Download or read book Do Subjective Expectations Explain Asset Pricing Puzzles written by Gurdip Bakshi and published by . This book was released on 2012 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: The structural uncertainty model with Bayesian learning, advanced by Weitzman (AER 2007), provides a framework for gauging the effect of structural uncertainty on asset prices and risk premiums. This paper provides an operational version of this approach that incorporates realistic priors about consumption growth volatility, while guaranteeing finite asset pricing quantities. In contrast to the extant literature, the resulting asset pricing model with subjective expectations yields well-defined expected utility, finite moment generating function of consumption growth, and tractable expressions for equity premium and riskfree return. Our quantitative analysis reveals that explaining the historical equity premium and riskfree return, in the context of subjective expectations, requires implausible levels of structural uncertainty. Furthermore, these implausible prior beliefs result in consumption disaster probabilities that virtually coincide with those implied by more realistic priors. At the same time, the two sets of prior beliefs have diametrically opposite asset pricing implications: one asserting, and the other contradicting, the antipuzzle view.
Download or read book Do Subjective Expectations Explain Asset Pricing Puzzles written by Gurdip Bakshi and published by . This book was released on 2009 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: The structural uncertainty model with Bayesian learning, advanced by Weitzman (AER 2007), provides a framework for gauging the effect of structural uncertainty on asset prices and risk premiums. This paper provides an operational version of this approach that incorporates realistic priors about consumption growth volatility, while guaranteeing finite asset pricing quantities. In contrast to the extant literature, the resulting asset pricing model with subjective expectations yields well-defined expected utility, finite moment generating function of consumption growth, and tractable expressions for equity premium and riskfree return. Our quantitative analysis reveals that explaining the historical equity premium and riskfree return, in the context of subjective expectations, requires implausible levels of structural uncertainty. Furthermore, these implausible prior beliefs result in consumption disaster probabilities that virtually coincide with those implied by more realistic priors. At the same time, the two sets of prior beliefs have diametrically opposite asset pricing implications: one asserting, and the other contradicting, the antipuzzle view.
Download or read book Departures from Rational Expectations and Asset Pricing Anomalies written by Andrei Semenov and published by . This book was released on 2008 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the potential of the consumption CAPM with pessimism, doubt, and the availability heuristic in the agent's beliefs to resolve the equity premium and risk-free rate puzzles. Using the nonlinear GMM estimation techniques, we find that doubt and the availability heuristic play an important role in explaining the cross-section of asset returns. However, when taken alone, these deviations from rational expectations can not resolve the equity premium and risk-free rate puzzles. This result is robust to the assumption that the expected value of an uncertain prospect is nonlinear in the subjective outcome probabilities.
Download or read book Handbook of Economic Expectations written by Ruediger Bachmann and published by Elsevier. This book was released on 2022-11-04 with total page 876 pages. Available in PDF, EPUB and Kindle. Book excerpt: Handbook of Economic Expectations discusses the state-of-the-art in the collection, study and use of expectations data in economics, including the modelling of expectations formation and updating, as well as open questions and directions for future research. The book spans a broad range of fields, approaches and applications using data on subjective expectations that allows us to make progress on fundamental questions around the formation and updating of expectations by economic agents and their information sets. The information included will help us study heterogeneity and potential biases in expectations and analyze impacts on behavior and decision-making under uncertainty. Combines information about the creation of economic expectations and their theories, applications and likely futures Provides a comprehensive summary of economics expectations literature Explores empirical and theoretical dimensions of expectations and their relevance to a wide array of subfields in economics
Download or read book Econometric Issues in Asset Pricing Puzzles written by Garrett Henry TeSelle and published by . This book was released on 1996 with total page 412 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Disaster in My Heart A Visceral Explanation for Some Asset Pricing Puzzles written by Suk Lee and published by . This book was released on 2018 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is an unfortunate, yet unmistakable fact that human life can sometimes be unusually painful: loss of loved ones, divorce, critical medical issues just to name a few. I introduce the notion of 'dis-utility shocks': rare but large negative deviations from consumption-based utility level, to represent such uncommon adversities. I adjoin dis-utility shocks to a standard consumption-based asset pricing model and develop a method to compute their impact on asset prices numerically. Despite their idiosyncratic nature, calibration results indicate that dis-utility shocks affect asset prices in ways that address the main puzzles regarding stock price movements.
Download or read book Expectations Data in Asset Pricing written by Klaus Adam and published by . This book was released on 2022 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Asset prices reflect investors' subjective beliefs about future cash flows and prices. In this chapter, we review recent research on the formation of these beliefs and their role in asset pricing. Return expectations of individual and professional investors in surveys differ markedly from those implied by rational expectations models. Variation in subjective expectations of future cash flows and price levels appear to account for much of aggregate stock market volatility. Mapping the survey evidence into agent expectations in asset pricing models is complicated by measurement errors and belief heterogeneity. Recent efforts to build asset pricing models that match the survey evidence on subjective belief dynamics include various forms of learning about payout or price dynamics, extrapolative expectations, and diagnostic expectations. Challenges for future research include the exploration of subjective risk perceptions, aggregation of measured beliefs, and links between asset market expectations and the macroeconomy.
Download or read book Special Issue Asset Pricing Puzzles in Finance written by Stan Hurn and published by . This book was released on 2006 with total page 128 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Asset Pricing written by Bing Cheng and published by World Scientific. This book was released on 2008 with total page 91 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modern asset pricing models play a central role in finance and economic theory and applications. This book introduces a structural theory to evaluate these asset pricing models and throws light on the existence of Equity Premium Puzzle. Based on the structural theory, some algebraic (valuation-preserving) operations are developed in asset spaces and pricing kernel spaces. This has a very important implication leading to practical guidance in portfolio management and asset allocation in the global financial industry. The book also covers topics, such as the role of over-confidence in asset pricing modeling, relationship of the portfolio insurance with option and consumption-based asset pricing models, etc.
Download or read book Do Subjective Growth Expectations Matter for Asset Prices written by Aditya Chaudhry and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Subjective growth expectations matter far less for asset prices than suggested by standard models. Reverse causality contaminates the correlation of growth expectations with prices: prices cause growth expectations. A 1% rise in price raises annual growth expectations 32 basis points. To quantify the causal effect of growth expectations on prices, I develop an asset demand model in which Bayesian investors learn from analysts. This causal effect is an order of magnitude smaller than assumed in standard models. A 1% rise in annual investor growth expectations raises price only 7 to 16 basis points. Inelastic demand rationalizes this small causal effect.
Download or read book Risks for the Long Run written by Ravi Bansal and published by . This book was released on 2010 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We model dividend and consumption growth rates as containing a small long-run predictable component and economic uncertainty (i.e., growth rate volatility) as being time-varying. The magnitudes of the predictable variation and changing volatility in growth rates, as in the data, are quite small. These growth rate dynamics, for which we provide empirical support, in conjunction with plausible parameter configurations of the Epstein and Zin (1989) preferences can explain key observed asset markets phenomena. In particular, we show that the model can justify the observed equity premium, the low risk free rate, and the ex-post volatilities of the market return, real risk free rate, and the price-dividend ratio. As in the data, the model also implies that dividend yields predict returns and that market return volatility is stochastic. The main economic insight we capture is that news about growth rates significantly alter agent's perceptions regarding long run expected growth rates and growth rate uncertainty--in equilibrium, this leads to a large equity risk premium, low risk free interest rate, and large market volatility.
Download or read book Risk for the Long Run written by Ravi Bansal and published by . This book was released on 2001 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 Discussion Paper 806 Asset Pricing Puzzles and Incomplete Markets Revised written by Queen's University. Institute for Economic Research and published by . This book was released on 1991 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Parameter Learning in General Equilibrium written by Pierre Collin-Dufresne and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, the variance of shocks, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.
Download or read book Explaining Asset Pricing Puzzles Associated with the 1987 Market Crash written by Luca Benzoni and published by . This book was released on 2010 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic uncertainty are subject to rare jumps. The arrival of a jump triggers the updating of agents' beliefs about the likelihood of future jumps, which produces a market crash and a permanent shift in option prices. Consumption and dividends remain smooth, and the model is consistent with salient features of individual stock options, equity returns, and interest rates.
Download or read book Parameter Learning in General Equilibrium written by Pierre Collin-Dufresne and published by . This book was released on 2015 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.
