Download or read book Fat Tails and Spurious Estimation of Consumption based Asset Pricing Models written by Alexis Akira Toda and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book What Difference Fat Tails Make written by Paskalis Glabadanidis and published by . This book was released on 2017 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This chapter presents an empirical application of Bayesian MCMC estimation to the three main asset pricing models in use in the financial econometrics literature, namely, the Capital Asset Pricing Model (CAPM), the Fama-French (1992) three-factor model, and the Carhart (1997) four-factor model for decile portfolios sorted on market capitalization and book-to-market ratios. I use a SUR model similar in spirit to Zellner (1976) with a Student t-link to allow for fat tails in the distribution of the return innovations. The empirical findings are encouraging in that fat tails lead to posterior distributions of the asset pricing errors that encompass zero and indicate that previous findings of statistically and economically significant intercepts might be an artifact of using a Gaussian error distribution.

Download or read book The Double Power Law in Consumption and Implications for Testing Euler Equations written by Alexis Akira Toda and published by . This book was released on 2015 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide evidence suggesting that the cross-sectional distributions of U.S. consumption and its growth rate obey the power law in both the upper and lower tails, with exponents approximately equal to 4. Consequently, high order moments are unlikely to exist, and the GMM estimation of Euler equations that employs cross-sectional moments may be inconsistent. Through bootstrap studies, we find that the power law appears to generate spurious non-rejection of heterogeneous-agent asset pricing models in explaining the equity premium. Dividing households into age groups, we propose an estimation approach which appears less susceptible to fat tail issues.

Download or read book Asset Pricing Models with Conditional Betas and Alphas written by Wayne E. Ferson and published by . This book was released on 2010 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the estimation of asset pricing model regressions with conditional alphas and betas, focusing on the joint effects of data snooping and spurious regression. We find that the regressions are reasonably well specified for conditional betas, even in settings where simple predictive regressions are severely biased. However, there are biases in estimates of the conditional alphas. When time-varying alphas are suppressed and only time-varying betas are considered, the betas become baised. Previous studies overstate the significance of time-varying alphas.

Download or read book Asset Pricing Models with Conditional Betas and Alphas written by Wayne E. Ferson and published by . This book was released on 2006 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the estimation of asset pricing model regressions with conditional alphas and betas, focusing on the joint effects of data snooping and spurious regression. We find that the regressions are reasonably well specified for conditional betas, even in settings where simple predictive regressions are severely biased. However, there are biases in estimates of the conditional alphas. When time-varying alphas are suppressed and only time-varying betas are considered, the betas become baised. Previous studies overstate the significance of time-varying alphas.

Download or read book Estimating the Continuous Time Consumption Based Asset Pricing Model written by Sanford J. Grossman and published by London : Department of Economics, University of Western Ontario. This book was released on 1985 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: The consumption based asset pricing model predicts that excess yields are determined in a fairly simple way by the market's degree of relative risk aversion and by the pattern of covariances between percapita consumption growth and asset returns. Estimation and testingis complicated by the fact that the model's predictions relate to the instantaneous flow of consumption and point-in-time asset values, but only data on the integral or unit average of the consumption flow is available. In our paper, we show how to estimate the parameters of interest consistently from the available data by maximum likelihood. We estimate the market's degree of relative risk aversion and the instantaneous covariances of asset yields and consumption using six different data sets. We also test the model's overidentifying restrictions

Download or read book On the Economic Value of Modeling Fat Tails written by Prasad V. Bidarkota and published by . This book was released on 2003 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the impact of modeling fat tails observed in the empirical distributions of macroeconomic time series on the implications of theoretical macroeconomic models. We study this issue in the context of the widely used consumption-based asset-pricing model. We derive exact analytical solutions to bond prices and risk premiums on forward prices and holding period returns in this model, assuming that the endowment evolves as a stochastic process with innovations drawn alternatively from fat-tailed and Gaussian distributions. We calculate and compare the implied risk premiums for suitable parameterizations of the two versions of the model.

Download or read book A Long run Risks Model of Asset Pricing with Fat Tails written by and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data written by Dirk Krueger and published by . This book was released on 2007 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.

Download or read book Exploring Consumption Based Asset Pricing Model with Stochastic Trend Forcing Processes written by Tony S. Wirjanto and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Using Canadian data, the consumption-based asset pricing model is studied, defined in terms of nondurable and durable goods consumption. A two-stage estimation procedure is used, which takes account of the presence of common stochastic trends in the forcing processes. This method yields more reasonable estimates of the preference parameters than the previous studies did, and the asset-pricing equation is not rejected by the data. Moreover, the preference specification adopted in this paper allows a number of useful economic information to be obtained. The additive separability assumption and the Cobb-Douglas functional form of the utility function are ruled complements in the sense of Edgeworth and Pareto.

Download or read book Advances in Consumption Based Asset Pricing Empirical Tests written by and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Asset Pricing Models with and Without Consumption Data written by Gikas A. Hardouvelis and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper evaluates the ability of the empirical model of asset pricing of Campbell(1993a,b) to explain the time-series and cross-sectional variation of expected returns ofportfolios of stocks. In Campbell's model, an alternative risk-return relationship is derivedby substituting consumption out of the linearized first-order condition of the representativeagent. We compare this methodology to models that use actual consumption data, such asthe model of Epstein and Zin, 1989, 1991, and the standard consumption-based CAPM.Although we find that Campbell's model fits the data slightly better than models whichexplicitly price consumption risk, and provides reasonable estimates of the representativeagent's preference parameters, the parameter restrictions of the Campbell model, as well asits over-identifying orthogonality conditions, are generally rejected. The parameter restrictionsof the Campbell model, and the over-identifying conditions, are marginally not rejectedwhen the empirical model is augmented to account for the "size effect"

Download or read book The Impact of Fat Tails on Equilibrium Rates of Return and Term Premia written by Prasad V. Bidarkota and published by . This book was released on 2004 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the impact of ignoring fat tails observed in the empirical distributions of macroeconomic time series on the equilibrium implications of the consumption-based asset-pricing model with habit formation. Fat tails in the empirical distributions of consumption growth rates are modeled as a dampened power law process that nevertheless guarantees finiteness of moments of all orders. This renders model-implied mean equilibrium rates of return and equity and term premia finite. Comparison with a benchmark Gaussian process reveals that accounting for fat tails lowers the model-implied mean risk-free rate by 20 percent, raises the mean equity premium by 80 percent and the term premium by 20 percent, bringing the model implications closer to their empirically observed counterparts.

Download or read book Seasonality in Consumption based Asset Pricing written by Wayne Ferson and published by . This book was released on 1987 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book An Empirical Investigation of Consumption based Asset Pricing Models with Stochastic Habit Formation written by Qiang Dai and published by . This book was released on 2011 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Tracing Tails Large Idiosyncratic Income Shocks in a Heterogeneous Agent Asset Pricing Model written by Tobias Langen and published by . This book was released on 2014 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: I present evidence that large individual income changes can help explaining the size and value premium in a cross-section of portfolio returns. I develop a tail risk measure, the Idiosyncratic Income Risk Factor and estimate it on US income data. The results show that the extreme income shocks vary with the state of the economy. In an augmented Consumption-Based Asset Pricing Model, the Idiosyncratic Income Risk Factor emerges as a priced factor when explaining a cross-section of returns of 25 portfolios sorted by size and book-to-market ratio. The findings support Krebs' (2004) critique of the Constantinides and Duffie (1996) idiosyncratic risk asset pricing model: central moments of the cross-sectional distribution of income cannot be used to test the implications of the Constantinides and Duffie (1996) model. I present evidence that supports the notion of a fat-tail-generating personal disaster process affecting asset prices.

Download or read book Essays in Consumption based Asset Pricing Models written by Hugo Alejandro Garduño Arredondo and published by . This book was released on 2008 with total page 324 pages. Available in PDF, EPUB and Kindle. Book excerpt: