Download or read book A Consumption Based Explanation of Expected Stock Returns written by Motohiro Yogo and published by . This book was released on 2014 with total page 65 pages. Available in PDF, EPUB and Kindle. Book excerpt: When utility is nonseparable in nondurable and durable consumption and the elasticity of substitution between the two consumption goods is sufficiently high, marginal utility rises when durable consumption falls. The model explains both the cross-sectional variation in expected stock returns and the time variation in the equity premium. Small stocks and value stocks deliver relatively low returns during recessions, when durable consumption falls, which explains their high average returns relative to big stocks and growth stocks. Stock returns are unexpectedly low at business cycle troughs, when durable consumption falls sharply, which explains the countercyclical variation in the equity premium.
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.
Download or read book By Force of Habit written by John Y. Campbell and published by . This book was released on 1995 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a consumption-based model that explains the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slow-moving external habit to the standard power utility function. The latter feature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habit-persistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution.
Download or read book Surplus Consumption Ratio and Expected Stock Returns written by Imen Ghattassi and published by . This book was released on 2013 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on Campbell and Cochrane [1999] Consumption-Based Asset Pricing Model (C)CAPM with habit formation, this paper provides empirical evidence in favor of the importance of habit persistence in asset pricing. Using U.S data, we show that the surplus consumption ratio is a strong predictor of excess returns at long-horizons and that it captures a component of expected returns, not explained by the consumption-wealth ratio. Moreover, this paper shows that the (C)CAPM with habit formation performs far better than the standard (C)CAPM in accounting for the cross-sectional variations in average excess returns on the 25 FA MA-FRENCH portfolios sorted by size and book-to-market value.
Download or read book Global Stock Markets written by Wolfgang Drobetz and published by Springer Science & Business Media. This book was released on 2013-06-29 with total page 346 pages. Available in PDF, EPUB and Kindle. Book excerpt: Wolfgang Drobetz provides empirical evidence on the time variation of expected stock returns over the stages of the business cycle.
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.
Download or read book By Force of Habit written by John Y. Campbell and published by . This book was released on 2009 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a consumption-based model that explains the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slow-moving external habit to the standard power utility function. The latterfeature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habit-persistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution.
Download or read book Consumption Risk and Expected Stock Returns written by Jonathan A. Parker and published by . This book was released on 2003 with total page 13 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book External Habit and the Cyclicality of Expected Stock Returns written by Thomas D. Tallarini and published by . This book was released on 2005 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Consumption Stock Returns and the Gains from International Risk sharing written by Karen K. Lewis and published by . This book was released on 1996 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: Standard theoretical models predict that domestic residents should diversify their portfolios into foreign assets much more than observed in practice. Whether this lack of diversification is important depends upon the potential gains from risk-sharing. General equilibrium models and consumption data tend to find that the costs are small, typically less than «% of permanent consumption. On the other hand, stock returns imply gains that are several hundred times larger. In this paper, I examine the reasons for these differences. I find that the primary differences are due to either: (a) the much higher variability of stocks, and/or (b) the higher degree of risk aversion required to reconcile an international equity premium. On the other hand, the significant differences do not arise treating stock returns as exogenous.
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
Download or read book Stock Returns and Expected Business Conditions written by Sean D. Campbell and published by . This book was released on 2005 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: "We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwisestandard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing R-squared. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion"--National Bureau of Economic Research web site
Download or read book Consumption Fluctuations and Expected Returns written by Victoria Atanasov and published by . This book was released on 2019 with total page 86 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper introduces a novel consumption-based variable, cyclical consumption, and examines its predictive properties for stock returns. Future expected stock returns are high (low) when aggregate consumption falls (rises) relative to its trend and marginal utility from current consumption is high (low). We show that the empirical evidence ties consumption decisions of agents to time-variation in returns in a manner consistent with asset pricing models based on external habit formation. The predictive power of cyclical consumption is not confined to bad times and subsumes the predictability of many popular forecasting variables.
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.
Download or read book Expected Returns and Habit Persistence written by Yuming Li and published by . This book was released on 2001 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a consumption-based asset pricing model with infinite-horizon nonlinear habit formation, Campbell and Cochrane (1999) show that low consumption in surplus of habit should forecast high expected returns. This article argues that the finite-horizon linear habit model also implies an inverse relation between expected returns and surplus consumption. This article also presents empirical evidence, which indicates that expected returns on stocks and bonds vary with surplus consumption implied by the habit models. The volatility of returns and the reward to volatility are also related to surplus consumption. However, less than 30 percent of the predictable variation of expected returns, using standard lagged information variables, is attributed to surplus consumption.
Download or read book Consumption and Portfolio Decisions when Expected Returns are Time Varying written by John Y. Campbell and published by . This book was released on 1996 with total page 88 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes and implements a new approach to a classic unsolved problem in financial economics: the optimal consumption and portfolio choice problem of a long-lived investor facing time-varying investment opportunities. The investor is assumed to be infinitely-lived, to have recursive Epstein-Zin-Weil utility, and to choose in discrete time between a riskless asset with a constant return, and a risky asset with constant return variance whose expected log return follows and AR(1) process. The paper approximates the choice problem by log-linearizing the budget constraint and Euler equations, and derives an analytical solution to the approximate problem. When the model is calibrated to US stock market data it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one.
Download or read book Financial Econometrics Modeling Market Microstructure Factor Models and Financial Risk Measures written by G. Gregoriou and published by Springer. This book was released on 2010-12-13 with total page 277 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book proposes new methods to build optimal portfolios and to analyze market liquidity and volatility under market microstructure effects, as well as new financial risk measures using parametric and non-parametric techniques. In particular, it investigates the market microstructure of foreign exchange and futures markets.
