Download or read book Correlation Risk Strings and Asset Prices written by Walter Distaso and published by . This book was released on 2019 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Standard asset pricing theories treat return volatility and correlations as two intimately related quantities, which hinders achieving a neat definition of a correlation premium. We introduce a model with a continuum of securities that have returns driven by a string. This model leads to new arbitrage pricing restrictions, according to which, holding any asset requires compensation for the granular exposure of this asset returns to changes in all other asset returns: an average correlation premium. We find that this correlation premium is both statistically and economically significant, and considerably fluctuates, driven by time-varying correlations and global market developments. The model explains the cross-section of expected returns and their counter-cyclicality without making reference to common factors affecting asset returns. It also explains the time-series behavior of the premium for the risk of changes in asset correlations (the correlation-risk premium), including its inverse relation with realized correlations.
Download or read book Cross section Without Factors written by Walter Distaso and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Financial Economics written by Antonio Mele and published by MIT Press. This book was released on 2022-11-22 with total page 1147 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive reference for financial economics, balancing theoretical explanations, empirical evidence, and the practical relevance of knowledge in the field. This volume offers a comprehensive, integrated treatment of financial economics, tracking the major milestones in the field and providing methodological tools. Doing so, it balances theoretical explanations, empirical evidence, and practical relevance. It illustrates nearly a century of theoretical advances with a vast array of models, showing how real phenomena (and, at times, market practice) have helped economists reformulate existing theories. Throughout, the book offers examples and solved problems that help readers understand the main lessons conveyed by the models analyzed. The book provides a unique and authoritative reference for the field of financial economics. Part I offers the foundations of the field, introducing asset evaluation, information problems in asset markets and corporate finance, and methods of statistical inference. Part II explains the main empirical facts and the challenges these pose for financial economists, which include excess price volatility, market liquidity, market dysfunctionalities, and the countercyclical behavior of market volatility. Part III covers the main instruments that protect institutions against the volatilities and uncertainties of capital markets described in part II. Doing so, it relies on models that have become the market standard, and incorporates practices that emerged from the 2007–2008 financial crisis.
Download or read book Econophysics and Capital Asset Pricing written by James Ming Chen and published by Springer. This book was released on 2017-10-04 with total page 293 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book rehabilitates beta as a definition of systemic risk by using particle physics to evaluate discrete components of financial risk. Much of the frustration with beta stems from the failure to disaggregate its discrete components; conventional beta is often treated as if it were "atomic" in the original Greek sense: uncut and indivisible. By analogy to the Standard Model of particle physics theory's three generations of matter and the three-way interaction of quarks, Chen divides beta as the fundamental unit of systemic financial risk into three matching pairs of "baryonic" components. The resulting econophysics of beta explains no fewer than three of the most significant anomalies and puzzles in mathematical finance. Moreover, the model's three-way analysis of systemic risk connects the mechanics of mathematical finance with phenomena usually attributed to behavioral influences on capital markets. Adding consideration of volatility and correlation, and of the distinct cash flow and discount rate components of systematic risk, harmonizes mathematical finance with labor markets, human capital, and macroeconomics.
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.
Download or read book Correlation Risk written by C. N. V. Krishnan and published by . This book was released on 2008 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: Investors hold portfolios of assets with different risk-reward profiles for diversification benefits. Conditional on the volatility of assets, diversification benefits can vary over time depending on the correlation structure among asset returns. The correlation of returns between assets has varied substantially over time. To insure against future quot;low diversificationquot; states, investors might demand securities that offer higher payouts in these states. If this is the case, then investors would pay a premium for securities that perform well in regimes in which the correlation is high. We empirically test this hypothesis and find that correlation carries a significantly negative price of risk, after controlling for asset volatility and other risk factors.
Download or read book Dynamic Decisions Asset Pricing and Default Correlation written by Lucas Bernard and published by . This book was released on 2008 with total page 296 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Correlation Risk Modeling and Management written by Gunter Meissner and published by John Wiley & Sons. This book was released on 2013-12-19 with total page 268 pages. Available in PDF, EPUB and Kindle. Book excerpt: A thorough guide to correlation risk and its growing importance in global financial markets Ideal for anyone studying for CFA, PRMIA, CAIA, or other certifications, Correlation Risk Modeling and Management is the first rigorous guide to the topic of correlation risk. A relatively overlooked type of risk until it caused major unexpected losses during the financial crisis of 2007 through 2009, correlation risk has become a major focus of the risk management departments in major financial institutions, particularly since Basel III specifically addressed correlation risk with new regulations. This offers a rigorous explanation of the topic, revealing new and updated approaches to modelling and risk managing correlation risk. Offers comprehensive coverage of a topic of increasing importance in the financial world Includes the Basel III correlation framework Features interactive models in Excel/VBA, an accompanying website with further materials, and problems and questions at the end of each chapter
Download or read book Evaluating correlation Breakdowns During Periods of Market Volatility written by Mico Loretan and published by . This book was released on 2000 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial market observers have noted that during periods of high market volatility, correlations between asset prices can differ substantially from those seen in quieter markets. For example, correlations among yield spreads were substantially higher during the fall of 1998 than in earlier or later periods. Such changes in correlations could reflect changes in the underlying distribution of returns or quot;contagionquot; across markets that is present only during periods of market turbulence. However, as noted by Boyer, Gibson and Loretan (1999), increases in the volatility of returns are generally accompanied by an increase in sampling correlations even when the true correlations are constant. We show that this result is not just of theoretical interest: When we consider quarterly measures of volatility and correlation for three pairs of asset returns, we find that the theoretical relationship can explain much of the movement in correlations over time. We then examine the implications of this link between measures of volatility and correlation for risk management, bank supervision, and monetary policy making.
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 Option Implied Correlations and the Price of Correlation Risk written by Joost Driessen and published by . This book was released on 2013 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by extensive evidence that stock-return correlations are stochastic, we analyze whether the risk of correlation changes (affecting diversification benefits) may be priced. We propose a direct and intuitive test by comparing option-implied correlations between stock returns (obtained by combining index option prices with prices of options on all index components) with realized correlations. Our parsimonious model shows that the substantial gap between average implied (39.5% for S&P500 and 46.0% for DJ30) and realized correlations (32.5% and 35.5%, respectively) is direct evidence of a large negative correlation risk premium. Empirical implementation of our model also indicates that the index variance risk premium can be attributed to the high price of correlation risk. Finally, we provide evidence that option-implied correlations have remarkable predictive power for future stock market returns, which also stays significant after controlling for a number of fundamental market return predictors.
Download or read book Tail Risk and Asset Prices written by Bryan Kelly and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new measure of time-varying tail risk that is directly estimable from the cross section of returns. We exploit firm-level price crashes every month to identify common fluctuations in tail risk across stocks. Our tail measure is significantly correlated with tail risk measures extracted from S&P 500 index options, but is available for a longer sample since it is calculated from equity data. We show that tail risk has strong predictive power for aggregate market returns: A one standard deviation increase in tail risk forecasts an increase in excess market returns of 4.5% over the following year. Cross-sectionally, stocks with high loadings on past tail risk earn an annual three-factor alpha 5.4% higher than stocks with low tail risk loadings. These findings are consistent with asset pricing theories that relate equity risk premia to rare disasters or other forms of tail risk.
Download or read book Credit Correlation written by Youssef Elouerkhaoui and published by Springer. This book was released on 2017-11-15 with total page 466 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides an advanced guide to correlation modelling for credit portfolios, providing both theoretical underpinnings and practical implementation guidance. The book picks up where pre-crisis credit books left off, offering guidance for quants on the latest tools and techniques for credit portfolio modelling in the presence of CVA (Credit Value Adjustments). Written at an advanced level, it assumes that readers are familiar with the fundamentals of credit modelling covered, for example, in the market leading books by Schonbucher (2003) and O’Kane (2008). Coverage will include the latest default correlation approaches; correlation modelling in the ‘Marshall-Olkin’ contagion framework, in the context of CVA; numerical implementation; and pricing, calibration and risk challenges. The explosive growth of credit derivatives markets in the early-to-mid 000’s was bought to a close by the 2007 financial crisis, where these instruments were held largely to blame for the economic downturn. However, in the wake of increased regulation across all financial instruments and the challenge of buying and selling bonds in large amounts, credit derivatives have once again been found to be the answer and the market has grown significantly. Written by a practitioner for practitioners, this book will also interest researchers in mathematical finance who want to understand how things happen and work ‘on the floor’. Building the reader’s knowledge from the ground up, and with numerous real life examples used throughout, this book will prove a popular reference for anyone with a mathematical mind interested credit markets.
Download or read book Risk Sharing and Asset Prices written by Anusha Chari and published by . This book was released on 2002 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: When countries liberalize their stock markets, firms that become eligible for purchase by foreigners (investible), experience an average stock price revaluation of 10.4 percent. Since the covariance of the median investible firm's stock return with the local market is 30 times larger than its covariance with the world market, liberalization reduces the systematic risk associated with holding investible securities. Consistent with this fact: 1) the average effect of the reduction in systematic risk is 3.4 percentage points, or roughly one third of the total effect; and 2) variation in the firm-specific response is directly proportional to the firm-specific change in systematic risk. The statistical significance of this proportionality persists after controlling for changes in expected future profits and index inclusion criteria such as size and liquidity.
Download or read book Differences of Opinion and the Price Volume Relation written by Costas Xiouros and published by . This book was released on 2010 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper solves a dynamic general equilibrium asset pricing model of disagreement that draws a direct link between asset prices and the financial volume of trade. The model exhibits two risk averse agents that hold heterogeneous beliefs about the conditional mean of the aggregate consumption growth. The differences in opinions is supported by the fact that agents interpret public information differently. The connecting link between prices and volume is an exogenously time varying disagreement intensity that determines the magnitude of disagreement about new information. The model is able to explain a number of seemingly unrelated asset pricing facts namely the positive correlation between price changes and volume, the contemporaneous relation between volume and return volatility, the excess volatility, the volatility persistence and the negative correlation between price levels and volatility.
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 CoAnomaly written by James Tengyu Guo and published by . This book was released on 2019 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: I propose a simple time-series risk measure in trading stock market anomalies, CoAnomaly, the time-varying average pairwise correlation among 34 anomalies, which helps to explain both the time-series and the cross-sectional anomaly return patterns. Since correlations among underlying assets determine the portfolio variance, CoAnomaly is an important state variable for arbitrageurs who hold diversified portfolios of anomalies to boost their performance. Empirically, I show that, first, CoAnomaly is persistent and forecasts long-run aggregate volatility of the diversified anomaly portfolio. Second, CoAnomaly positively predicts future average anomaly returns in the time series. Third, in the cross-section of these 34 anomaly portfolios, CoAnomaly carries a negative price of risk. These return patterns suggest that arbitrageurs take the time-varying correlation into account and their intertemporal hedging demand plays an important role in setting asset prices.
