Download or read book The Predictability Implied by Consumption Based Asset Pricing Models written by Jiun-Lin Chen and published by . This book was released on 2018 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The consumption-based models have a lack of predictive power for explaining variability of stock returns. This paper examines two well-known models, Campbell and Cochrane (1999)'s habit model and Bansal and Yaron (2004)'s long-run risks model, to see whether they produce a significant power of return predictability. For the habit model, empirical tests reveal that the state variable, the surplus consumption ratio, explains counter-cyclical time-varying expected returns. The long-run risks model also proves to explain that main sources of volatility in price-dividend ratio are a persistent and predictable consumption growth rate and fluctuating economic uncertainty. The models are also tested by following the work of Kirby (1998) whether they can explain the observed return predictability. Both models fail to generate any significant predictive power. The habit model is relatively strong in volatility, which implies that variation in expected excess return is largely attributable to the time-varying risk aversion.

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 The Restrictions on Predictability Implied by Rational Asset Pricing Models written by Chris Kirby and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article shows how rational asset pricing models restrict the regression-based criteria commonly used to measure return predictability. Specifically, it invokes no arbitrage arguments to show that the intercept, slope coefficients, and R-squared in predictive regressions must take specific values. These restrictions provide a way to directly assess whether the predictability uncovered using regression analysis is consistent with rational pricing. Empirical tests reveal that the returns on the CRSP size deciles are too predictable to be compatible with a number of well-known pricing models. However, the overall pattern of predictability across these portfolios is reasonably consistent with what we would expect under circumstances where predictability is rational.

Download or read book Do Consumption based Asset Pricing Models Explain Own history Predictability in Stock Market Returns written by Michael F. Ashby and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Frontiers of Business Cycle Research written by Thomas F. Cooley and published by Princeton University Press. This book was released on 1995-02-26 with total page 452 pages. Available in PDF, EPUB and Kindle. Book excerpt: This introduction to modern business cycle theory uses a neoclassical growth framework to study the economic fluctuations associated with the business cycle. Presenting advances in dynamic economic theory and computational methods, it applies concepts to t

Download or read book Global Stock Markets written by Wolfgang Drobetz and published by Springer Science & Business Media. This book was released on 2013-06-29 with total page 346 pages. Available in PDF, EPUB and Kindle. Book excerpt: Wolfgang Drobetz provides empirical evidence on the time variation of expected stock returns over the stages of the business cycle.

Download or read book A Consumption Based Asset Pricing Model of the Yield Curve written by Nathan Born and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper seeks to create a representative model of the yield curve by combining the standard consumption based asset pricing model used by Canzoneri, et al and the equation for the Pure Expectations Hypothesis of the Term Structure of Interest Rates. I begin with reviewing different theories of the yield curve. I then use consumption based asset pricing model in conjunction with the expectations hypothesis to see whether the models can accurately represent the data on yield curve slopes. I conclude with an examination of the forward looking aspects of the yield curve. I find that the forward-looking nature of the yield curve which is implied by the Expectations Hypothesis is not entirely reliable in predicting real GDP.

Download or read book By Force of Habit written by John Y. Campbell and published by . This book was released on 1995 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a consumption-based model that explains the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slow-moving external habit to the standard power utility function. The latter feature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habit-persistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution.

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 Empirical Asset Pricing written by Wayne Ferson and published by MIT Press. This book was released on 2019-03-12 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 Predictability in Consumption Growth and Equity Returns written by George Theocharides and published by . This book was released on 2009 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate a widely cited consumption-based asset pricing model using fully Bayesian MCMC method. Although the model is generally consistent with consumption and dividend growth moments in annual data, the conditional mean of consumption growth (a latent process) is not persistent enough to satisfy the model's restriction that the price/dividend ratio be an affine function of the latent process. We argue that this lack of persistence in the latent process may result in equity volatility puzzle. The model accounts for only 50% of total variation in asset returns. The model can explain equity premium at a cost of high risk aversion. We also find that a one-factor nature of the model implies zero predictability of excess equity returns by price/dividend ratios.

Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.

Download or read book Predictability and the Cross section of Expected Returns written by Christian Schlag and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Many modern macro finance models imply that excess returns on arbitrary assets are predictable via the price-dividend ratio and the variance risk premium of the aggregate stock market. We propose a simple empirical test for the ability of such a model to explain the cross-section of expected returns by sorting stocks based on the sensitivity of expected returns to these quantities. Models with only one uncertainty-related state variable, like the habit model or the long-run risks model, cannot pass this test. However, even extensions with more state variables mostly fail. We derive conditions under which models would be able to produce expected return patterns in line with the data and discuss various examples.

Download or read book An Analytical Framework for Assessing Asset Pricing Models and Predictability written by René Garcia and published by . This book was released on 2008 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: New insights about the connections between stock market volatility and returns, the pricing of long-run claims, or return predictability have recently revived interest in consumption-based equilibrium asset pricing. The recursive utility model is prominently used in these contexts to determine the price of assets in equilibrium. Often, solutions are approximate and quantities of interest are computed through simulations. We propose an approach that delivers closed-form formulas for price-consumption and price-dividend ratios, as well as for many of the statistics usually computed to assess the ability of the model to reproduce stylized facts. The proposed framework is flexible enough to capture rich dynamics for consumption and dividends. Closed-form formulas facilitate the economic interpretation of empirical results. We illustrate the usefulness of our approach by investigating the properties of long-run asset pricing models in many empirical dimensions.

Download or read book Happiness Maintenance and Asset Prices written by Antonio Falato and published by . This book was released on 2008 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book International Asset Pricing Under Habit Formation and Idiosyncratic Consumption Risk written by Yuming Li and published by . This book was released on 2003 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a consumption-based asset pricing model to explain the equity premium and riskfree puzzles as well as the predictability of returns in the international equity markets. We find that because the model entails idiosyncratic consumption risk which is higher than the aggregate consumption risk, the model helps lower the investor risk aversion needed to explain the mean equity premiums. In addition, because the model also allows for habit formation that disentangles intertemporal substitution from investor risk aversion, the model can resolve the riskfree rate puzzle. Further, as the timevarying individual investor risk aversion and the re-distribution of wealth among heterogeneous investors are contributing factors to the time-varying equity premiums, the model explains larger portions of the long-horizon predictability for many countries' equity markets and the world market portfolio than the world representative-agent model. In contrast, the power utility model with or without idiosyncratic consumption risk fails to explain the level of the real riskfree rate or the predictability of returns.

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: