Download or read book The Term Structure of the Risk return Tradeoff written by John Y. Campbell and published by . This book was released on 2005 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent research in empirical finance has documented that expected excess returns on bonds and stocks, real interest rates, and risk shift over time in predictable ways. Furthermore, these shifts tend to persist over long periods of time. In this paper we propose an empirical model that is able to capture these complex dynamics, yet is simple to apply in practice, and we explore its implications for asset allocation. Changes in investment opportunities can alter the risk-return tradeoff of bonds, stocks, and cash across investment horizons, thus creating a term structure of the risk-return tradeoff.'' We show how to extract this term structure from our parsimonious model of return dynamics, and illustrate our approach using data from the U.S. stock and bond markets. We find that asset return predictability has important effects on the variance and correlation structure of returns on stocks, bonds and T-bills across investment horizons

Download or read book The Term Structure of the Risk Return Trade Off written by John Y. Campbell and published by . This book was released on 2008 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: Expected excess returns on bonds and stocks, real interest rates, and risk shift over time in predictable ways. Furthermore, these shifts tend to persist for long periods. Changes in investment opportunities can alter the risk-return trade-off of bonds, stocks, and cash across investment horizons, thus creating a term structure of the risk-return trade-off. This term structure can be extracted from a parsimonious model of return dynamics, as is illustrated with data from the U.S. stock and bond markets.

Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.

Download or read book Horizon Effect in the Term Structure of Long run Risk return Trade offs written by Cedric Okou and published by . This book was released on 2014 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Factor Investing and Asset Allocation A Business Cycle Perspective written by Vasant Naik and published by CFA Institute Research Foundation. This book was released on 2016-12-30 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Risk Profiling and Tolerance Insights for the Private Wealth Manager written by Joachim Klement and published by CFA Institute Research Foundation. This book was released on 2018-05-01 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: If risk aversion and willingness to take on risk are driven by emotions and we as humans are bad at correctly identifying them, the finance profession has a serious challenge at hand—how to reliably identify the individual risk profile of a retail investor or high-net-worth individual. In this series of CFA Institute Research Foundation briefs, we have asked academics and practitioners to summarize the current state of knowledge about risk profiling in different key areas.

Download or read book The Risk Return Tradeoff in the Long Run written by Christian T. Lundblad and published by . This book was released on 2012 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: The risk-return tradeoff is fundamental to finance. However, while many asset pricing models imply a positive relationship between the risk premium on the market portfolio and the variance of its return, previous studies find the empirical relationship is weak at best. In sharp contrast, this study, demonstrates that the weak empirical relationship is an artifact of the small sample nature of the available data, as an extremely large number of time-series observations is required to precisely estimate this relationship. To maximize the available time-series, I employ the nearly two century history of US equity market returns from Schwert (1990), exploring the empirical risk-return tradeoff for a variety of specifications that allow for asymmetric volatility, regime-switching, and additional factors associated with intertemporal (ICAPM) hedging demands. Similar to studies that use the more recent US equity price history, conditional market volatility in the historical data is persistent and displays strong asymmetric relationships to return innovations. Further, the conditional correlation between stock and bond markets is closely related to periods of documented financial crises. Finally, in contrast to evidence based upon the recent US experience, the estimated relationship between risk and return is positive and statistically significant across every specification considered.

Download or read book The Known the Unknown and the Unknowable in Financial Risk Management written by Francis X. Diebold and published by Princeton University Press. This book was released on 2010-05-09 with total page 392 pages. Available in PDF, EPUB and Kindle. Book excerpt: A clear understanding of what we know, don't know, and can't know should guide any reasonable approach to managing financial risk, yet the most widely used measure in finance today--Value at Risk, or VaR--reduces these risks to a single number, creating a false sense of security among risk managers, executives, and regulators. This book introduces a more realistic and holistic framework called KuU --the K nown, the u nknown, and the U nknowable--that enables one to conceptualize the different kinds of financial risks and design effective strategies for managing them. Bringing together contributions by leaders in finance and economics, this book pushes toward robustifying policies, portfolios, contracts, and organizations to a wide variety of KuU risks. Along the way, the strengths and limitations of "quantitative" risk management are revealed. In addition to the editors, the contributors are Ashok Bardhan, Dan Borge, Charles N. Bralver, Riccardo Colacito, Robert H. Edelstein, Robert F. Engle, Charles A. E. Goodhart, Clive W. J. Granger, Paul R. Kleindorfer, Donald L. Kohn, Howard Kunreuther, Andrew Kuritzkes, Robert H. Litzenberger, Benoit B. Mandelbrot, David M. Modest, Alex Muermann, Mark V. Pauly, Til Schuermann, Kenneth E. Scott, Nassim Nicholas Taleb, and Richard J. Zeckhauser. Introduces a new risk-management paradigm Features contributions by leaders in finance and economics Demonstrates how "killer risks" are often more economic than statistical, and crucially linked to incentives Shows how to invest and design policies amid financial uncertainty

Download or read book Risk and Return Trade Off in the U S Treasury Market written by Eric Ghysels and published by . This book was released on 2014 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper characterizes the risk-return trade-off in the U.S. Treasury market. We propose a discrete-time no-arbitrage term structure model, in which bond prices are solved in closed form and the conditional variances of bond yields are decomposed into a short-run component and a long-run component, each of which follows a GARCH-type process. Estimated using Treasury yields data from January 1962 to August 2007, our model simultaneously matches the conditional volatility dynamics and the deviation from the expectations hypothesis in the data. We find that a higher short-run volatility component of bond yields significantly predicts a higher future excess return, above and beyond the predictive power of the yields. The long-run volatility component does not predict bond excess returns.

Download or read book Understanding Financial Risk Management written by Angelo Corelli and published by Emerald Group Publishing. This book was released on 2024-05-27 with total page 605 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial risk management is a topic of primary importance in financial markets. It is important to learn how to measure and control risk, how to be primed for the opportunity of compensative return, and how to avoid useless exposure.

Download or read book Measuring the Risk Return Tradeoff with Time Varying Conditional Covariances written by Esben Hedegaard and published by . This book was released on 2014 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the prediction of Merton's intertemporal CAPM that time varying risk premiums arise from the conditional covariances of returns on assets with the return on the market and other state variables. We find a positive and significant price of risk for the covariance with the market return that is driven by the time series variation in the conditional covariances, and the risk-premium on the market remains positive and significant after controlling for additional state variables. Our method estimates the risk-return tradeoff in the ICAPM using multiple portfolios as test assets.

Download or read book Handbook of Financial Econometrics written by Yacine Ait-Sahalia and published by Elsevier. This book was released on 2009-10-19 with total page 809 pages. Available in PDF, EPUB and Kindle. Book excerpt: This collection of original articles—8 years in the making—shines a bright light on recent advances in financial econometrics. From a survey of mathematical and statistical tools for understanding nonlinear Markov processes to an exploration of the time-series evolution of the risk-return tradeoff for stock market investment, noted scholars Yacine Aït-Sahalia and Lars Peter Hansen benchmark the current state of knowledge while contributors build a framework for its growth. Whether in the presence of statistical uncertainty or the proven advantages and limitations of value at risk models, readers will discover that they can set few constraints on the value of this long-awaited volume. Presents a broad survey of current research—from local characterizations of the Markov process dynamics to financial market trading activity Contributors include Nobel Laureate Robert Engle and leading econometricians Offers a clarity of method and explanation unavailable in other financial econometrics collections

Download or read book Time Varying Risk Return Tradeoff in the Stock Market written by Hui Guo and published by . This book was released on 2012 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a semiparametric estimation technique, we show that the risk-return tradeoff and the Sharpe ratio of the stock market increases monotonically with the consumption wealth ratio (CAY) across time. While early studies have commonly interpreted such a finding as evidence of the countercyclical variation in aggregate relative risk aversion (RRA), we argue that it mainly reflects changes in investment opportunities for two reasons. First, we fail to reject the null hypothesis of constant RRA after controlling for CAY as a proxy for the hedge against changes in the investment opportunity set. Second, by contrast with habit formation models but consistent with ICAPM, we find that loadings on the conditional stock market variance scaled by CAY are negatively priced in the cross-sectional regressions. For illustration, we replicate the countercyclical stock market risk-return tradeoff using simulated data from Guo's (2004) limited stock market participation model, in which RRA is constant and CAY is a proxy for shareholders' liquidity conditions.

Download or read book Testing for a Unit Root in Panels with Dynamic Factors written by Hyungsik Roger Moon and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies testing for a unit root for large n and T panels in which the cross-sectional units are correlated. To model this cross-sectional correlation, we assume that the data is generated by an unknown number of unobservable common factors. We propose unit root tests in this environment and derive their (Gaussian) asymptotic distribution under the null hypothesis of a unit root and local alternatives. We also show that these tests have no power against the same local alternatives when it is necessary to remove deterministic components. Through Monte Carlo simulations, we provide evidence on the finite sample properties of these new tests.

Download or read book Interest Rate Term Structure and Valuation Modeling written by Frank J. Fabozzi and published by John Wiley & Sons. This book was released on 2002-11-29 with total page 530 pages. Available in PDF, EPUB and Kindle. Book excerpt: This ultimate guide contains an excellent blend of theory and practice This comprehensive guide covers various aspects of model building for fixed income securities and derivatives. Filled with expert advice, valuable insights, and advanced modeling techniques, Interest Rate, Term Structure, and Valuation Modeling is a book that all institutional investors, portfolio managers, and risk professionals should have. John Wiley & Sons, Inc. is proud to be the publisher of the esteemed Frank J. Fabozzi Series. Comprising nearly 100 titles-which include numerous bestsellers—The Frank J. Fabozzi Series is a key resource for finance professionals and academics, strategists and students, and investors. The series is overseen by its eponymous editor, whose expert instruction and presentation of new ideas have been at the forefront of financial publishing for over twenty years. His successful career has provided him with the knowledge, insight, and advice that has led to this comprehensive series. Frank J. Fabozzi, PhD, CFA, CPA, is Editor of the Journal of Portfolio Management, which is read by thousands of institutional investors, as well as editor or author of over 100 books on finance for the professional and academic markets. Currently, Dr. Fabozzi is an adjunct Professor of Finance at Yale University's School of Management and on the board of directors of the Guardian Life family of funds and the Black Rock complex of funds.

Download or read book Risk Return Trade Off on Currency Portfolios written by Joseph Byrne and published by . This book was released on 2018 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Unconditional asset pricing models have generally found it challenging to identify evidence ofrisk aversion. This paper addresses this challenge by examining whether currency portfolios display an intertemporal risk-return relationship. We consider time-varying relations because investors' risk-aversion may change over time, based upon changing economic states. Moreover, we take into account a broad based measure of investors' expectation from a data rich environment and factor model. We identify that the relations between risk and return vary over time, and the risk-aversion parameters on momentum and value currency portfolios increased during the financial crisis. Those parameters can command both positive and negative values. Therefore traditional time-invariant models may not identify strong risk-return relations because state dependent evidence is "washed out."