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Using Long Run Consumption Return Correlations To Test Asset Pricing Models
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Book Synopsis Using Long-Run Consumption-Return Correlations to Test Asset Pricing Models by : Jianfeng Yu
Download or read book Using Long-Run Consumption-Return Correlations to Test Asset Pricing Models written by Jianfeng Yu and published by . This book was released on 2012 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines a new set of implications for existing asset pricing models regarding the correlation between returns and consumption growth over both the short run and the long run. The fi ndings suggest that external habit formation models face a challenge in producing two robust facts in aggregate data, namely, that stock market returns lead consumption growth, and that the correlation between returns and consumption growth is higher at low frequencies. To reconcile these facts with a consumption-based model, I demonstrate the need for focusing on models that contain a forward looking consumption component, i.e., models that allow for both trend and cyclical fluctuations in consumption, and that link returns to cyclical fluctuations in consumption. Long-run risk models provide examples of models that contain this consumption component.
Book Synopsis Asset Pricing Tests with Long Run Risks in Consumption Growth by : George M. Constantinides
Download or read book Asset Pricing Tests with Long Run Risks in Consumption Growth written by George M. Constantinides and published by . This book was released on 2011 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: A novel methodology in testing the long-run risks model of Bansal and Yaron (2004) is presented based on the observation that, under the null, the potentially latent state variables, long-run risk and the conditional variance of its innovation, are known affine functions of the observable market-wide price-dividend ratio and risk free rate. In linear forecasting regressions of consumption growth and returns by the price-dividend ratio and risk free rate, the model implies much higher forecastability than what is observed in the data over 1931-2009. The co-integrated variant of the model by Bansal, Gallant, and Tauchen (2007), also implies much higher forecastability of returns than what is observed in the data. Finally, we reject the models' implications in jointly pricing the cross-section of returns and fitting the unconditional time series moments of consumption and dividend growth. The results suggest that either some important state variable is missing or that the models should be generalized in a way that the lagged price-dividend ratio and risk free enter the regressions in a non-linear fashion.
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 Essays in Technology Diffusion and Asset Pricing by : Ziemowit Konrad Bednarek
Download or read book Essays in Technology Diffusion and Asset Pricing written by Ziemowit Konrad Bednarek and published by . This book was released on 2010 with total page 368 pages. Available in PDF, EPUB and Kindle. Book excerpt: First chapter of this thesis finds a new consumption growth predictor linked to macroeconomic fundamentals: the technology gap, the dierence between potential and actual productivity of capital. I construct a representative firm business cycle model, in which the technology gap generates specic patterns of short- and long-run consumption growth, and consumption growth volatility. Intuitively, a high technology gap acts as an economic shock that increases consumption in the long term due to a higher future productivity level. I use quality-adjusted price indices of durable investment goods to create a proxy for the technology gap. Consistent with the model, I find empirical evidence that a high technology gap predicts: (i) strong consumption growth at longer horizons, (ii) high consumption growth volatility, and (iii) high risk-free rate. Second chapter demonstrates the relationship between research and development expenditure, and firm productivity. I construct a model which implies that firm-level R & D optimal policy should be dependent on ex-ante productivity. Firms ex-ante further from the frontier optimally invest more in R & D. Ex-post productivity depends on the amount of R & D investment and the match between new technology and existing production factors. Firms investing more in R & D are ex-post on average closer to the frontier, controlling for theoretically motivated endogeneity. I present empirical evidence supporting the model. Using data envelopment, I construct a measure of firm-level distance from industry-wide productivity frontier. On average, a 1% larger distance from the frontier causes a 0.5% increase in R & D intensity next quarter. R & D activity in turn predicts high stock return volatility. Third chapter tests the existing durable consumption-based asset pricing model of Yogo (2006). Consumption risk is measured by the covariance between asset returns and future durable consumption growth, rather than contemporaneous growth, as in the original model. I present empirical evidence that excess returns on Fama-French portfolios are correlated more with future than contemporaneous durable consumption growth. I transform the original Euler equations of the model to use information about the future consumption growth. As its correlation with returns is higher, the estimate of risk aversion from the model decreases substantially compared with Yogo (2006). I also find that the altered consumption risk measure increases the explanatory power of the model. I approximate the original model and show that it can be estimated in the simple OLS framework. Cross-sectional R square is highest when the consumption growth is sampled over six to eight quarters ahead. This result is robust to dierent sets of test assets.
Book Synopsis Can Fundamentals Explain Cross-country Correlations of Asset Returns by : Fernando Restoy
Download or read book Can Fundamentals Explain Cross-country Correlations of Asset Returns written by Fernando Restoy and published by . This book was released on 1998 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Volatility written by Robert A. Jarrow and published by . This book was released on 1998 with total page 472 pages. Available in PDF, EPUB and Kindle. Book excerpt: Written by a number of authors, this text is aimed at market practitioners and applies the latest stochastic volatility research findings to the analysis of stock prices. It includes commentary and analysis based on real-life situations.
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.
Book Synopsis Is Consumption Growth Only a Sideshow in Asset Pricing? by : Thomas A. Maurer
Download or read book Is Consumption Growth Only a Sideshow in Asset Pricing? written by Thomas A. Maurer and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I show that risk sources such as unexpected demographic changes or shocks to the agent's subjective time preferences may have stronger implications and be of greater importance for asset pricing than risk in the (aggregate) consumption growth process. In the first chapter, I discuss stochastic changes to time preferences. Shocks to the agent's subjective time discounting of future utility cause stochastic changes in asset prices and the agent's value function. Independent of the consumption growth process, shocks to time discounting imply a covariation between asset returns and the marginal utility process, and the equity premium is non-zero. My model can generate both a reasonably low level and volatility in the risk-free real interest rate and a high stock price volatility and equity premium. If time discounting follows a process with mean- reversion, then the interest rate process is mean-reverting and stock returns are (at long horizons) negatively auto-correlated. In the second chapter, I analyze the asset pricing implications of birth and death rate shocks in an overlapping generations model. The interest rate and the equity premium are time varying and under certain conditions the interest rate is lower and the equity premium is higher during periods characterized by a high birth rate and low mortality than in times of a low birth rate and high mortality. Demographic changes may explain substantial parts of the time variation in the real interest rate and the equity premium. Demographic uncertainty implies a large unconditional variation in asset returns and leads to stochastic changes in the conditional volatility of stock returns. In the last chapter, I illustrate how shocks to the death rate may affect expected asset returns in the cross-section. An agent demands more of an asset with higher (lower) payoff in states of the world when he expects to live longer (shorter) and marginal utility is high (low) than an asset with the opposite payoff schedule. In equilibrium, the first asset pays a lower expected return than the latter. Empirical evidence supports the model. Out-of-sample evidence suggests that a strategy, which loads on uncertainty in the death rate, pays a positive unexplained return according to traditional market models.
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 2019-03-26 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 Cointegration, Causality, and Forecasting by : Halbert White
Download or read book Cointegration, Causality, and Forecasting written by Halbert White and published by Oxford University Press, USA. This book was released on 1999 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: A collection of essays in honour of Clive Granger. The chapters are by some of the world's leading econometricians, all of whom have collaborated with and/or studied with both) Clive Granger. Central themes of Granger's work are reflected in the book with attention to tests for unit roots and cointegration, tests of misspecification, forecasting models and forecast evaluation, non-linear and non-parametric econometric techniques, and overall, a careful blend of practical empirical work and strong theory. The book shows the scope of Granger's research and the range of the profession that has been influenced by his work.
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 Asset Pricing Tests with Long Run Risks in Consumption Growth by : George M. Constantinides
Download or read book Asset Pricing Tests with Long Run Risks in Consumption Growth written by George M. Constantinides and published by . This book was released on 2008 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Bansal and Yaron (2004) model of long-run risks (LRR) in aggregate consumption and dividend growth and its cointegrated extension are tested on a cross-section of assets and rejected over 1930-2006. Reversal of earlier conclusions is due to the increased power of the tests resulting from two observations under the null: the latent state variables and, therefore, the pricing kernel are known affine functions of observables; and, the unconditional moments of the time series processes impose constraints in addition to the pricing constraints. The models perform better in postwar subperiods, consistent with evidence of structural-breaks.
Book Synopsis Tests of the Conditional Asset Pricing Model by : Stuart Hyde
Download or read book Tests of the Conditional Asset Pricing Model written by Stuart Hyde and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the relationship between consumption and the term structure using U.K. interest rate data. We demonstrate that the term structure contains information about future economic activity as implied by the benchmark time separable power utility consumption based capital asset pricing model (C-CAPM) since the yield spread has forecasting power for future consumption growth. Further, we analyze the ability of this benchmark and two alternative models which adopt utility functions characterized by non-separability, namely, the extension to the habit formation model of Campbell and Cochrane (1999) proposed by Wachter (2006) and the housing C-CAPM proposed by Piazzesi et al. (2007). Our findings are supportive of the habit formation specification of Wachter (2006), other models fail to yield economically plausible parameter values.
Book Synopsis Long-Run Stockholder Consumption Risk and Asset Returns by : Annette Vissing-Jorgensen
Download or read book Long-Run Stockholder Consumption Risk and Asset Returns written by Annette Vissing-Jorgensen and published by . This book was released on 2013 with total page 71 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting micro-level household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or non-stockholder consumption risk, and provides more plausible economic magnitudes. We find that risk aversion estimates around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French size and value portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks.
Book Synopsis Essays on Pricing Models in Economics and Finance by : Anchada Charoenrook
Download or read book Essays on Pricing Models in Economics and Finance written by Anchada Charoenrook and published by . This book was released on 2000 with total page 290 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Explaining Asset Return Properties with a Real Business Cycle Asset Pricing Model by : Terence Khoo
Download or read book Explaining Asset Return Properties with a Real Business Cycle Asset Pricing Model written by Terence Khoo and published by . This book was released on 1992 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets by : Ehud I. Ronn
Download or read book The Impact of Large Changes in Asset Prices on Intra-Market Correlations in the Domestic and International Markets written by Ehud I. Ronn and published by . This book was released on 2001 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper considers the impact and implications of quot;largequot; changes in asset prices on the intra-market correlations in the domestic and international markets. Assuming that asset returns are normally-distributed, we show that the absolute magnitude of the correlation, conditional on a change greater than or equal to a given absolute size in one of the variables, is monotonically increasing in the magnitude of that absolute change. We present empirical tests using domestic and international-market data that support this theoretical result. These results have significant implications for hedging interest rate risk, tests of asset pricing models, Roll's R 2 concern with the explanatory power of financial asset pricing models, and the implementation of the value-at-risk concept.
