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Author : Christos Koulovatianos
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (756 download)
Download or read book Asset Pricing Under Rational Learning about Rare Disasters written by Christos Koulovatianos and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Federal Reserve Federal Reserve Board
Publisher : CreateSpace
ISBN 13 : 9781503231191
Total Pages : 34 pages
Book Rating : 4.2/5 (311 download)
Download or read book Learning, Rare Disasters, and Asset Prices written by Federal Reserve Federal Reserve Board and published by CreateSpace. This book was released on 2014-11-15 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this study, we examine how learning about disaster risk affects asset pricing in an endowment economy. We extend the literature on rare disasters by allowing for two sources of uncertainty: (1) the lack of historical data results in unknown parameters for the disaster process, and (2) the disaster takes time to unfold and is not directly observable. The model generates time variation in the risk premium through Bayesian updating of agents' beliefs regarding the likelihood and severity of disaster realization. The model accounts for the level and volatility of U.S. equity returns and generates predictability in returns.
Author : Yang K. Lu
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (864 download)
Download or read book Learning, Rare Disasters, and Asset Prices written by Yang K. Lu and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Yang K. Lu
Publisher :
ISBN 13 :
Total Pages : 35 pages
Book Rating : 4.:/5 (13 download)
Download or read book Learning, Rare Disasters, and Asset Prices written by Yang K. Lu and published by . This book was released on 2016 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: We incorporate joint learning about state and parameter into a consumption-based asset pricing model with rare disasters. Agents are uncertain whether a negative shock signals the onset of a disaster or how much long-term damage a disaster will cause and they update their beliefs over time. The interaction of state and parameter uncertainty increases the total amount of uncertainty and slows learning. Once the two types of uncertainty are both priced in asset prices, their joint effect enables our model to account for the level and volatility of U.S. equity returns without relying on exogenous variation in disaster risk or any realization of disaster shock in the data sample.
Author : Robert J. Barro
Publisher :
ISBN 13 :
Total Pages : 42 pages
Book Rating : 4.:/5 (19 download)
Download or read book Rare Disasters, Asset Prices, and Welfare Costs written by Robert J. Barro and published by . This book was released on 2007 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: A representative-consumer model with Epstein-Zin-Weil preferences and i.i.d. shocks, including rare disasters, accords with key asset-pricing observations. If the coefficient of relative risk aversion equals 3-4, the model accords with observed equity premia and risk-free real interest rates. If the intertemporal elasticity of substitution is greater than one, an increase in uncertainty lowers the price-dividend ratio for equity, whereas a rise in the expected growth rate raises this ratio. In a model with endogenous saving, more uncertainty lowers the saving ratio (because substitution effects dominate). The match with major features of asset pricing suggests that the model is a reasonable candidate for assessing the welfare cost of aggregate consumption uncertainty. In the baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by as much as 20% each year to eliminate the small chance of major economic collapses. The welfare cost from usual economic fluctuations is much smaller, though still important, corresponding to lowering GDP by around 1.5% each year.
Author : Jessica A. Wachter
Publisher :
ISBN 13 :
Total Pages : 64 pages
Book Rating : 4.:/5 (13 download)
Download or read book Learning with Rare Disasters written by Jessica A. Wachter and published by . This book was released on 2019 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial crises appear to have long-lasting effects, even after the crisis itself has past. This paper offers a simple explanation through Bayesian learning from rare events. Agents face a latent and time-varying probability of economic disaster. When a disaster occurs, learning results in greater effects on asset prices because agents update their probability of future disasters. Moreover, agents' belief that the disaster risk is high can rationally persist for years, even when it is in fact low. We generalize the model to allow for a noisy signal of the disaster probability. This generalized model explains excess stock market volatility together with negative skewness, effects that previous models in the literature struggle to explain.
Author : Joachim Grammig
Publisher :
ISBN 13 :
Total Pages : 52 pages
Book Rating : 4.:/5 (13 download)
Download or read book Consumption-Based Asset Pricing with Rare Disaster Risk - A Simulated Method of Moments Approach written by Joachim Grammig and published by . This book was released on 2018 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a simulated method of moments strategy to estimate a consumption-based asset pricing model (CBM) that accounts for the possibility of severe economic contractions, thereby providing a test of the rare disaster hypothesis and a re-evaluation of the empirical performance of the canonical CBM. Unlike in previous studies, the estimates of the investor preference parameters and the model-implied equity premium, mean risk-free rate, and market Sharpe ratio are economically plausible and precise. Accounting for rare disasters thus helps to restore the nexus between financial markets and the real economy that is implied by the CBM.
Author : Joachim Grammig
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (894 download)
Download or read book Consumption-based Asset Pricing with Rare Disaster Risk written by Joachim Grammig and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The rare disaster hypothesis suggests that the extraordinarily high postwar U.S. equity premium resulted because investors ex ante demanded compensation for unlikely but calamitous risks that they happened not to incur. Although convincing in theory, empirical tests of the rare disaster explanation are scarce. We estimate a disaster-including consumption-based asset pricing model (CBM) using a combination of the simulated method of moments and bootstrapping. We consider several methodological alternatives that differ in the moment matches and the way to account for disasters in the simulated consumption growth and return series. Whichever specification is used, the estimated preference parameters are of an economically plausible size, and the estimation precision is much higher than in previous studies that use the canonical CBM. Our results thus provide empirical support for the rare disaster hypothesis, and help reconcile the nexus between real economy and financial markets implied by the consumption-based asset pricing paradigm.
Author : Jerry Tsai
Publisher :
ISBN 13 :
Total Pages : 60 pages
Book Rating : 4.:/5 (93 download)
Download or read book Disaster Risk and Its Implications for Asset Pricing written by Jerry Tsai and published by . This book was released on 2015 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: After laying dormant for more than two decades, the rare disaster framework has emerged as a leading contender to explain facts about the aggregate market, interest rates, and financial derivatives. In this paper we survey recent models of disaster risk that provide explanations for the equity premium puzzle, the volatility puzzle, return predictability and other features of the aggregate stock market. We show how these models can also explain violations of the expectations hypothesis in bond pricing, and the implied volatility skew in option pricing. We review both modeling techniques and results and consider both endowment and production economies. We show that these models provide a parsimonious and unifying framework for understanding puzzles in asset pricing.
Author : John H. Cochrane
Publisher : Princeton University Press
ISBN 13 : 1400829135
Total Pages : 560 pages
Book Rating : 4.4/5 (8 download)
Download or read book Asset Pricing written by John H. Cochrane and published by Princeton University Press. This book was released on 2009-04-11 with total page 560 pages. Available in PDF, EPUB and Kindle. Book excerpt: Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
Author : Jantje Sönksen
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (119 download)
Download or read book Empirical Asset Pricing with Multi-period Disaster Risk written by Jantje Sönksen and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a simulation-based strategy to estimate and empirically assess a class of asset pricing models that account for rare but severe consumption contractions that can extend over multiple periods. Our approach expands the scope of prevalent calibration studies and tackles the inherent sample selection problem associated with measuring the effect of rare disaster risk on asset prices. An analysis based on postwar U.S. and historical multi-country panel data yields estimates of investor preference parameters that are economically plausible and robust with respect to alternative specifications. The estimated model withstands tests of validity; the model-implied key financial indicators and timing premium all have reasonable magnitudes. These findings suggest that the rare disaster hypothesis can help restore the nexus between the real economy and financial markets when allowing for multi-period disaster events.Our methodological contribution is a new econometric framework for empirical asset pricing with rare disaster risk.
Author :
Publisher : Elsevier
ISBN 13 : 0444633898
Total Pages : 749 pages
Book Rating : 4.4/5 (446 download)
Download or read book Handbook of Behavioral Economics - Foundations and Applications 1 written by and published by Elsevier. This book was released on 2018-09-27 with total page 749 pages. Available in PDF, EPUB and Kindle. Book excerpt: Handbook of Behavioral Economics: Foundations and Applications presents the concepts and tools of behavioral economics. Its authors are all economists who share a belief that the objective of behavioral economics is to enrich, rather than to destroy or replace, standard economics. They provide authoritative perspectives on the value to economic inquiry of insights gained from psychology. Specific chapters in this first volume cover reference-dependent preferences, asset markets, household finance, corporate finance, public economics, industrial organization, and structural behavioural economics. This Handbook provides authoritative summaries by experts in respective subfields regarding where behavioral economics has been; what it has so far accomplished; and its promise for the future. This taking-stock is just what Behavioral Economics needs at this stage of its so-far successful career. Helps academic and non-academic economists understand recent, rapid changes in theoretical and empirical advances within behavioral economics Designed for economists already convinced of the benefits of behavioral economics and mainstream economists who feel threatened by new developments in behavioral economics Written for those who wish to become quickly acquainted with behavioral economics
Author : Eric Barthalon
Publisher : Columbia University Press
ISBN 13 : 0231538308
Total Pages : 445 pages
Book Rating : 4.2/5 (315 download)
Download or read book Uncertainty, Expectations, and Financial Instability written by Eric Barthalon and published by Columbia University Press. This book was released on 2014-11-18 with total page 445 pages. Available in PDF, EPUB and Kindle. Book excerpt: Eric Barthalon applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests economic agents perceive the flow of clocks' time and forget the past at a context-dependent pace: rapidly in the presence of persistent and accelerating inflation and slowly in the event of the opposite situation. Barthalon recasts Allais's work as a general theory of "expectations" under uncertainty, narrowing the gap between economic theory and investors' behavior. Barthalon extends Allais's theory to the field of financial instability, demonstrating its relevance to nominal interest rates in a variety of empirical scenarios and the positive nonlinear feedback that exists between asset price inflation and the demand for risky assets. Reviewing the works of the leading protagonists in the expectations controversy, Barthalon exposes the limitations of adaptive and rational expectations models and, by means of the perceived risk of loss, calls attention to the speculative bubbles that lacked the positive displacement discussed in Kindleberger's model of financial crises. He ultimately extrapolates Allaisian theory into a pragmatic approach to investor behavior and the natural instability of financial markets. He concludes with the policy implications for governments and regulators. Balanced and coherent, this book will be invaluable to researchers working in macreconomics, financial economics, behavioral finance, decision theory, and the history of economic thought.
Author : Jantje Sönksen
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (1 download)
Download or read book Rare Disaster Risk and Asset Prices written by Jantje Sönksen and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Hui Chen
Publisher :
ISBN 13 :
Total Pages : 50 pages
Book Rating : 4.:/5 (635 download)
Download or read book Rare Disasters and Risk Sharing with Heterogeneous Beliefs written by Hui Chen and published by . This book was released on 2010 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Although the threat of rare economic disasters can have large effect on asset prices, difficulty in inference regarding both their likelihood and severity provides the potential for disagreements among investors. Such disagreements lead investors to insure each other against the types of disasters each one fears the most. Due to the highly nonlinear relationship between consumption losses in a disaster and the risk premium, a small amount of risk sharing can significantly attenuate the effect that disaster risk has on the equity premium. We characterize the sensitivity of risk premium to wealth distribution analytically. Our model shows that time variation in the wealth distribution and the amount of disagreement across agents can both lead to significant variation in disaster risk premium. It also highlights the conditions under which disaster risk premium will be large, namely when disagreement across agents is small or when the wealth distribution is highly concentrated in agents fearful of disasters. Finally, the model predicts an inverse U-shaped relationship between the equity premium and the size of the disaster insurance market -- National Bureau of Economic Research web site.
Author : Soohun Kim
Publisher :
ISBN 13 :
Total Pages : 85 pages
Book Rating : 4.:/5 (13 download)
Download or read book Asset Prices in Turbulent Markets with Rare Disasters written by Soohun Kim and published by . This book was released on 2015 with total page 85 pages. Available in PDF, EPUB and Kindle. Book excerpt: I propose a parsimonious econometric model for the stochastic process governing the evolution of per capita consumption and stock market dividend over time. The model features stochastic volatility of consumption and dividend growth rates, and time-varying likelihood of rare disasters. I embed this time-variation of risk in an endowment economy with a representative agent and estimate the parameters from U.S. stock market data using Maximum Likelihood. Allowing for time-varying likelihood of rare disasters improves the model's performance. My model successfully explains a number of empirical puzzles: the high equity risk premium, excessive volatility of equity return, predictability of market returns through the price-to-dividend ratio, and the cyclical patterns observed in the term structure of the yield on dividend strips. In addition, the model-implied correlations between equity premium, variance risk premium, and the implied volatility of deep OTM put options are consistent with empirical findings in the literature.
Author : John H. Cochrane
Publisher : Now Publishers Inc
ISBN 13 : 1933019158
Total Pages : 117 pages
Book Rating : 4.9/5 (33 download)
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.
