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A Parsimonious Macroeconomic Model For Asset Pricing
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Book Synopsis A Parsimonious Macroeconomic Model for Asset Pricing by : Fatih Guvenen
Download or read book A Parsimonious Macroeconomic Model for Asset Pricing written by Fatih Guvenen and published by . This book was released on 2009 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: In this paper, I study asset prices in a two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices that have been documented in the literature, such as a high equity premium; relatively smooth interest rates; procyclical variation in stock prices; and countercyclical variation in the equity premium, in its volatility, and in the Sharpe ratio. While the model also reproduces the long-horizon predictability of the equity premium, the extent of predictability is smaller than in the data. In this model, the risk-free asset market plays a central role by allowing the non-stockholders (who have low EIS) to smooth the fluctuations in their labor income. This process concentrates nonstockholders' aggregate labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. Finally, when it comes to business cycle performance the model's progress has been more limited: consumption is still too volatile compared to the US data, whereas investment is still too smooth. These are important areas for potential improvement in this framework
Book Synopsis A Parsimonious Macroeconomic Model for Asset Pricing by : Fatih Guvenen
Download or read book A Parsimonious Macroeconomic Model for Asset Pricing written by Fatih Guvenen and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A Parsimonious Macroeconomic Model for Asset Pricing by : Fatih Guvenen
Download or read book A Parsimonious Macroeconomic Model for Asset Pricing written by Fatih Guvenen and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Natural Expectations, Macroeconomic Dynamics, and Asset Pricing by : Andreas Fuster
Download or read book Natural Expectations, Macroeconomic Dynamics, and Asset Pricing written by Andreas Fuster and published by . This book was released on 2011 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: How does an economy behave if (1) fundamentals are truly hump-shaped, exhibiting momentum in the short run and partial mean reversion in the long run, and (2) agents do not know that fundamentals are hump-shaped and base their beliefs on parsimonious models that they fit to the available data? A class of parsimonious models leads to qualitatively similar biases and generates empirically observed patterns in asset prices and macroeconomic dynamics. First, parsimonious models will robustly pick up the short-term momentum in fundamentals but will generally fail to fully capture the long-run mean reversion. Beliefs will therefore be characterized by endogenous extrapolation bias and pro-cyclical excess optimism. Second, asset prices will be highly volatile and exhibit partial mean reversion--i.e., overreaction. Excess returns will be negatively predicted by lagged excess returns, P/E ratios, and consumption growth. Third, real economic activity will have amplified cycles. For example, consumption growth will be negatively auto-correlated in the medium run. Fourth, the equity premium will be large. Agents will perceive that equities are very risky when in fact long-run equity returns will co-vary only weakly with long-run consumption growth. If agents had rational expectations, the equity premium would be close to zero. Fifth, sophisticated agents--i.e., those who are assumed to know the true model--will hold far more equity than investors who use parsimonious models. Moreover, sophisticated agents will follow a counter-cyclical asset allocation policy. These predicted effects are qualitatively confirmed in U.S. data.
Book Synopsis Asset Pricing for Dynamic Economies by : Sumru Altug
Download or read book Asset Pricing for Dynamic Economies written by Sumru Altug and published by Cambridge University Press. This book was released on 2008-09-11 with total page 686 pages. Available in PDF, EPUB and Kindle. Book excerpt: This introduction to general equilibrium modelling takes an integrated approach to the analysis of macroeconomics and finance. It provides students, practitioners, and policymakers with an easily accessible set of tools that can be used to analyze a wide range of economic phenomena. Key features: • Provides a consistent framework for understanding dynamic economic models • Introduces key concepts in finance in a discrete time setting • Develops simple recursive approach for analyzing a variety of problems in a dynamic, stochastic environment • Sequentially builds up the analysis of consumption, production, and investment models to study their implications for allocations and asset prices • Reviews business cycle analysis and the business cycle implications of monetary and international models • Covers latest research on asset pricing in overlapping generations models and on models with borrowing constraints and transaction costs • Includes end-of-chapter exercises allowing readers to monitor their understanding of each topic Online resources are available at www.cambridge.org/altug_labadie
Book Synopsis “A” Parismonious Macroeconomic Model for Asset Pricing by : Fatih Guvenen
Download or read book “A” Parismonious Macroeconomic Model for Asset Pricing written by Fatih Guvenen and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Empirical Asset Pricing by : Wayne Ferson
Download or read book Empirical Asset Pricing written by Wayne Ferson and published by MIT Press. This book was released on 2019-03-12 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.
Book Synopsis Asset Pricing with Countercyclical Household Consumption Risk by : George M. Constantinides
Download or read book Asset Pricing with Countercyclical Household Consumption Risk written by George M. Constantinides and published by . This book was released on 2014 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents evidence that shocks to household consumption growth are negatively skewed, persistent, and countercyclical and play a major role in driving asset prices. We construct a parsimonious model in which heterogeneous households have recursive preferences and a single state variable drives the conditional cross-sectional moments of household consumption growth. We demonstrate, under certain conditions, the existence of equilibrium in such a heterogeneous-household economy. The estimated model provides a good fit for the moments of the cross-sectional distribution of household consumption growth and the unconditional moments of the risk free rate, equity premium, market price-dividend ratio, and aggregate dividend and consumption growth. The explanatory power of the model does not derive from possible predictability of aggregate dividend and consumption growth as these are intentionally modeled as i.i.d. processes. Consistent with empirical evidence, the model implies that the risk free rate and price-dividend ratio are pro-cyclical while the expected market return and the variance of the market return and risk free rate are countercyclical. Household consumption risk also explains the cross-section of excess returns.
Book Synopsis Asset Pricing Theory by : Costis Skiadas
Download or read book Asset Pricing Theory written by Costis Skiadas and published by Princeton University Press. This book was released on 2009-02-09 with total page 363 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asset Pricing Theory is an advanced textbook for doctoral students and researchers that offers a modern introduction to the theoretical and methodological foundations of competitive asset pricing. Costis Skiadas develops in depth the fundamentals of arbitrage pricing, mean-variance analysis, equilibrium pricing, and optimal consumption/portfolio choice in discrete settings, but with emphasis on geometric and martingale methods that facilitate an effortless transition to the more advanced continuous-time theory. Among the book's many innovations are its use of recursive utility as the benchmark representation of dynamic preferences, and an associated theory of equilibrium pricing and optimal portfolio choice that goes beyond the existing literature. Asset Pricing Theory is complete with extensive exercises at the end of every chapter and comprehensive mathematical appendixes, making this book a self-contained resource for graduate students and academic researchers, as well as mathematically sophisticated practitioners seeking a deeper understanding of concepts and methods on which practical models are built. Covers in depth the modern theoretical foundations of competitive asset pricing and consumption/portfolio choice Uses recursive utility as the benchmark preference representation in dynamic settings Sets the foundations for advanced modeling using geometric arguments and martingale methodology Features self-contained mathematical appendixes Includes extensive end-of-chapter exercises
Book Synopsis Dynamic Choice and Asset Markets by : Sumru Altug
Download or read book Dynamic Choice and Asset Markets written by Sumru Altug and published by . This book was released on 1994 with total page 396 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides thorough models that analyze pricing and costs of all commodities. It considers the consumers' risks and opportunities. The authors begin with the theoretical background and develop the topics by integrating real-world, testable implications. Dynamic Choice and Asset Markets will be of value to students of finance and macroeconomics as well as researchers and economists using asset pricing models.
Book Synopsis Macroeconomic Uncertainty and Asset Prices by : Hwagyun Kim
Download or read book Macroeconomic Uncertainty and Asset Prices written by Hwagyun Kim and published by . This book was released on 2011 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we measure the time-varying uncertainty of macroeconomic fluctuations and study its link to asset returns via a consumption-based asset pricing model. To this end, we introduce a stochastic volatility model employing a latent nonstationary common volatility with two asymptotic regimes and smooth transition between them. We define the common volatility factor extracted from consumption and dividend growth rates as the macroeconomic uncertainty and analyze its effects on asset prices using a model with the Epstein-Zin-Weil preferences. The presence of smooth transition in our volatility model creates another layer of uncertainty in macroeconomic fluctuations, and thus provides an additional channel that generates a sizable risk premium for even a small amount of the consumption volatility. The channel can play an important role in determining asset prices, especially if the perceived macroeconomic uncertainty unravels slowly. Our estimates for the risk aversion and elasticity of intertemporal substitution are both around two, and the simulation results show that the model matches the first and the second moments of market return and the risk-free rate, hence the equity premium.
Book Synopsis A Theory of Asset Pricing Based on Heterogeneous Information by : Elias Albagli
Download or read book A Theory of Asset Pricing Based on Heterogeneous Information written by Elias Albagli and published by . This book was released on 2011 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a theory of asset prices that emphasizes heterogeneous information as the main element determining prices of different securities. Our main analytical innovation is in formulating a model of noisy information aggregation through asset prices, which is parsimonious and tractable, yet flexible in the specification of cash flow risks. We show that the noisy aggregation of heterogeneous investor beliefs drives a systematic wedge between the impact of fundamentals on an asset price, and the corresponding impact on cash flow expectations. The key intuition behind the wedge is that the identity of the marginal trader has to shift for different realization of the underlying shocks to satisfy the market-clearing condition. This identity shift amplifies the impact of price on the marginal trader's expectations. We derive tight characterization for both the conditional and the unconditional expected wedges. Our first main theorem shows how the sign of the expected wedge (that is, the difference between the expected price and the dividends) depends on the shape of the dividend payoff function and on the degree of informational frictions. Our second main theorem provides conditions under which the variability of prices exceeds the variability for realized dividends. We conclude with two applications of our theory. First, we highlight how heterogeneous information can lead to systematic departures from the Modigliani-Miller theorem. Second, in a dynamic extension of our model we provide conditions under which bubbles arise -- National Bureau of Economic Research web site.
Book Synopsis Asset Pricing Models and Financial Market Anomalies by : Doron Avramov
Download or read book Asset Pricing Models and Financial Market Anomalies written by Doron Avramov and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article develops a framework that applies to single securities to test whether asset pricing models can explain the size, value, and momentum anomalies. Stock level beta is allowed to vary with firm-level size and book-to-market as well as with macroeconomic variables. With constant beta, none of the models examined capture any of the market anomalies. When beta is allowed to vary, the size and value effects are often explained, but the explanatory power of past return remains robust. The past return effect is captured by model mispricing that varies with macroeconomic variables.
Book Synopsis Essays on Asset Pricing, Debt Valuation, and Macroeconomics by : Ram Sai Yamarthy
Download or read book Essays on Asset Pricing, Debt Valuation, and Macroeconomics written by Ram Sai Yamarthy and published by . This book was released on 2017 with total page 260 pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation consists of three chapters which examine topics at the intersection of financial markets and macroeconomics. Two of the sections relate to the valuation of U.S. Treasury and corporate debt while the third understands the role of banking frictions on equity markets.More specifically, the first chapter asks the question, what is the role of monetary policy fluctuations for the macroeconomy and bond markets? To answer this question we design a novel asset-pricing framework which incorporates a time-varying Taylor rule for monetary policy, macroeconomic factors, and risk pricing restrictions from investor preferences. By estimating the model using U.S. term structure data, we find that monetary policy fluctuations significantly impact inflation uncertainty and bond risk exposures, but do not have a sizable effect on the first moments of macroeconomic variables. Monetary policy fluctuations contribute about 20% to the variation in bond risk premia. Models with frictions in financial contracts have been shown to create persistence effects in macroeconomic fluctuations. These persistent risks can then generate large risk premia in asset markets. Accordingly, in the second chapter, we test the ability that a particular friction, Costly State Verification (CSV), has to generate empirically plausible risk exposures in equity markets, when household investors have recursive preferences and shocks occur in the growth rate of productivity. After embedding these mechanisms into a macroeconomic model with financial intermediation, we find that the CSV friction is negligible in realistically augmenting the equity risk premium. While the friction slows the speed of capital investment, its contribution to asset markets is insignificant. The third chapter examines how firms manage debt maturity in the presence of investment opportunities. I document empirically that debt maturity tradeoffs play an important role in determining economic fluctuations and asset prices. I show at aggregate and firm levels that corporations lengthen their average maturity of debt when output and investment rates are larger. To explain these findings, I construct an economic model where firms simultaneously choose investment, short, and long-term debt. In equilibrium, long-term debt is more costly than short-term debt and is only used when investment opportunities present themselves in peaks of the business cycle.
Book Synopsis A Test of the Multi-factor Asset Pricing Model with the ASA-NBER Macroeconomic Forecasts by : Kiwoong Cheong
Download or read book A Test of the Multi-factor Asset Pricing Model with the ASA-NBER Macroeconomic Forecasts written by Kiwoong Cheong and published by . This book was released on 1988 with total page 196 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Stock Prices and Monetary Policy by : Paul De Grauwe
Download or read book Stock Prices and Monetary Policy written by Paul De Grauwe and published by CEPS. This book was released on 2008 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: The question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring has been hotly debated. This paper analyses this question using a behavioural macroeconomic model. This model generates bubbles and crashes. It analyses how 'leaning against the wind' strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. We find that such policies can be effective in reducing macroeconomic volatility, thereby improving the trade-off between output and inflation variability. The strength of this result, however, depends on the degree of credibility of the inflation-targeting regime. In the absence of such credibility, policies aiming at stabilising stock prices do not stabilise output and inflation.
Book Synopsis Machine Learning in Asset Pricing by : Stefan Nagel
Download or read book Machine Learning in Asset Pricing written by Stefan Nagel and published by Princeton University Press. This book was released on 2021-05-11 with total page 156 pages. Available in PDF, EPUB and Kindle. Book excerpt: A groundbreaking, authoritative introduction to how machine learning can be applied to asset pricing Investors in financial markets are faced with an abundance of potentially value-relevant information from a wide variety of different sources. In such data-rich, high-dimensional environments, techniques from the rapidly advancing field of machine learning (ML) are well-suited for solving prediction problems. Accordingly, ML methods are quickly becoming part of the toolkit in asset pricing research and quantitative investing. In this book, Stefan Nagel examines the promises and challenges of ML applications in asset pricing. Asset pricing problems are substantially different from the settings for which ML tools were developed originally. To realize the potential of ML methods, they must be adapted for the specific conditions in asset pricing applications. Economic considerations, such as portfolio optimization, absence of near arbitrage, and investor learning can guide the selection and modification of ML tools. Beginning with a brief survey of basic supervised ML methods, Nagel then discusses the application of these techniques in empirical research in asset pricing and shows how they promise to advance the theoretical modeling of financial markets. Machine Learning in Asset Pricing presents the exciting possibilities of using cutting-edge methods in research on financial asset valuation.
