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Author : Qunzi Zhang
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (994 download)
Download or read book Essays in Higher Moment Asset Pricing and Liquidity Risk written by Qunzi Zhang and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Thèse. HEC. 2014
Author : Mehdi Karoui
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (921 download)
Download or read book Three Essays in Asset Pricing written by Mehdi Karoui and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "This thesis consists of three essays that explore alternative approaches to extracting information from option data, and, along somewhat different lines, examine the channels through which liquidity is priced in equity options.The first essay proposes a novel approach to extracting option-implied equity premia, and empirically examines the information content of these risk premia for forecasting the stock market return. Our approach does not require specifying the functional form of the pricing kernel, and does not impose any restrictions on investors' preferences. We only assume the existence of put and call options which complete the market, and show that the implied equity premium can be inferred from expected excess returns on a portfolio of options. An empirical investigation of S&P 500 index options yields the following conclusions: (i) the implied equity premium predicts stock market returns; (ii) the implied equity premium consistently outperforms variables commonly used in the forecasting literature both in- and out-of-sample; (iii) the implied equity premium is positively related to future returns and negatively related to current returns, as theoretically expected.The second essay studies the effect of illiquidity on equity option returns. Illiquidity is well-known to be a significant determinant of stock and bond returns. We are the first to report on illiquidity premia in equity option markets using a large cross-section of firms. An increase in option illiquidity decreases the current option price and predicts higher expected delta-hedged option returns. This effect is statistically and economically significant, and it is consistent with existing evidence that market makers in the equity options market hold net long positions. The illiquidity premium is robust across puts and calls, across maturities and moneyness, as well as across different empirical approaches. It is also robust when controlling for various firm-specific variables including a standard measure of illiquidity of the underlying stock. For long term options, we find evidence of a liquidity risk factor. In the third essay, we demonstrate that in multifactor asset pricing models, prices of risk for factors that are nonlinear functions of the market return can be readily obtained using data on index returns and index options. We apply this general result to the measurement of the conditional price of coskewness and cokurtosis risk. The price of coskewness risk corresponds to the spread between the physical and the risk-neutral second moments, and the price of cokurtosis risk corresponds to the spread between the physical and the risk-neutral third moments. Estimates of these prices of risk have the expected sign, and they lead to reasonable risk premia. An out-of-sample analysis of factor models with coskewness and cokurtosis risk indicates that the new estimates of the price of risk improve the models. performance. The models also robustly outperform competitors such as the CAPM and the Fama-French model." --
Author : Nardos M. Beyene
Publisher :
ISBN 13 :
Total Pages : 72 pages
Book Rating : 4.:/5 (113 download)
Download or read book Three Essays on Liquidity Shocks and Their Implication for Asset Pricing and Valuation Models written by Nardos M. Beyene and published by . This book was released on 2019 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: The main objective of my three essays is to incorporate liquidity shocks and the linkages between the liquidity condition of financial markets into asset pricing and valuation models. The first essay focuses on the liquidity adjusted capital asset pricing model, while the second and the third essays examine the popular asset valuation model called the Fed model. The first essay investigates the pricing of the commonality risk in the U.S. stock market by using a more comprehensive market illiquidity measure that can reflect the liquidity condition of different asset markets. This measure is given by the yield difference between commercial paper and treasury bill. In addition, consistent with the definition of commonality risk, I form portfolios based on the sensitivity of each stock's illiquidity to the market-wide illiquidity. Using monthly data from January 1997 to December 2016 and the conditional version of the Liquidity-adjusted Capital Asset Pricing Model (LCAPM) estimated by the Dynamic Conditional Correlation approach, I find a significant commonality risk premium of 0.022% and 0.014% per year for 12-month and 24-month holding periods, respectively. This premium estimate is significantly higher than those found using the market illiquidity measure and estimation procedures from previous studies. These findings provide evidence that a security's easiness in terms of tradability at times of liquidity dry up is extremely important. It is also higher than the excess return associated with other forms of liquidity risk. In addition, the paper finds a variation in the estimated commonality risk premium over time, with values being higher during periods of market turmoil. Moreover, estimating the LCAPM with the yield difference between commercial paper and treasury bill as a measure of market illiquidity performs better in predicting returns for the low commonality risk portfolios. The second essay examines the inflation illusion hypothesis in explaining the high correlation between government bond yield and stock yield as implied by the Fed model. According to the inflation illusion hypothesis, there is mis-pricing in the stock market due to the failure of investors to adjust their cash flow expectation to inflation. This led to a co-movement in stock yield and government bond yield. I use the Gordon Growth model to determine the mis-pricing component in the stock market. In the next step, the correlation between bond yield and stock yield is estimated using the Asymmetric Generalized Dynamic Conditional Correlation (AG-DCC) model. Finally, I regress this correlation on mis-pricing and two other control variables, GDP and inflation. I use monthly data from January 1983 to December 2016. Consistent with the Fed model, the paper finds a significant positive correlation between the yield on government bonds and stock yield, with an average correlation of 0.942 - 0.997. However, in contrast to the inflation illusion hypothesis, mis-pricing in the stock market has an insignificant impact on this correlation. The third essay provides liquidity shocks contagion between the stock market and the corporate bond market as the driving force behind the high correlation between the yield on stocks and the yield on government bonds as implied by the Fed model. The idea is that when liquidity drops in the stock market, firms' credit risk rises because the deterioration in the liquidity of equities traded in the stock market increases the firms' default probability. Consequently, investors' preferences shift away from corporate bonds to government bonds. Higher demand for government bonds keeps their yield low, leading to a co-movement of government bond yield and stock yield. In order to test this liquidity-based explanation, the paper first examines the interdependence between liquidity in the stock and corporate bond markets using the Markov switching model, and a time series non-parametric technique called the Convergent Cross Mapping (CCM). In order to see the response of government bond yield and stock yield to liquidity shocks in the stock market, the study implements an Auto Regressive Distributed Lag (ARDL) model. Using monthly data from January 1997 to December 2016, the paper presents strong evidence of liquidity shocks transmission form the stock market to the corporate bond market. Furthermore, liquidity shocks in the stock market are found to have a significant impact on the stock yield. These findings support the illiquidity contagion explanation provided in this paper.
Author : Ying Wu
Publisher :
ISBN 13 :
Total Pages : 249 pages
Book Rating : 4.:/5 (913 download)
Download or read book Essays in International Asset Pricing written by Ying Wu and published by . This book was released on 2013 with total page 249 pages. Available in PDF, EPUB and Kindle. Book excerpt: The empirical research focuses on the common risk factors in stock returns and trading activities. The first essay is titled "Asset Pricing with Extreme Liquidity Risk". Defining extreme liquidity as the tails of illiquidity for all stocks, I propose a direct measure of market-wide extreme liquidity risk and find that extreme liquidity risk is priced cross-sectionally in the U.S. equity market. From 1973 through 2011, stocks in the highest quintile of extreme liquidity risk loadings earned value-weighted average returns 6.6% per year higher than stocks in the lowest quintile. The extreme liquidity risk premium is robust to common risk factors related to size, value and momentum. The premium is different from that on aggregate liquidity risk documented in Pástor and Stambaugh (2003) as well as that based on tail risk of Kelly (2011). Extreme liquidity estimates can offer a warning sign of extreme liquidity events. Predictive regressions show that extreme liquidity measure reliably outperforms aggregate liquidity measures in predicting future market returns. Finally, I incorporate the extreme liquidity risk into Acharya and Pedersen's (2005) framework and find new supporting evidence for their liquidity-adjusted capital asset pricing model. The second essay is co-authored with Prof. Andrew Karolyi. We have developed a multi-factor returns-generating model for an international setting that captures how restrictions on investability or accessibility can matter. The model works reasonably well in a wide variety of settings. More specifically, using monthly returns for over 37,000 stocks from 46 developed and emerging market countries over a two-decade period, we propose and test a multi-factor model that includes factor portfolios based on firm characteristics and that builds separate factors comprised of globally-accessible stocks, which we call "global factors," and of locally-accessible stocks, which we call "local factors." Our new "hybrid" multi-factor model with both global and local factors not only captures strong common variation in global stock returns, but also achieves low pricing errors and rejection rates using conventional testing procedures for a variety of regional and global test asset portfolios formed on size, value, and momentum. In the third essay, I examine the implications of the Lo and Wang (2000, 2006) mutual fund separation model in the cross-sectional behavior of global trading activity. It demonstrates that return-based factors work poorly around the world. On average across countries, market-wide turnover captures 37% of all systematic turnover components in individual stock trading, and two additional Fama and French (1993) factor turnovers increase the explanatory power by 23%. Similarly Lo and Wang's (2000) turnovers only capture on average 64% of all systematic turnover components. Using this multi-factor asset pricing-trading framework, a horserace is further performed to explore other factors in return by examining the turnover behavior of different factor mimicking portfolios. All the return-based factors capture at most 67% of the common variation in trading, suggesting that stock pricing and trading volume may not be compatible around the world. In cross-country analysis, the explanatory power of the returnbased factor model varies substantially across countries and markets, with better performance for European developed markets and China. Surprisingly, in North America, Japan and most emerging markets there are larger amounts of commonality in trading, mostly higher than 47 %, for reasons other than return motive.
Author : Yangqiulu Luo
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (14 download)
Download or read book Two Essays on Empirical Asset Pricing written by Yangqiulu Luo and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of two essays on empirical asset pricing. The first essay examines if the idiosyncratic risk is priced. Theories such as Merton (1987) predict that idiosyncratic risk should be priced when investors do not diversify their portfolio. However, the previous literature has presented a mixed set of results of the pricing of idiosyncratic risk. We find strong evidence that idiosyncratic risk is priced differently across bull and bear markets. For the sample period from June 1946 to the end of 2010, a factor portfolio long on stocks with high idiosyncratic volatility and short on stocks with low idiosyncratic volatility yields an equal-weighted monthly return of 1.59% for bull markets but -1.29% for bear markets. These evidences support the hypothesis that investors are rewarded for betting on individual stocks during bull markets and holding more diversified portfolios during bear markets. The second essay examines the role of the limits to arbitrage in the negative effect of liquidity on subsequent stock returns. I hypothesize that if the negative effect persists because of the limits to arbitrage, the effect should be more pronounced when there are more severe limits to arbitrage. My empirical evidence supports the hypothesis. In addition, I find that the effect of the limits to arbitrage on the liquidity anomaly is not correlated to the liquidity risk.
Author : Ning Chen (Ph.D.)
Publisher :
ISBN 13 :
Total Pages : 268 pages
Book Rating : 4.:/5 (35 download)
Download or read book Essays on Liquidity Risk and Asses Pricing written by Ning Chen (Ph.D.) and published by . This book was released on 2005 with total page 268 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Alan Picard
Publisher :
ISBN 13 :
Total Pages : 165 pages
Book Rating : 4.:/5 (111 download)
Download or read book Three Essays in Asset Pricing written by Alan Picard and published by . This book was released on 2015 with total page 165 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract This dissertation consists of three essays. My first paper re-examines the link between idiosyncratic risk and expected returns for a large sample of firms in both developed and emerging markets. Recent studies using Fama-French three factor models have shown a negative relationship between idiosyncratic volatility and expected returns for developed markets. This relationship has not been studied to date for emerging markets. This study relates the current-month’s idiosyncratic volatility to the subsequent month’s returns for a sample of both developed and emerging markets expanding benchmark factors by including both a momentum and a systematic liquidity risk component. My second essay contributes to the important literature on the topic of the small capitalization stocks historical outperformance over large capitalization stocks by investigating the hypothesis that the small firm premium is related to macroeconomic and financial variables and that relationship is driven by the economic cycle in the United States and Canada. More specifically, this study employs recent advances in nonlinear time series models to explore the relationship between the small firm premium, and financial and macroeconomic variables in the Canadian and U.S. economies. My third paper re-examines the findings of a recent research paper that suggested that market wide liquidity may act as a leading indicator to the economic cycle. Using several liquidity measures and various macroeconomic variables to proxy for the economic conditions, the paper presents evidence that stock market liquidity could forecast business cycles: A major decrease in the overall level of market liquidity could indicate weak economic growth in the subsequent months. However, the drawback in the analysis is that the relationship is investigated in a linear approach even though it has been proven that most macroeconomic variables follow non-linear dynamics. Employing similar liquidity measures and macroeconomic proxies, and two popular econometrics models that account for non-linear behavior, this study hence re-investigates the relationship between stock market liquidity and business cycles.
Author : Stefan Koch
Publisher :
ISBN 13 :
Total Pages : 125 pages
Book Rating : 4.:/5 (72 download)
Download or read book Essays in Empirical Asset Pricing written by Stefan Koch and published by . This book was released on 2010 with total page 125 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Wenqing Wang
Publisher :
ISBN 13 :
Total Pages : 342 pages
Book Rating : 4.:/5 ( download)
Download or read book Three Essays on Empirical Asset Pricing written by Wenqing Wang and published by . This book was released on 2004 with total page 342 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Xing Hu
Publisher :
ISBN 13 :
Total Pages : 330 pages
Book Rating : 4.:/5 (745 download)
Download or read book Essays in Empirical Asset Pricing written by Xing Hu and published by . This book was released on 2011 with total page 330 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Chishen Wei
Publisher :
ISBN 13 :
Total Pages : 170 pages
Book Rating : 4.:/5 (758 download)
Download or read book Essays on Empirical Asset Pricing written by Chishen Wei and published by . This book was released on 2011 with total page 170 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contains two essays that use empirical techniques to shed light on open questions in the asset pricing literature. In the first essay, I investigate whether foreign institutional investors affect stock liquidity in domestic equity markets. The evidence indicates that stocks with higher foreign institutional ownership subsequently experience higher liquidity. However, it is difficult to interpret the causal relation of this finding because institutional investors self-select into more liquid stocks. To solve this problem, I exploit a provision in the 2003 US dividend tax cut which extends tax-relief to dividends from US tax-treaty countries but not to dividends from non-treaty countries. This natural experiment suggests a causal link between foreign institutional investors and liquidity. Consistent with the predictions of theoretical models, I find that liquidity improves due to foreign institutional investors increasing information competition. In the second essay, I introduce a new measure of difference of opinion using mutual fund portfolio weights to test prominent competing theories of the effect of heterogeneous beliefs on asset prices. The over-valuation theory (Miller (1977)) proposes that in the presence of short-sale constraints stock prices reflects only the view of optimistic investors which implies lower subsequent returns. Alternatively, neo-classical asset pricing models (Williams (1977), Merton (1987)) suggest that differences of opinions indicate high levels of information uncertainty or risk which implies higher expected returns. My initial result finds no support for the over-valuation theory. Instead, the measure used in this study finds that high differences of opinion stocks weakly outperform low differences of opinion stocks by 2.42% annually which is more consistent with the information uncertainty explanation.
Author : Thomas W. Barkley
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (439 download)
Download or read book Two Essays on Effects of Information and Liquidity in Asset Pricing written by Thomas W. Barkley and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: ABSTRACT: Information and liquidity interact when asset prices are to be determined. I study these effects in the price discovery process of the S & P 500 index traded in the cash, futures and options markets, and document that transaction costs and market trading activity proxies are important determinants. I also study the liquidity risk premiums associated with stocks traded on different exchanges, and document that there are multiple aspects to liquidity showing considerable variation over time. Empirical results suggest that some common liquidity measures can be consolidated into two latent liquidity variables: one arising from asymmetric information among traders and another from order processing or direct transaction costs associated with trading the asset. Taken together, my research suggests that traders pay close attention to information asymmetries and fixed costs of trading when evaluating asset prices; this subsequently influences an informed investor's decision regarding the market in which they should transact.
Author : Travis Robert Alonzo Sapp
Publisher :
ISBN 13 :
Total Pages : 222 pages
Book Rating : 4.:/5 (148 download)
Download or read book Three Essays in Asset Pricing written by Travis Robert Alonzo Sapp and published by . This book was released on 2001 with total page 222 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Qingqing Chen
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (432 download)
Download or read book Essays on Asset Pricing written by Qingqing Chen and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Viral V. Acharya
Publisher :
ISBN 13 :
Total Pages : 52 pages
Book Rating : 4.X/5 (4 download)
Download or read book Asset Pricing with Liquidity Risk written by Viral V. Acharya and published by . This book was released on 2004 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Andria van der Merwe
Publisher : Springer
ISBN 13 : 1137389230
Total Pages : 211 pages
Book Rating : 4.1/5 (373 download)
Download or read book Market Liquidity Risk written by Andria van der Merwe and published by Springer. This book was released on 2016-01-12 with total page 211 pages. Available in PDF, EPUB and Kindle. Book excerpt: Andria van der Merwe provides a thorough guide to the critical tools needed to navigate liquidity markets and value security pricing in the presence of market frictions and information asymmetries. This is essential reading for anyone with a current or future interest in liquidity models, market structures, and trading mechanisms.
Author : Lei Zhao
Publisher :
ISBN 13 : 9780438193239
Total Pages : 0 pages
Book Rating : 4.1/5 (932 download)
Download or read book Three Essays on Asset Pricing written by Lei Zhao and published by . This book was released on 2018 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using more stringent test assets and more formal model diagnostic tools, the first essay demonstrates the importance of higher-order comoment risks in asset pricing by assessing the performance of the most commonly used asset pricing models with and without these risks incorporated. Specifically, we find that higher-order comoment risks help the Fama and French serial pricing kernels to be closer to the admissible pricing kernel and that the newly developed Fama and French five-factor model (Fama and French, 2015), when augmented by the quadratic and cubic terms of the market return and with momentum incorporated, requires the least adjustment to be admissible.
