Download or read book Essays on Return Predictability and Volatility Estimation written by Yuzhao Zhang and published by . This book was released on 2008 with total page 316 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Stock Market Volatility written by Chengbo Fu and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on stock market volatility. In the first essay, we show that investors will have the information in the idiosyncratic volatility spread when using two different models to estimate idiosyncratic volatility. In a theoretical framework, we show that idiosyncratic volatility spread is related to the change in beta and the new betas from the extra factors between two different factor models. Empirically, we find that idiosyncratic volatility spread predicts the cross section of stock returns. The negative spread-return relation is independent from the relation between idiosyncratic volatility and stock returns. The result is driven by the change in beta component and the new beta component of the spread. The spread-relation is also robust when investors estimate the spread using a conditional model or EGARCH method. In the second essay, the variance of stock returns is decomposed based on a conditional Fama-French three-factor model instead of its unconditional counterpart. Using time-varying alpha and betas in this model, it is evident that four additional risk terms must be considered. They include the variance of alpha, the variance of the interaction between the time-varying component of beta and factors, and two covariance terms. These additional risk terms are components that are included in the idiosyncratic risk estimate using an unconditional model. By investigating the relation between the risk terms and stock returns, we find that only the variance of the time-varying alpha is negatively associated with stock returns. Further tests show that stock returns are not affected by the variance of time-varying beta. These results are consistent with the findings in the literature identifying return predictability from time-varying alpha rather than betas. In the third essay, we employ a two-step estimation method to separate the upside and downside idiosyncratic volatility and examine its relation with future stock returns. We find that idiosyncratic volatility is negatively related to stock returns when the market is up and when it is down. The upside idiosyncratic volatility is not related to stock returns. Our results also suggest that the relation between downside idiosyncratic volatility and future stock returns is negative and significant. It is the downside idiosyncratic volatility that drives the inverse relation between total idiosyncratic volatility and stock returns. The results are consistent with the literature that investor overreact to bad news and underreact to good news.

Download or read book Essays on the Predictability and Volatility of Asset Returns written by Stefan A. Jacewitz and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation collects two papers regarding the econometric and economic theory and testing of the predictability of asset returns. It is widely accepted that stock returns are not only predictable but highly so. This belief is due to an abundance of existing empirical literature finding often overwhelming evidence in favor of predictability. The common regressors used to test predictability (e.g., the dividend-price ratio for stock returns) are very persistent and their innovations are highly correlated with returns. Persistence when combined with a correlation between innovations in the regressor and asset returns can cause substantial over-rejection of a true null hypothesis. This result is both well documented and well known. On the other hand, stochastic volatility is both broadly accepted as a part of return time series and largely ignored by the existing econometric literature on the predictability of returns. The severe effect that stochastic volatility can have on standard tests are demonstrated here. These deleterious effects render standard tests invalid. However, this problem can be easily corrected using a simple change of chronometer. When a return time series is read in the usual way, at regular intervals of time (e.g., daily observations), then the distribution of returns is highly non-normal and displays marked time heterogeneity. If the return time series is, instead, read according to a clock based on regular intervals of volatility, then returns will be independent and identically normally distributed. This powerful result is utilized in a unique way in each chapter of this dissertation. This time-deformation technique is combined with the Cauchy t-test and the newly introduced martingale estimation technique. This dissertation finds no evidence of predictability in stock returns. Moreover, using martingale estimation, the cause of the Forward Premium Anomaly may be more easily discerned.

Download or read book Three Essays on Stock Market Volatility and Stock Return Predictability written by Shu Yan and published by . This book was released on 2000 with total page 310 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on the Predictability and Volatility of Returns in the Stock Market written by Ruojun Wu and published by . This book was released on 2008 with total page 137 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies the effect of parameter uncertainty on the return predictability and volatility of the stock market. The first two chapters focus on the decomposition of market volatility, and the third chapter studies the return predictability. When facing imperfect information, the investors tend to form a learning scheme that encompasses both historical data and prior beliefs. In the variance decomposition framework, the introducing of learning directly impacts the way that return forecasts are revised and consequently the relative component of market volatility based on these forecasts, namely the price movements from revision on future discount rates and those from future cash flows. According to the empirical study in Chapter 1, the former is not necessarily the major driving force of market volatility, which provides an alternative view on what moves stock prices. Learning is modeled and estimated by Bayesian method. Chapter 2 follows the topic in Chapter 1 and studies the role of persistent state variables in return decomposition in order to provide more robust inference on variance decomposition. In Chapter 3 we propose to utilize theoretical constraints to help predict market returns when in sample data is very noisy and creates model uncertainty for the investors. The constraints are also incorporated by Bayesian method. We show in the out-of-sample forecast experiment that models with theoretical constraints produce better forecasts.

Download or read book Essays on Stock Return Predictability and Portfolio Allocation written by Bradley Steele Paye and published by . This book was released on 2004 with total page 380 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Disaster Risk and Equity Return Predictability written by Shunlin Liang and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of two essays on disaster risk and equity return predictability. The first essay proposes new measures of firm-level and market level disaster risk from deviation of put-call symmetry, which is free from being contaminated by the asymmetry between option traders and equity investors. Compared with other known measures of disaster risk, the market-level disaster risk measure robustly predicts aggregate market returns, with out-of-sample (R^2=6.86%) for the next twelve months. The cross-sectional analysis shows that firm-level disaster risk also explains variations in expected stock returns. Stocks with high firm-level disaster risk earn an annual four-factor subsequent alpha 8.0% higher than stocks with low firm-level disaster risk. I explore potential mechanisms giving rise to these asset pricing facts. The second essay finds that the investor’s learning of higher moments can account for the time-variation, size, and volatility of equity premium. I estimate the investor’s belief on skewness and kurtosis of consumption and dividend growth, and assume investor’s Bayesian learning about a skew student’s t-distribution with unknown fixed parameters. The predictive regressions show that more negative skewness and higher kurtosis predict higher subsequent market excess returns, which implies the investor’s learning generates the time variation of equity premium although the true distribution is static. The calibrated asset pricing model shows that the investor’s learning also explains the size and volatility of the equity premium observed in the data when the investor has a preference for early resolution of uncertainty.

Download or read book Essays on Stochastic Volatility and Jumps written by Diep Ngoc Duong and published by . This book was released on 2013 with total page 184 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation comprises three essays on financial economics and econometrics. The first essay outlines and expands upon further testing results from Bhardwaj, Corradi and Swanson (BCS: 2008) and Corradi and Swanson (2011). In particular, specification tests in the spirit of the conditional Kolmogorov test of Andrews (1997) that rely on block bootstrap resampling methods are first discussed. We then broaden our discussion from single process specification testing to multiple process model selection by discussing how to construct predictive densities and how to compare the accuracy of predictive densities derived from alternative (possibly misspecified) diffusion models. In particular, we generalize simulation steps outlined in Cai and Swanson (2011) to multifactor models where the number of latent variables is larger than three. In the second essay, we begin by discussing important developments in volatility modeling, with a focus on time varying and stochastic volatility as well as the "model free" estimation of volatility via the use of so-called realized volatility, and variants thereof called realized measures. In an empirical investigation, we use realized measures to investigate the role of "small" and large" jumps in the realized variation of stock price returns and show that jumps do matter in the relative contribution to the total variation of the process, when examining individual stock returns, as well as market indices. The third essay examines the predictive content of a variety of realized measures of jump power variations, all formed on the basis of power transformations of instantaneous returns. Our prediction involves estimating members of the linear and nonlinear extended Heterogeneous Autoregressive of the Realized Volatility (HAR-RV) class of models, using S & P 500 futures data as well as stocks in the Dow 30, for the period 1993-2009. Our findings suggest that past "large" jump power variations help less in the prediction of future realized volatility, than past "small" jump power variations. Our empirical findings also suggest that past realized signed jump power variations, which have not previously been examined in this literature, are strongly correlated with future volatility.

Download or read book Essays on Return Predictability in Financial Markets written by Chan R. Mang and published by . This book was released on 2012 with total page 149 pages. Available in PDF, EPUB and Kindle. Book excerpt: My thesis examines return predictability in government bond markets and currency markets. In Chapter 1, I take the term structure model in Cochrane and Piazzesi (2008) and construct currency market prices. The implied currency market prices are then counterfactually volatile and predictable, at least with respect to commonly used predictor variables. Getting the model closer to currency market data means reducing bond risk compensation but doing so nearly eliminates predictability in bond markets. One way to generate sensible time-variation in bond and currency risk-premia allows the volatility of returns to be time-varying. In Chapter 2, I test if alternative forecast rules perform better than the return-forecasting factor of Cochrane and Piazzesi (2008). I compare forecasts assuming all historical data is available to recursively made ones that are revised with the arrival of news. Differences in the two forecast rules systematically move with realized bond risk-premia and forecast mean yield curve levels and short-term interest rates one year ahead not just for the U.S., but also for government bond markets of other industrialized economies. I show that lower long-term rates relative to short-rates in 2004-2005 is consistent with an expected a decline of interest rates by market participants. In Chapter 3, I show that the cross-sectional average spread in the return-forecasting factor of Cochrane and Piazzesi (2005, 2008) can forecast currency risk-premia. However, the return-forecasting factor spread consistent with real-time data does not forecast currency risk-premia. I also find that both currency risk-premia and exchange rate changes have a predictable component that is detected by the information gap, what I call the hidden FX market factor, between forecasts that take as given the full sample of data and those consistent with real-time availability. Controlling for large and transitory exchange rate changes using this information gap make interest rate differentials between the average foreign country and the U.S. positively correlated with dollar appreciation rates, delivering the right sign predicted by uncovered interest parity.

Download or read book Three Essays on Global Stock Markets written by Mengmeng Dong (Professor of finance) and published by . This book was released on 2018 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation consists of three sole-authored essays that study global stock returns. The first one “Global Anomalies” estimates the aggregated return predictability of 117 U.S. anomalies across 40 countries. These anomaly variables generate substantial return predictability when they are aggregated within the same category as defined in Hou, Xue, and Zhang (2015) using composite measures. Combining all six categories of anomaly variables into one single composite measure, a global hedge portfolio generates an average equal (value)-weighted monthly return of 2.15% (1.20%) with a t-statistic of 9.22 (4.66). These results highlight the importance of using composite measures to summarize the information contained in individual anomaly variables. My dissertation consists of three sole-authored essays that study global stock returns. The first one “Global Anomalies” estimates the aggregated return predictability of 117 U.S. anomalies across 40 countries. These anomaly variables generate substantial return predictability when they are aggregated within the same category as defined in Hou, Xue, and Zhang (2015) using composite measures. Combining all six categories of anomaly variables into one single composite measure, a global hedge portfolio generates an average equal (value)-weighted monthly return of 2.15% (1.20%) with a t-statistic of 9.22 (4.66). These results highlight the importance of using composite measures to summarize the information contained in individual anomaly variables. In the third chapter “The Impact of Price Limits on Stock Volatility and Price Delay: Evidence from China”, I focus on the Chinese stock market and study how market interventions affect price behaviors. To overcome challenge in identification, I first match firms by characteristics and use difference-in-difference methodology to establish causality. Exploring a Special Treatment policy in China, I show that 5-basis-point tightening in daily price limits (from ±10% to ±5%) significantly reduces annualized volatility by 6.5 basis points (t =5.00) yet increases price delay by 63% from the previous year (t =7.40). Trading activity and liquidity significantly decrease under new limits but return increases by an equal-weighted average of 27% (t = 3.22) in 12 months. Evidence suggests that in the long-run price limits are effective in reducing volatility and improving firm value yet causing delayed price discovery and lower liquidity.

Download or read book Essays on Stock Return Predictability and Market Efficiency written by Lei Jiang and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Credit Conditions and Stock Return Predictability written by Heungju Park and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation examines stock return predictability with aggregate credit conditions. The aggregate credit conditions are empirically measured by credit standards (Standards) derived from the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices. Using Standards, this study investigates whether the aggregate credit conditions predict the expected returns and volatility of the stock market. The first essay, "Credit Conditions and Expected Stock Returns," analyzes the predictability of U.S. aggregate stock returns using a measure of credit conditions, Standards. The analysis reveals that Standards is a strong predictor of stock returns at a business cycle frequency, especially in the post-1990 data period. Empirically the essay demonstrates that a tightening of Standards predicts lower future stock returns. Standards performs well both in-sample and out-of-sample and is robust to a host of consistency checks including a small sample analysis. The second essay, "Credit Conditions and Stock Return Volatility," examines the role played by credit conditions in predicting aggregate stock market return volatility. The essay employs a measure of credit conditions, Standards in the stock return volatility prediction. Using the level and the log of realized volatility as the estimator of the stock return volatility, this study finds that Standards is a strong predictor of U.S. stock return volatility. Overall, the forecasting power of Standards is strongest during tightening credit periods.

Download or read book Trois essais sur le contenu informatif de la distribution des rendements implicite aux prix des options Three essays on the informative content of the option implied return distribution written by Dominique Toupin and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Résumé en anglais

Download or read book Option Markets Return Predictability and Term Structure written by Yanhui Zhao and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on eliciting information about underlying assets from the equity options markets, and improving our understanding of the term structure cost of equity. In the first essay, we find that high standard deviations of the volatility premium, of implied volatility innovations, and of the volatility term structure spread in equity options predict low underlying returns. This return predictability is not explained by the levels of these three variables, or by volatility of volatility, other known firm characteristics, or common risk factor models. We find support for interpreting the standard deviations of these option-based measures as forward-looking proxies of heterogeneous beliefs. In the second essay, we find that stocks with high risk-neutral skewness (RNS) exhibit abnormal performance driven by rebounds following poor performance. This behavior connects it to momentum crashes caused by reversal in past losers. In periods of post-recession rebounds and high market volatility when momentum crashes occur, a zero-investment high-low RNS portfolio has significant positive abnormal returns. The momentum anomaly is strongest (weakest) in stocks with the lowest (highest) RNS, consistent with the positive relationship of RNS to momentum crashes. These results hold controlling for trading frictions, other firm characteristics, and risk factors. We generalize our findings to all stocks by constructing an RNS factor-mimicking portfolio SKEW and find that a WML strategy that avoids high SKEW beta stocks has superior performance to the baseline and risk-managed WML strategies. In the third essay, we estimate the cost of equity capital term structure for the insurance industry as a whole, and several insurance sectors such as life/health and property/casualty. We use a vector autoregressive process to jointly model the dynamics of expected cash flows, beta, and the market risk premium. We obtain a closed form solution for the discount rate appropriate for each maturity. Our empirical analysis shows that for the insurance industry, the cost of equity based on our term structure model is on average nearly 299.6 basis points higher compared to the single period CAPM. This means that these insurers might overly invest if they rely on the single period CAPM.

Download or read book Essays in Honor of Peter C B Phillips written by Thomas B. Fomby and published by Emerald Group Publishing. This book was released on 2014-11-21 with total page 500 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume honors Professor Peter C.B. Phillips' many contributions to the field of econometrics. The topics include non-stationary time series, panel models, financial econometrics, predictive tests, IV estimation and inference, difference-in-difference regressions, stochastic dominance techniques, and information matrix testing.

Download or read book Essays on Volatility Risk Premia in Asset Pricing written by and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis contains two essays. In the first essay, we investigate the impact of time varying volatility of consumption growth on the cross-section and time-series of equity returns. While many papers test consumption-based pricing models using the first moment of consumption growth, less is known about how the time-variation of consumption growth volatility affects asset prices. In a model with recursive preferences and unobservable conditional mean and volatility of consumption growth, the representative agent's estimates of conditional moments of consumption growth affect excess returns. Empirically, we find that estimated consumption volatility is a priced source of risk, and exposure to it predicts future returns in the cross-section. Consumption volatility is also a strong predictor of aggregate quarterly excess returns in the time-series. The estimated negative price of risk together with the evidence on equity premium predictability suggest that the elasticity of intertemporal substitution of the representative agent is greater than unity, a finding that contributes to a long standing debate in the literature. In the second essay, I present a simple model to show that if agents face binding portfolio constraints, stocks with high volatility in states of low market returns demand a premium beyond the one implied by systematic risks. Assets whose volatility positively covaries with market volatility also have high expected returns. Both effects of this idiosyncratic volatility risk premium are strongest for assets that face more binding trading restrictions. Unlike the prior empirical literature that obtains mixed results when focusing on the level of idiosyncratic volatility, I investigate the dynamic behavior of idiosyncratic volatility and find strong support for my predictions. Comovement of innovations of idiosyncratic volatility with market returns negatively predicts returns for trading restricted stocks relative to unrestricted stocks, and comovement.

Download or read book Essays on Return Predictability and Yield Factors written by Xuyang Ma and published by . This book was released on 2014 with total page 95 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation includes three chapters in which the first two are on return predictability and the third is on yield curve and yield factors. The abstract of each of them is as follows: 1), This paper proposes using capital gains instead of total returns in return predictability tests. Total return predictability can be inferred from capital gain predictability since total returns with dividends are highly correlated with returns based on capital gains only. An exact linear relationship exists among log dividend growth, log capital gain and log dividend price ratio. This exact linear relationship has similar implication as the Campbell-Shiller (1988) linear approximation but is more precise and easier for predictability tests. I verify the standard empirical findings on return predictability using capital gain predictability. Separation of price change and dividend change also leads to a new finding: shocks to dividend growth is shown to have significant positive correlation with shocks to dividend price ratio in the vector autoregressive regression (VAR) rather than close to zero as shown in previous literature. 2), This paper tests the return predictability of the cyclical and trend components in the log dividend price ratio. The log dividend ratio is found to have a near-unit root trend factor if the expectation of the future discount factor is highly persistent. We use Bayesian analysis and the Kalman filter to extract the strictly stationary and near-random-walk components in the log dividend price ratio. The extracted cyclical process can predict one-year ahead total returns during the post-war period and one-year ahead dividend growth rates during the pre-war and war period with notable R^2. We also demonstrate a reverse of predictability: returns become more predictable while dividend growth rates become more unpredictable. 3), This paper examines the fourth principal component of the yields matrix, which is largely ignored in macro-finance forecasting applications, in the context of predicting excess bond returns. Using yields data from the Fama-Bliss and the Federal Reserve, we present the significant in-sample and out-of-sample predictive power of models including the fourth yield factor. Additionally, the "return-forecasting factor" in Cochrane and Piazzesi (2005) is shown to be a restricted linear combination of all yield factors and to be highly correlated with the second and fourth factors. We interpret the fourth yield factor as a factor representing "S-shape" (the shape of a sigmoid curve) and demonstrate the connection between the S-shape factor and the yield curve.