiveness was tested through coefficients of determinationR2 analysis of regressions timing. The research results proof that this model is applicable to the BrazilianStock Market, being superior to the Three Factors Model, and also to CAPM, while explaining the gains ofthe sampled shares. The relevance of each factor of risk varied in accordance with the characteristics ofeach portfolio.; O objetivo do presente artigo é investigar a validade do “Modelo de Precificação de Ativos dos Quatro Fatores” no mercado acionário brasileiro. Esse modelo é definido pela adição do Fator de Risco Momento ao Modelo dos Três Fatores de Fama e French. Dessa forma...

Labor income risk and asset returns

Julliard, Christian
Fonte: Christian Julliard Publicador: Christian Julliard
Tipo: Monograph; NonPeerReviewed Formato: application/pdf
Publicado em /05/2007 Português
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This paper shows, from the consumer’s budget constraint, that expected future labor income growth rates and the residuals of the cointegration relation among log consumption, log asset wealth and log current labor income (summarized by the variable cay of Lettau and Ludvigson (2001a)), should help predict U.S. quarterly stock market returns and explain the cross-section of average returns. I …nd that a) ‡uctuations in expected future labor income are a strong predictor of both real stock returns and excess returns over a Treasury bill rate, b) when this variable is used as conditioning information for the Consumption Capital Asset Pricing Model (CCAPM), the resulting linear factor model explains four …fth of the variation in observed average returns across the Fama and French (25) portfolios and prices correctly the small growth portfolio. The paper also …nds that about one third of the variance of returns is predictable, over a horizon of one year, using expected future labor income growth rates and cay jointly as forecasting variables.