Download or read book Pricing Kernels with Coskewness and Volatility Risk written by Fousseni Chabi-Yo and published by . This book was released on 2009 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: I investigate a pricing kernel in which coskewness and the market volatility risk factors are endogenously determined. I show that the price of coskewness and market volatility risk are restricted by investor risk aversion and skewness preference. The risk aversion is estimated to be between two and five and significant. The price of volatility risk ranges from -1.5% to -0.15% per year. Consistent with theory, I find that the pricing kernel is decreasing in the aggregate wealth and increasing in the market volatility. When I project my estimated pricing kernel on a polynomial function of the market return, doing so produces the puzzling behaviors observed in pricing kernel. Using pricing kernels, I examine the sources of the idiosyncratic volatility premium. I find that nonzero risk aversion and firms' non-systematic coskewness determine the premium on idiosyncratic volatility risk. When I control for the non-systematic coskewness factor, I find no significant relation between idiosyncratic volatility and stock expected returns. My results are robust across different sample periods, different measures of market volatility and firm characteristics.
Download or read book Pricing Kernels with Stochastic Skewness and Volatility Risk written by Fousseni Chabi-Yo and published by . This book was released on 2012 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: I derive pricing kernels in which the market volatility is endogenously determined. Using the Taylor expansion series of the representative investor's marginal utility, I show that the price of market volatility risk is restricted by the investor's risk aversion and skewness preference. The risk aversion is estimated to be between two and five and is significant. The price of the market volatility is negative. Consistent with economic theory, I find that the pricing kernel decreases in the market index return and increases in market volatility. The projection of the estimated pricing kernel onto a polynomial function of the market return produces puzzling behaviors, which can be observed in the pricing kernel and absolute risk aversion functions. The inclusion of additional terms in the Taylor expansion series of the investor's marginal utility produces a pricing kernel function of market stochastic volatility, stochastic skewness, and stochastic kurtosis. The prices of risk of these moments are restricted by the investor's risk aversion, skewness preference, and kurtosis preference. The prices of risk of these moments should not be confused with the price of risk of powers of the market return, such as co-skewness and co-kurtosis.
Download or read book Arbitrage Pricing Theory Conditional Coskewness and Volatility Shocks and Time Varying Coskewness and Its Value to Investors written by Marie Denise Racine and published by . This book was released on 1992 with total page 300 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Properties of the Pricing Kernel and Implications written by Ranadeb Chaudhuri and published by . This book was released on 2009 with total page 264 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Empirical Asset Pricing written by Wayne Ferson and published by MIT Press. This book was released on 2019-03-26 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.
Download or read book Volatility and the Pricing Kernel written by David Schreindorfer and published by . This book was released on 2022 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Empirical Pricing Kernels written by Horatio Cuesdeanu and published by . This book was released on 2016 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: By considering options on the S&P 500 it is shown how (i) missing option data, (ii) misestimated subjective probabilities, and (iii) a time varying variance (risk-premium) lead to different empirical pricing kernels. Accounting for all these aspects, the empirical return pricing kernel is w-shaped in calm periods and u-shaped in turbulent times. Finding w-shaped return pricing kernels, this paper is the first to reveal the interconnectedness between two asset pricing "puzzles": non-monotonically decreasing return pricing kernels and u-shaped volatility pricing kernels. Based on the non-parametric estimates, a parametric option pricing model that matches the stylized facts in the return and volatility dimension is proposed. Moreover, it is shown how a simple ambiguity aversion economy generates w- and u-shaped return pricing kernels.
Download or read book The Size of the Permanent Component of Asset Pricing Kernels written by Fernando Alvarez and published by . This book was released on 2001 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: We derive a lower bound for the size of the permanent component of asset pricing kernels. The bound is based on return properties of long-term zero-coupon bonds, risk-free bonds, and other risky securities. We find the permanent component of the pricing kernel to be very large; its volatility is about 100% of the volatility of the stochastic discount factor. This result implies that, if the pricing kernel is a function of consumption, innovations to consumption need to have permanent effects.
Download or read book Price and Volatility Co Jumps written by Federico M. Bandi and published by . This book was released on 2014 with total page 75 pages. Available in PDF, EPUB and Kindle. Book excerpt: The dependence between the magnitudes of discontinuous changes in asset prices and contemporaneous discontinuous changes in volatility (co-jumps) is a fundamental aspect of the price process contributing, among other effects, to skewness in the return distribution. Yet, its nature has been reported by many as being - in terms of sign, magnitude, and statistical significance - largely elusive. Using a novel identification strategy for stochastic volatility modelling in continuous time relying on trade-level information for spot variance estimation, as well as infinitesimal cross-moments, this paper documents that a sizeable proportion of discontinuous changes in asset prices are associated with strongly anti-correlated, contemporaneous changes in volatility. Not only are the price jump sizes strongly negatively correlated with the volatility jump sizes, but the absolute values of their (negative) mean and dispersion appear to increase with the volatility level, an additional effect which should lead to care in the management of joint directional and volatility jump risk. Using a possibly non-monotonic pricing kernel, we illustrate the equilibrium impact of price and volatility co-jumps on both return and variance risk premia.
Download or read book A Characterization of the Coskewness Cokurtosis Pricing Model written by Kerry Back and published by . This book was released on 2014 with total page 9 pages. Available in PDF, EPUB and Kindle. Book excerpt: The coskewness-cokurtosis pricing model is equivalent to there not being any return for which the alpha is positive and for which the residual risk has positive coskewness and negative cokurtosis with the market. Such returns would be extremely attractive to investors with mean-variance-skewness-kurtosis preferences who hold the market portfolio. This result establishes a parallel to the CAPM, which is equivalent to the absence of positive alpha returns. It also establishes a parallel to the fundamental theorem of asset pricing, because it relates absence of portfolios with unusually good costs/payoffs to the existence of a stochastic discount factor of a particular type.
Download or read book On Pricing Kernels Information and Risk written by Diane Wilcox and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We discuss the finding that cross-sectional characteristic based models have yielded portfolios with higher excess monthly returns but lower risk than their arbitrage pricing theory counterparts in an analysis of equity returns of stocks listed on the JSE. Under the assumption of general no-arbitrage conditions, we argue that evidence in favour of characteristic based pricing implies that information is more likely assimilated by means of nonlinear pricing kernels for the markets considered.
Download or read book Asymmetric Returns and Semidimensional Risks written by Cheekiat Low and published by . This book was released on 2001 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most theoretical models in finance measure risk as variance or covariance. However, many financial decision-makers seem to regard risk as the volatility of below-target returns and treat the volatility of above-target returns as a sweetener. Using simple metrics of downside risk and upside potential, constructed from conditional covariances, I test for the empirical content of this asymmetry. I introduce a new composite metric of semidimensional risks which reveals that the nonlinearity in the covariation of stock returns with bearish and bullish conditions of the market is priced in the cross-section of stock returns. In particular, I find that stocks that have concave characteristic regression lines against the market earn higher average returns than stocks that have convex characteristic regression lines. This new metric captures the relevant information in returns asymmetry or nonlinearity better than either coskewness or the square-coefficient from quadratic regression. I also present results that are consistent with a semidimensional risk-based explanation for the twin puzzles of return momentum and reversal. The primitive representation of the security pricing kernel as the negative of covariance between marginal utility of consumption and security returns lends theoretical support for semidimensional risks and provides a unifying perspective for seemingly disparate literature on semivariances, skewness and behavioral finance.
Download or read book Pricing Kernels and Their Dependence on the Implied Volatility Index written by Roman Lykhnenko and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays on Pricing Kernel Estimation Option Data Filtering and Risk neutral Density Tail Estimation written by Pirmin Meier and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first chapter introduces a new method to estimate the option-implied empirical pricing kernel. Departing from an adequate and economically motivated initial pricing kernel, we apply a customized functional gradient descent (FGD) algorithm based on B-splines. We empirically illustrate the estimation properties of the method using S & P 500 option data and find that the algorithm yields accurate estimates. In addition, we provide evidence of the superior predictive ability of our method in comparison with other approaches recently introduced in the empirical pricing kernel literature. The empirical pricing kernel is time-varying, which reflects changes in the relevant pricing kernel state variables. However, little is known about these factors driving the pricing kernel over time. Therefore, I present in the second chapter a time series model for the evolution of the empirical pricing kernel using a boosting approach based on regression trees. Given that trees have the ability to choose among a set of predictors the most relevant ones, I develop a tool to answer the main question regarding the principal pricing kernel driving factors. I show in the empirical part of the chapter that the influence of relevant driving factors such as volatility, financial and macroeconomic variables and sentiment measures substantially varies over time and I provide some insights on how they affect the pricing kernel shape. In the third chapter, we investigate how to estimate accurately the tails of the option-implied risk-neutral density, which is known to be a challenging problem. We review several methods and additionally introduce a new tail extension approach that combines the idea of price matching with the assumption of tails drawn from a generalized extreme value distribution. Based on a theoretical market model with known implied risk-neutral density, we conduct a performance analysis. We find that the best results are obtained either.
Download or read book Portfolio Theory and Management written by H. Kent Baker and published by Oxford University Press. This book was released on 2013-01-07 with total page 802 pages. Available in PDF, EPUB and Kindle. Book excerpt: Portfolio management is an ongoing process of constructing portfolios that balances an investor's objectives with the portfolio manager's expectations about the future. This dynamic process provides the payoff for investors. Portfolio management evaluates individual assets or investments by their contribution to the risk and return of an investor's portfolio rather than in isolation. This is called the portfolio perspective. Thus, by constructing a diversified portfolio, a portfolio manager can reduce risk for a given level of expected return, compared to investing in an individual asset or security. According to modern portfolio theory (MPT), investors who do not follow a portfolio perspective bear risk that is not rewarded with greater expected return. Portfolio diversification works best when financial markets are operating normally compared to periods of market turmoil such as the 2007-2008 financial crisis. During periods of turmoil, correlations tend to increase thus reducing the benefits of diversification. Portfolio management today emerges as a dynamic process, which continues to evolve at a rapid pace. The purpose of Portfolio Theory and Management is to take readers from the foundations of portfolio management with the contributions of financial pioneers up to the latest trends emerging within the context of special topics. The book includes discussions of portfolio theory and management both before and after the 2007-2008 financial crisis. This volume provides a critical reflection of what worked and what did not work viewed from the perspective of the recent financial crisis. Further, the book is not restricted to the U.S. market but takes a more global focus by highlighting cross-country differences and practices. This 30-chapter book consists of seven sections. These chapters are: (1) portfolio theory and asset pricing, (2) the investment policy statement and fiduciary duties, (3) asset allocation and portfolio construction, (4) risk management, (V) portfolio execution, monitoring, and rebalancing, (6) evaluating and reporting portfolio performance, and (7) special topics.
Download or read book Liquidity and Asset Prices written by Yakov Amihud and published by Now Publishers Inc. This book was released on 2006 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
Download or read book A Behavioral Approach to Asset Pricing written by Hersh Shefrin and published by Elsevier. This book was released on 2008-05-19 with total page 636 pages. Available in PDF, EPUB and Kindle. Book excerpt: Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stock market activity. Incorporating the latest research and theory, Shefrin offers both a strong theory and efficient empirical tools that address derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio. The book provides a series of examples to illustrate the theory. The second edition continues the tradition of the first edition by being the one and only book to focus completely on how behavioral finance principles affect asset pricing, now with its theory deepened and enriched by a plethora of research since the first edition
