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A Dynamic Asset Pricing Model With Time Varying Idiosyncratic Risk
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Book Synopsis A Dynamic Asset Pricing Model with Time-Varying Idiosyncratic Risk by : Paskalis Glabadanidis
Download or read book A Dynamic Asset Pricing Model with Time-Varying Idiosyncratic Risk written by Paskalis Glabadanidis and published by . This book was released on 2004 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper utilizes a state-of-the-art multivariate GARCH model to account for time-variation in idiosyncratic risk in improving the performance of the single-factor CAPM, the three factor Fama-French model and the four-factor Carhart model. I show how to incorporate time-variation in the second moments of the residuals in a very general way. When applied to the Fama and French (1993) size/book-to-market portfolio returns, I document a 50% reduction in the average absolute pricing error of this dynamic Fama-French model over the static one. In addition, I find that market betas of growth stocks increase during recessions while market betas of value stocks decrease during recessions and that HML betas of value stocks increase during recessions while HML betas of growth stocks decrease during recessions. Finally, for the Fama and French industry portfolios I find that the single-factor model outperforms the three and four factor models substantially both in their unconditional and conditional forms.
Book Synopsis A Dynamic Test of Conditional Asset Pricing Models by : Daniele Bianchi
Download or read book A Dynamic Test of Conditional Asset Pricing Models written by Daniele Bianchi and published by . This book was released on 2019 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: I use Bayesian tools to develop a dynamic testing methodology for conditional factor pricing models, in which time-varying betas, idiosyncratic risks, and factors risk premia are jointly estimated in a single step. Based on this framework, I test over fifty years of post-war monthly data some of the most common factor pricing models on size, book-to-market, and momentum deciles portfolios, both in the time series and in the cross section. The empirical results show that, a conditional specification of the recent five-factor model of Fama and French (2015) outperforms a set of theory-based competing linear pricing models along several dimensions.
Book Synopsis Asset Pricing with Time Varying Volatility by : Victor Ng
Download or read book Asset Pricing with Time Varying Volatility written by Victor Ng and published by . This book was released on 1989 with total page 216 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Time-varying Distributions of Returns, Nominal Interest Rates and Risk Premia in a Dynamic Asset Pricing Model by : Alberto Giovannini
Download or read book Time-varying Distributions of Returns, Nominal Interest Rates and Risk Premia in a Dynamic Asset Pricing Model written by Alberto Giovannini and published by . This book was released on 1986 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis International Asset Pricing Under Habit Formation and Idiosyncratic Consumption Risk by : Yuming Li
Download or read book International Asset Pricing Under Habit Formation and Idiosyncratic Consumption Risk written by Yuming Li and published by . This book was released on 2003 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a consumption-based asset pricing model to explain the equity premium and riskfree puzzles as well as the predictability of returns in the international equity markets. We find that because the model entails idiosyncratic consumption risk which is higher than the aggregate consumption risk, the model helps lower the investor risk aversion needed to explain the mean equity premiums. In addition, because the model also allows for habit formation that disentangles intertemporal substitution from investor risk aversion, the model can resolve the riskfree rate puzzle. Further, as the timevarying individual investor risk aversion and the re-distribution of wealth among heterogeneous investors are contributing factors to the time-varying equity premiums, the model explains larger portions of the long-horizon predictability for many countries' equity markets and the world market portfolio than the world representative-agent model. In contrast, the power utility model with or without idiosyncratic consumption risk fails to explain the level of the real riskfree rate or the predictability of returns.
Book Synopsis Rational Pessimism, Rational Exuberance, and Asset Pricing Models by : Ravi Bansal
Download or read book Rational Pessimism, Rational Exuberance, and Asset Pricing Models written by Ravi Bansal and published by . This book was released on 2007 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper estimates and examines the empirical plausibiltiy of asset pricing models that attempt to explain features of financial markets such as the size of the equity premium and the volatility of the stock market. In one model, the long run risks model of Bansal and Yaron (2004), low frequency movements and time varying uncertainty in aggregate consumption growth are the key channels for understanding asset prices. In another, as typified by Campbell and Cochrane (1999), habit formation, which generates time-varying risk-aversion and consequently time-variation in risk-premia, is the key channel. These models are fitted to data using simulation estimators. Both models are found to fit the data equally well at conventional significance levels, and they can track quite closely a new measure of realized annual volatility. Further scrutiny using a rich array of diagnostics suggests that the long run risk model is preferred.
Book Synopsis Asset Prices and Time-Varying Risk by : Robert P. Flood
Download or read book Asset Prices and Time-Varying Risk written by Robert P. Flood and published by . This book was released on 2006 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: Observers have often characterized asset markets as being subject to periods of tranquility and periods of turbulence. Until recently, however, researchers were unable to produce closed-form asset pricing formulas in a model environment of time-varying risk. Some work by Abel provided us with the insights needed to produce such formulas. This paper gives a exposition of how to develop the formulas in an environment where the formulas may by obtained using a simple extension of standard tools.While the paper is intended mainly as an exposition of new work, it also contains a report on the asset market effect of fiscal reform. It is found that entering a period of weak coordination between government spending and taxing (tax rate) policy is good for stock prices.
Book Synopsis Financial Markets and the Real Economy by : John H. Cochrane
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Book Synopsis Time-Varying Conditional Covariances in Tests of Asset Pricing Models by : Campbell R. Harvey
Download or read book Time-Varying Conditional Covariances in Tests of Asset Pricing Models written by Campbell R. Harvey and published by . This book was released on 2005 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes tests of asset pricing models that allow for time variation in conditional covariances. The evidence indicates that the conditional covariances do change through time. Estimates of the expected excess return on the market divided by the variance of the market (reward-to-risk ratio) are presented for the Sharpe-Lintner CAPM, as well as a number of tests of the model specification. The patterns of the pricing errors through time suggest the model's inability to capture the dynamic behavior of asset returns. This is the working paper version of my 1989 Journal of Financial Economics article.
Book Synopsis Nonparametric Estimation of the Time-varying Sharpe Ratio in Dynamic Asset Pricing Models by : Peter Woehrmann
Download or read book Nonparametric Estimation of the Time-varying Sharpe Ratio in Dynamic Asset Pricing Models written by Peter Woehrmann and published by . This book was released on 2005 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Asset Pricing with Return Asymmetries by : Hugues Langlois-Bertrand
Download or read book Asset Pricing with Return Asymmetries written by Hugues Langlois-Bertrand and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "This thesis consists of three essays about the impact on asset prices of return asymmetries. In the first essay, I investigate the dynamic properties of widely used U.S. equity risk factors such as size, value, and momentum. These factors display significant return asymmetries as well as time-varying dependence, which is especially striking since their linear unconditional cross-correlations are near zero. Therefore, an analysis based only on linear correlations drastically overstates the diversification benefits offered by these risk factors. I propose a novel econometric methodology to capture dynamic dependence and multivariate asymmetries, and I show that these features have a significant impact on optimal portfolio allocations, as well as on risk measures.The second essay answers an important question: Has financial integration eroded the benefits of international diversification? Using an extension of the methodology used in the first essay, I can capture the evolution over time of dependence in a large cross-section of developed and emerging equity markets. Correlations and tail dependence have significantly increased for both groups of countries, but tail dependence in emerging markets is still relatively low. Hence, international diversification benefits have reduced over time, but emerging markets still offer important benefits especially during large market downturns.In the third essay, I explore the theoretical implications of these return asymmetries in a rational framework. Using a distribution related to the one used in the first two essays, I derive an asset pricing model that incorporates both systematic and idiosyncratic return asymmetries. Systematic asymmetry can have a positive or negative risk premium depending on the asymmetry of the market portfolio, whereas idiosyncratic asymmetry always commands a negative risk premium. In the empirical section, I find that systematic and idiosyncratic asymmetries help explain the variation in expected returns for U.S. and international equity markets, government bonds, currencies, and commodities. Therefore, I provide a risk-based explanation of expected returns using both systematic and idiosyncratic asymmetries, and contribute to our understanding of asset prices in different markets." --
Book Synopsis Climbing and Falling Off the Ladder by : Lawrence Schmidt
Download or read book Climbing and Falling Off the Ladder written by Lawrence Schmidt and published by . This book was released on 2016 with total page 105 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes state-dependent, idiosyncratic tail risk as a key driver of asset prices. I provide new evidence on the importance of tail events in explaining the shape of the idiosyncratic distribution of income growth rates and its evolution over time. I then formalize its role within a tractable affine, jump-diffusion asset pricing framework with recursive preferences, heterogeneous agents and incomplete markets, making my results immediately applicable to a wide class of existing models for aggregate dynamics. Next, I demonstrate its importance using a calibrated model in which agents are exposed to a time-varying probability of experiencing a rare, idiosyncratic disaster. The model, whose parameters are disciplined by the data, matches the level and dynamics of the equity premium. Empirically, stock returns are highly informative about labor market event risk, and, consistent with the model's predictions, initial claims for unemployment, a proxy for labor market uncertainty, is a highly robust predictor of returns.
Book Synopsis Time-Varying Asset Pricing Models in the Context of Segmented Markets by : Chris Bilson
Download or read book Time-Varying Asset Pricing Models in the Context of Segmented Markets written by Chris Bilson and published by . This book was released on 2002 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores and tests two multi-factor asset pricing models in an international context. One model focuses only on local risk factors and therefore assumes that the market is completely segmented. The other model focuses only on global risk factors and assumes that the market is fully integrated. The models incorporate time-variation in both the risk exposures and risk premia. The models are applied in cross-section to a range of developed and emerging markets so that varying levels of integration are examined. Expected returns are formed using time-varying estimates of risk premia that allow for out-of-sample testing. Using a range of performance metrics, the findings show that returns in developed markets are better approximated by a global pricing model, whereas returns in emerging markets are better represented by a local pricing model. These results are found to be generally robust to a range of research design issues.
Book Synopsis Tracing Tails - Large Idiosyncratic Income Shocks in a Heterogeneous Agent Asset Pricing Model by : Tobias Langen
Download or read book Tracing Tails - Large Idiosyncratic Income Shocks in a Heterogeneous Agent Asset Pricing Model written by Tobias Langen and published by . This book was released on 2014 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: I present evidence that large individual income changes can help explaining the size and value premium in a cross-section of portfolio returns. I develop a tail risk measure, the Idiosyncratic Income Risk Factor and estimate it on US income data. The results show that the extreme income shocks vary with the state of the economy. In an augmented Consumption-Based Asset Pricing Model, the Idiosyncratic Income Risk Factor emerges as a priced factor when explaining a cross-section of returns of 25 portfolios sorted by size and book-to-market ratio. The findings support Krebs' (2004) critique of the Constantinides and Duffie (1996) idiosyncratic risk asset pricing model: central moments of the cross-sectional distribution of income cannot be used to test the implications of the Constantinides and Duffie (1996) model. I present evidence that supports the notion of a fat-tail-generating personal disaster process affecting asset prices.
Book Synopsis An Asset Pricing Model with Time-Varying Elasticity of Intertemporal Substitution by : Aleksandar Georgiev
Download or read book An Asset Pricing Model with Time-Varying Elasticity of Intertemporal Substitution written by Aleksandar Georgiev and published by . This book was released on 2004 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: The main message of this paper is that it is Elasticity of Intertemporal Substitution, which is at the heart of the asset pricing puzzles, not Risk Aversion. We illustrate that point, by first showing that under certainty a model, which allows for a separation of the two characteristics of preferences - the one in Epstein and Zin (1991), leads to a specification of the main pricing equation, which involves a measure of Elasticity of Intertemporal Substitution only and not a measure of Risk Aversion. We then resort to an approximation of the main asset pricing equation under uncertainty, to demonstrate the central role played by Elasticity of Intertemporal Substitution and to emphasize the importance of its variability. We illustrate that importance by showing that the model in Campbell and Cochrane (1999) is in fact based on time-varying Elasticity of Intertemporal Substitution rather then on time-varying Risk Aversion.The main contribution of the paper is to develop a discrete-time alternative to the two most popular recursive utility based asset pricing models. The model proposed in the paper, directly nests the standard one, while replicating and improving upon the two frequently cited advantages of the Epstein-Zin model. It allows for time-varying risk premia, associated with the two most popular asset pricing factors and it achieves separation of risk attitudes from attitudes towards time via constant relative risk aversion (CRRA) and time-varying Elasticity of Intertemporal Substitution.
Book Synopsis A Capital Asset Pricing Model with Time Varying Covariances by : Tim Bollerslev
Download or read book A Capital Asset Pricing Model with Time Varying Covariances written by Tim Bollerslev and published by . This book was released on 1986 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Predictability Implied by Consumption-Based Asset Pricing Models by : Jiun-Lin Chen
Download or read book The Predictability Implied by Consumption-Based Asset Pricing Models written by Jiun-Lin Chen and published by . This book was released on 2018 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The consumption-based models have a lack of predictive power for explaining variability of stock returns. This paper examines two well-known models, Campbell and Cochrane (1999)'s habit model and Bansal and Yaron (2004)'s long-run risks model, to see whether they produce a significant power of return predictability. For the habit model, empirical tests reveal that the state variable, the surplus consumption ratio, explains counter-cyclical time-varying expected returns. The long-run risks model also proves to explain that main sources of volatility in price-dividend ratio are a persistent and predictable consumption growth rate and fluctuating economic uncertainty. The models are also tested by following the work of Kirby (1998) whether they can explain the observed return predictability. Both models fail to generate any significant predictive power. The habit model is relatively strong in volatility, which implies that variation in expected excess return is largely attributable to the time-varying risk aversion.
