Download or read book Essays in Asset Pricing and Forecasting written by Ritong Qu and published by . This book was released on 2021 with total page 230 pages. Available in PDF, EPUB and Kindle. Book excerpt: My thesis has two themes: The first theme is about studying investors' expectations and the relation to asset prices; while the second theme is about evaluating forecasting performance. Both themes focus on what we can learn from a panel of data. The first chapter of my dissertation studies rational investors' expectation of consumption growth at the presence of structure breaks and asset pricing implications. While the first chapter studies how rational individuals should do, the second and third chapters focus on forecasters' behavior in real world, by developing tools to evaluate forecasters' performance about multiple variables, across many forecasters and at single time periods. In Chapter 1, we use data on multiple consumption goods to identify infrequent, but persistent breaks to consumption growth dynamics. Over a sixty-year sample, we find four breaks, all of which are associated with major macroeconomic and financial market events such as oil price shocks, the Great Moderation, the end of the tech stock market bubble, and the Covid pandemic. The impact of the breaks on consumption growth is highly uncertain and heterogeneous across consumption goods. We explore the asset pricing implications of our novel empirical evidence in the context of a Lucas tree model in which investors use information on multiple consumption goods to learn about model parameters. We find that break risk in consumption growth, combined with investor learning, helps resolve a number of asset pricing puzzles such as high risk premium and volatility of market returns, as well as cross-sectional anomalies such as momentum. Chapter 2 is joint work with Allan Timmermann and Yinchu Zhu. Forecasting skills are often identified by comparing predictive accuracy across large numbers of forecasts. This generates a multiple hypothesis testing problem that can trigger many false positives. We develop a new bootstrap test approach for identifying superior predictive accuracy that applies to multi-dimensional panel settings with arbitrarily many forecasts, outcome variables, horizons, and time periods. Our approach controls the family-wise error rate while retaining the ability to identify truly skilled forecasters. An empirical analysis of the IMF's World Economic Outlook forecasts across 185 countries, five variables and several forecast horizons shows how our approach can be used to identify variables and countries for which the IMF's forecasts improve significantly at shorter horizons as well as cases where they fail to improve. Chapter 3 is also joint work with Allan Timmermann and Yinchu Zhu. We develop new methods for pairwise comparisons of predictive accuracy with cross-sectional data. Using a common factor setup, we establish conditions on cross-sectional dependencies in forecast errors which allow us to test the null of equal predictive accuracy on a single cross-section of forecasts. We consider both unconditional tests of equal predictive accuracy as well as tests that condition on the realization of common factors and show how to decompose forecast errors into exposures to common factors and idiosyncratic components. An empirical application compares the predictive accuracy of financial analysts' short-term earnings forecasts across six brokerage firms.

Download or read book Essays on Asset Pricing written by Tuomas Tomunen and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In recursive out-of-sample forecasts of excess rates of return on bonds in each currency, the Cochrane and Piazzesi (2008) term structure forecasting models fail to beat forecasts from the historical average excess rates of return. Graphical analysis indicates that the instability in the forecasting models' parameters begins in the global financial crisis.

Download or read book Essays on Asset Pricing written by Bosung Jang and published by . This book was released on 2017 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies how asset prices are related to various macroeconomic and financial factors. In the first chapter, I examine the influence of external financing costs on growth and asset prices. Using U.S. high-tech firm data and the aggregate financing cost measure of Eisfeldt and Muir (2016), I find that an increase in financing cost can have negative effects on R&D by reducing equity finance. This result suggests that financing cost can have substantial impacts on long-run productivity through the R&D channel. Motivated by this idea, I construct a general equilibrium model where financing costs affect innovation activities and future productivity. My model endogenously generates long-run risk and matches key features of macroeconomic and asset price data. The model produces a sizable equity premium, doing a good job of matching macro moments in the data. Furthermore, a large risk premium of R&D-intensive stocks is justified in the model as in the data. In addition, as a higher financing cost forecasts lower productivity growth in the model, this prediction is supported by empirical evidence. In the second chapter, I investigate whether heterogeneity between domestic and foreign households can help explain the cross-section of stock returns. For this analysis, I apply Yogo’s (2006) durable consumption model to a two-country setting using Korean stock market data. In Korea, U.S. investors have been a dominant foreign investor group, given that the total share of foreigners is considerably large. By incorporating the stochastic discount factor of the U.S. into the model, I find that it plays a significant role in pricing assets. In particular, our model is successful in accounting for the expected excess return of relatively high book-to-market equity groups, producing lower pricing errors than the Fama-French 3 factor model. In the third chapter, I study the effects of debt maturity choice on stock returns and financial structure. I construct a model where firms can issue both short-term and long-term bonds, subject to collateral constraints. I also assume that, when they run financial deficits, firms use equity finance paying issuance costs. The model performs well in matching empirical facts about stock returns and the financial structure of firms. In addition, the model provides an interesting implication that firms substitute between leverage and maturity. In the literature, theoretical explanations for the substitution relationship have been mainly based on conflicts between stakeholders. Without hinging on the contract-theoretic approach, my model replicates the theoretical prediction.

Download or read book Essays on Empirical Asset Pricing and Out of sample Forecasting written by Tobias Stein and published by . This book was released on 2021 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Asset Price Forecasting written by Zachary McGurk and published by . This book was released on 2016 with total page 149 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Asset Pricing and Financial Institutions written by Patrick Christian Kiefer and published by . This book was released on 2018 with total page 182 pages. Available in PDF, EPUB and Kindle. Book excerpt: Forecasts of risk prices at alternative time scales can be used to consolidate history dependence in asset return time series. The resulting Markovian structure identifies a martingale component in the latent transition dynamics. I apply the model to U.S. stock markets and find the concentration of return volatility on the martingale component - the spectral gap - is countercyclical, and predicts annual market returns out-of-sample (o.o.s.) with an R-squared of 10.8%. Value (HML) predictability is concave and front-heavy, peaking at a one-year 14.7% o.o.s. R-squared. In contrast, the momentum predictability term structure is convex, insignificant on the short end, but accelerates to 31.4% o.o.s. R-squared at the three-year horizon. I form timing portfolios to investigate the risk content of the aggregate forecasts. Incremental gains from timing value are compensation for bearing systematic shocks to time-varying expected returns. Exposure to the market timing portfolio is cross-sectionally priced, while gains from timing size (SMB) are not. The findings provide new restrictions for parametric asset pricing theories. Incomplete human capital markets induce unexpected rebalancing costs that are mitigated by a bank. Ex-ante, the bank exchanges risky endowments for demandable liabilities. An ex-post withdrawal corresponds to exercising a put option on the market, used to resolve an unexpected portfolio choice problem. Portfolio choice opens a risk aversion channel that distinguishes our predictions from Diamond and Dybvig (1983) and related models. In these models, deposits resolve consumption-timing tensions by accommodating the investor's intertemporal elasticity of substitution (IES). The inclusion of risk-based incentives allow us to characterize the endogenous link between the intermediary balance sheet and the preference-based pricing kernel. Moreover, ex-post rebalancing incentives relax enforcement problems for ex-ante optimal policies in incomplete markets. This provides a justification for the coexistence of intermediation and market institutions.

Download or read book Essays on Behavioral Finance and Asset Pricing written by Chen Wang and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of four essays exploring how people form beliefs and make decisions in the financial markets and their implications for asset prices. Two common threads run through this dissertation: the persistence of key state variables and the less-than-fully-rational approach to economic decision-making.Chapter 1 studies how professional forecasts of interest rates across maturities respond to new information. I document that forecasts for short-term rates underreact to new information while forecasts for long-term rates overreact. I propose a new explanation based on "autocorrelation averaging,'' whereby, to limited cognitive processing capacity, forecasters' estimate of the autocorrelation of a given process is biased toward the average autocorrelation of all the processes they observe. Consistent with this view, I show that forecasters over-estimate the autocorrelation of the less persistent term premium component of interest rates and under-estimate the autocorrelation of the more persistent short rate component. A calibrated model quantitatively matches the documented pattern of misreaction. Finally, I explore the pattern's implication for asset prices by showing that an overreaction-motivated predictor, the realized forecast error for the 10-year Treasury yield, robustly predicts excess bond returns.Chapter 2, joint with Ye Li, generalizes an exponential-affine asset pricing model to show that the prices of dividend strips reveal the underlying state variables, and thus, strongly predict future market return and dividend growth. We derive and empirically show that expected dividend growth is non-persistent, under which condition the ratio of market price to short-term dividend price, "duration,'' reveals only expected returns information. Duration predicts annual market return with an out-of-sample of R2 19%, subsuming the price-dividend ratio's predictive power. After controlling for duration, the price-dividend ratio predicts dividend growth with an out-of-sample R2 of 30%. Our results hold outside the U.S. We find the expected return is countercyclical and responds forcefully to monetary policy shocks. As implied by the ICAPM, shocks to duration, the expected-return proxy, are priced in the cross-section.Chapter 3, joint with Cameron Peng, shows that mutual funds contribute to cross-sectional momentum and excess volatility through positive feedback trading. Stocks held by positive feedback funds exhibit much stronger momentum, almost doubling the returns from a simple momentum strategy. This ``enhanced'' momentum is robust to alternative positive feedback trading measures and cannot be explained by other stock characteristics, ex-post firm fundamentals, fund flows, or herding. Moreover, enhanced momentum is almost entirely reversed after one quarter, suggesting initial overshooting and subsequent reversal. We argue that the most likely explanation is the price pressure from positive feedback trading. Finally, we relate positive feedback trading to mutual fund performance and show that it can positively predict a fund's return from active management.Chapter 4, joint with Ye Li, presents an intrinsic form of uncertainty in asset management, which we call ``delegation uncertainty.'' Investors hire managers for their superior models of asset markets, but delegation outcome is uncertain precisely because the managers' model is unknown to investors. We model investors' delegation decisions as a trade-off between asset return uncertainty and delegation uncertainty. Our theory explains several puzzles on fund performances. It also delivers asset pricing implications supported by our empirical analysis: (1) because investors partially delegate and hedge against delegation uncertainty, CAPM alpha arises; (2) the cross-section dispersion of alpha increases in uncertainty; (3) managers bet on alpha, engaging in factor timing, but factors' alpha is immune to the rise of their arbitrage capital -- when investors delegate more, delegation hedging becomes stronger. Finally, we offer a novel approach to extract model uncertainty from asset returns, delegation, and survey expectations.

Download or read book Three Essays on Information and Asset Prices written by Gang Li and published by . This book was released on 2003 with total page 218 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Firm s Dynamics Asset Pricing and Uncertainty written by Lizi Yu and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Moreover, we test if these uncertainty measures could forecast the stock returns of industrial portfolios together with other moments estimated from the model. The results suggest that a time-varying linear forecasting model of the uncertainty measures performs well in return forecasting both in short and long run for most of the industries.

Download or read book Three Essays of Firm s Fundamentals and Asset Pricing written by Wei-Kang Shih and published by . This book was released on 2010 with total page 189 pages. Available in PDF, EPUB and Kindle. Book excerpt: In my dissertation research, I have three essays discussing the firm's fundamentals and their asset pricing implications. In the first essay entitled "Alternative Equity Valuation Models", we use simultaneous equations estimation and combined forecasting methods to examine future stock prices forecast ability of Ohlson (1995) Model, Feltham and Ohlson (1995) Model, and Warren and Shelton (1971) Model. We also investigate whether comprehensive earnings can provide incremental price-relevant information beyond net income. Overall, we find that the simultaneous equations estimation procedure can produce more accurate future stock price forecasts than the traditional single equation estimation method, and combined forecast method can further reduce the prediction errors by using combination of individual forecasts. We also find supporting evidence that investors can use comprehensive earnings to more accurately forecast future stock prices in these valuation models. My second essay entitled "Technical, Fundamental, and Combined Information for Separating Winners from Losers" jointly use fundamental and technical information to improve the technical momentum strategy. We examine how fundamental accounting information can be used to supplement the technical information, such as past returns and past trading volume data, to separate momentum winners from losers. More specifically, we propose a unified framework of incorporating fundamental indicators FSCORE (Piotroski, 2000) and GSCORE (Mohanram, 2005) into the technical momentum strategy. Our empirical results suggest that the combined momentum strategy outperforms technical momentum strategy for both growth and value stocks. My third essay entitled "The Economic Consequences of Real Earnings Management" examines how real activities based earnings management affect firm's payout and investment decisions. Our paper focuses on real earnings management in a general equilibrium production (GEP) economy setting, and studies the economic implications of this phenomenon on the economy. To formalize the notion of real earnings management, we propose that risk-averse managers "manage" earnings through investment-payout decisions that are conditioned by their history and habits. In addition, we permit habits to change randomly which introduces another source of risk. We explicitly solve for the endogenous asset prices and interest rate, and show how this additional risk from managerial habits is priced in the production economy.

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.

Download or read book Essays in Market Integrations and Economic Forecasting written by Alonso E. Gomez Albert and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Insider Trading Informational Efficiency and Asset Pricing written by Stephen Rhett Clark and published by . This book was released on 2014 with total page 134 pages. Available in PDF, EPUB and Kindle. Book excerpt: While significant deviations between initial forecasts and actual box-office outcomes exist, prices nonetheless evolve in accordance with efficient updating. Further, convergence rates appear independent of both the average initial forecast error and the level of disagreement in forecasts. Lastly, the third chapter revisits the theoretical justifications for Bossaerts's (2004) ELM, with the goal of providing clear, intuitive proofs of the key results underlying the methodology. The seemingly biggest hurdle to garnering more widespread adoption of the ELM methodology is the confusion that surrounds the use of weighted modified returns when testing for rational asset pricing restrictions. I attack this hurdle by offering a transparent justification for this approach. I then establish how and why Bossaerts's results extend from the case of digital options to the more practically relevant class of all limited-liability securities, including equities. I conclude by showing that the ELM restrictions naturally lend themselves to estimation and testing of asset pricing models, using weighted modified returns, in a Generalized Method of Moments (GMM) framework.

Download or read book Essays in Asset Pricing written by Yousuf Haque and published by . This book was released on 2015 with total page 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 Essays in Empirical Asset Pricing written by Irina Pimenova and published by . This book was released on 2018 with total page 206 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this dissertation, I revisit two problems in empirical asset pricing. In Chapter 1, I propose a methodology to evaluate the validity of linear asset pricing factor models under short sale restrictions using a regression-based test. The test is based on the revised null hypothesis that intercepts obtained from regressing excess returns of test assets on factor returns, usually referred to as alphas, are non-positive. I show that under short sale restrictions a much larger set of models is supported by the data than without restrictions. In particular, the Fama-French five-factor model augmented with the momentum factor is rejected less often than other models. In Chapter 2, I investigate patterns of equity premium predictability in international capital markets and explore the robustness of common predictive variables. In particular, I focus on predictive regressions with multiple predictors: dividend-price ratio, four interest rate variables, and inflation. To obtain precise estimates, two estimation methods are employed. First, I consider all capital markets jointly as a system of regressions. Second, I take into account uncertainty about which potential predictors forecast excess returns by employing spike-and-slab prior. My results suggest evidence in favor of predictability is weak both in- and out-of-sample and limited to a few countries. The strong predictability observed on the U.S. market is rather exceptional. In addition, my analysis shows that considering model uncertainty is essential as it leads to a statistically significant increase of investors' welfare both in- and out-of-sample. On the other hand, the welfare increase associated with considering capital markets jointly is relatively modest. However, it leads to reconsider the relative importance of predictive variables because the variables that are statistically significant predictors in the country-specific regressions are insignificant when the capital markets are studied jointly. In particular, my results suggest that the in-sample evidence in favor of the interest rate variables, that are believed to be among the most robust predictors by the literature, is spurious and is mostly driven by ignoring the cross-country information. Conversely, the dividend-price ratio emerges as the only robust predictor of future stock returns.

Download or read book Essays in Asset Pricing and Market Imperfections written by Weiyang Qiu (Ph. D.) and published by . This book was released on 2010 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt: (cont.) The third part of the thesis studies asset pricing under heterogeneous information. In an asset market where agents have heterogeneous information, asset prices not only depend their expectations of the true fundamentals but also depend on their expectations of the expectations of others. Iterations of such expectations lead to the so-called "infinite regress" problem, which makes the analysis of asset pricing under heterogeneous information challenging. In this part, we solve the infinite-regress problem in a simple economic setting under a fairly general information structure. This allows us to examine how different forms of information heterogeneity impacts the behavior of asset prices, their return dynamics, trading volume as well as agents' welfare.