Download or read book Three Essays on Valuation and Investment in Incomplete Markets written by Nathanael David Ringer and published by . This book was released on 2011 with total page 146 pages. Available in PDF, EPUB and Kindle. Book excerpt: Incomplete markets provide many challenges for both investment decisions and valuation problems. While both problems have received extensive attention in complete markets, there remain many open areas in the theory of incomplete markets. We present the results in three parts. In the first essay we consider the Merton investment problem of optimal portfolio choice when the traded instruments are the set of zero-coupon bonds. Working within a Markovian Heath-Jarrow-Morton framework of the interest rate term structure driven by an infinite dimensional Wiener process, we give sufficient conditions for the existence and uniqueness of an optimal investment strategy. When there is uniqueness, we provide a characterization of the optimal portfolio. Furthermore, we show that a specific Gauss-Markov random field model can be treated within this framework, and explicitly calculate the optimal portfolio. We show that the optimal portfolio in this case can be identified with the discontinuities of a certain function of the market parameters. In the second essay we price a claim, using the indifference valuation methodology, in the model presented in the first section. We appeal to the indifference pricing framework instead of the classic Black-Scholes method due to the natural incompleteness in such a market model. Because we price time-sensitive interest rate claims, the units in which we price are very important. This will require us to take care in formulating the investor's utility function in terms of the units in which we express the wealth function. This leads to new results, namely a general change-of-numeraire theorem in incomplete markets via indifference pricing. Lastly, in the third essay, we propose a method to price credit derivatives, namely collateralized debt obligations (CDOs) using indifference. We develop a numerical algorithm for pricing such CDOs. The high illiquidity of the CDO market coupled with the allowance of default in the underlying traded assets creates a very incomplete market. We explain the market-observed prices of such credit derivatives via the risk aversion of investors. In addition to a general algorithm, several approximation schemes are proposed.

Download or read book Essays on Pricing and Portfolio Choice in Incomplete Markets written by Ti Zhou and published by . This book was released on 2008 with total page 282 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is a contribution to the pricing and portfolio choice theory in incomplete markets. It consists of three self-contained but interlinked essays. In the first essay, we present a utility-based methodology for the valuation and the risk management of mortgage-backed securities subject to totally unpredictable prepayment risk. Incompleteness stems from its embedded pre-payment option which affects the security's cash flow pattern. The prepayment time is constructed via deterministic or stochastic hazard rate. The relevant indifference price consists of a linear term, corresponding to the remaining outstanding balance, and a nonlinear one that incorporates the investor's risk aversion and the interest payments generated by the mortgage contract. The indifference valuation approach is also extended to the case of homogeneous mortgage pools. In the second essay, using forward optimality criteria, we analyze a portfolio choice problem when the local risk tolerance is time-dependent and asymptotically linear in wealth. This class corresponds to a dynamic extension of the traditional (static) risk tolerances associated with the power, logarithmic and exponential utilities. We provide explicit solutions for the optimal investment strategies and wealth processes in an incomplete non-Markovian market with asset prices modelled as Ito processes. The methodology allows for measuring the investment performance in terms of a benchmark and alter-native market views. In the last essay, we extend the forward investment performance approach to study the optimal portfolio choice problem in an incomplete market driven by jump processes. The asset price is modelled by a one-dimensional Lévy-Itô process. We prove the existence of a forward performance process by restricting the local risk tolerance functions to be time-independent and linear in wealth. This yields only three types of performance measurement criteria, namely, exponential, power and logarithmic. The optimal portfolios are constructed via stochastic feedback controls under these criteria.

Download or read book Three Essays in International Finance written by Byong-Ju Lee and published by Stanford University. This book was released on 2011 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three essays on international finance. The first essay is "Exchange rates and Fundamentals". A new open interest rate parity condition that takes account of economic fundamentals is developed from stochastic discount factors (SDFs) of two countries. Through this parity condition, business cycles or fundamentals are linked to exchange rates. Key empirical findings from this parity condition are as follows. First, this model beats the random walk hypothesis: economic fundamentals explain exchange rate movements for high interest rate currencies. Exchange rates of low interest rate currencies act like a random walk because they are less correlated with fundamentals owing to their low risk. For example, U.S. business cycles explain the direction of changes in exchange rates against the dollar. The same thing is true for Japan. Second, this model resolves the forward premium puzzle: the forward premium puzzle is not a general characteristic as regarded in previous studies. It happens when the risk awareness of investors is low, during economic expansions and for low risk currencies. The second essay is "Carry Trade and Global Financial Instability". Carry trade, an opportunistic investment strategy that takes advantage of interest rate differential across countries, is identified the cause of the large-scale depreciations of peripheral currencies in the later half of 2008. A simultaneous equations model, which is derived from a conceptual partial equilibrium model for a local foreign exchange market, is estimated from a cross-sectional sample. The results suggest that the larger appreciation of the yen than the dollar was brought about by a lack of the local supply of the yen rather than a more severe crunch of yen credits. The third essay is "The Economic Origin of Letters of Credit". This essay discusses the economic origin of letters of credit, an instrument widely used in international trade. A game theoretical analysis shows that letters of credit improve efficiency in trade settlements, increasing returns in trade. A few notable facts on letters of credit are discussed. First, the new institution is adopted by merchant banks to maximize their profits and in the process, an improvement in efficiency of international transactions is obtained. Second, the organization established by the legacy institution, bills of exchange, played a critical role in adopting the new institution. Third, the legal enforcement is not essential in this economic institution. Finally, two drivers are identified that improve efficiency of transactions: concentration and projection.

Download or read book Stochastic Analysis Filtering and Stochastic Optimization written by George Yin and published by Springer Nature. This book was released on 2022-04-22 with total page 466 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume is a collection of research works to honor the late Professor Mark H.A. Davis, whose pioneering work in the areas of Stochastic Processes, Filtering, and Stochastic Optimization spans more than five decades. Invited authors include his dissertation advisor, past collaborators, colleagues, mentees, and graduate students of Professor Davis, as well as scholars who have worked in the above areas. Their contributions may expand upon topics in piecewise deterministic processes, pathwise stochastic calculus, martingale methods in stochastic optimization, filtering, mean-field games, time-inconsistency, as well as impulse, singular, risk-sensitive and robust stochastic control.

Download or read book Three Essays on the Value Premium written by Kenneth Edward Scislaw and published by . This book was released on 2010 with total page 360 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on International Equity Returns and Valuation Ratios written by Ji Youn An and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation explores the importance of firm valuation ratios (or stock price multiples) in predicting returns in international markets. This characteristic has been documented by literature as the value premium. In Chapter 2, "Warranted Multiples and Future Returns" joint with Sanjeev Bhojraj and David Ng, we look into the U.S. stock market and examine whether adjusted stock multiples can lead to higher predictability in stock returns. We adjust stock multiples by common economic factors and find that the adjusted price multiples can explain future returns better than unadjusted price multiples. In Chapter 3, "Country, Industry and Idiosyncratic Components in Valuation Ratios" joint with Sanjeev Bhojraj and David Ng, we examine the importance of country, industry and firm-idiosyncratic components in firm valuation ratios with a sample from 33 countries. We find that firm valuation ratios are largely affected by country membership. However, we confirm that firmidiosyncratic component in a firm valuation ratio leads the returns predictability, i.e. higher level of value premium. In Chapter 4, "Can the Long-Run Risks Explain the International Value Premium? Evidence Using Last Century Data", I examine where the value premium is coming from. I explore in depth whether the long-run risks model, a recently introduced asset pricing model, can explain the value premium in 17 developed countries.

Download or read book Essays on Financial Economics written by Rui Luo and published by . This book was released on 2018 with total page 124 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contains three essays on financial economics. The first essay explores whether managerial inconsistent time preference leads to investment and financial distortions. Time-inconsistent CEOs are impatient -- they want to experience rewards sooner and delay costs later. As a result, they repeatedly procrastinate some good investments and regularly preproperate borrowing and dividend payments, leading to underinvestment, over-borrowing and excessive dividend payments relative to the first-best. I first test this prediction via reduced-form regressions. I construct a proxy for time inconsistency based on managers' time preference revealed in their personal portfolio decisions. I find that firms with time-inconsistent managers significantly invest less, hold more debt and pay more dividends. I then formulate a dynamic investment model in which the value-maximizing manager has inconsistent time preference. Simulation results again confirm my argument: managers cut investments, hold more debt and make more dividend payments if they exhibit self-control problems. The second essay exploits proprietary records of site visits in China and investigates how corporate site visits affect information asymmetry and whether this impact is influenced by the disclosure regulation. Starting from 2009, firms listed on Shenzhen Stock Exchange were mandated to disclose site visit information while firms listed on Shanghai Stock Exchange were not required to do so. Using the adverse selection component of bid-ask spread and dispersion in analyst forecasts as proxies for information asymmetry, this paper finds that overall corporate site visits reduce information asymmetry. However, the reduction of information asymmetry is not significantly different between firms that are mandated to disclose and those that are not. The third essay provides a dynamic minimum-variance hedge for firms in incomplete markets. By accounting for price transmission between the input and output prices, the model enables firms to minimize both input and output price fluctuations through a single tradable futures contract even in incomplete markets. The model conditions on the direction of price transmission between inputs and outputs, and on the availability of futures contracts. Using the problem of a hypothetical jet fuel producer as motivation, it is found that the two-sided model leads to a more effective hedge (more volatility reduction).

Download or read book Essays in Financial Economics written by Winston Wei Dou and published by . This book was released on 2017 with total page 383 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three essays that theoretically and empirically investigate the asset pricing and macroeconomic implications of uncertainty shocks, propose new measures for model robustness, explain the joint dynamics on equity excess returns and real exchange rates. In the first chapter, I show that the effect of uncertainty shocks on asset prices and macroeconomic dynamics depends on the degree of risk sharing in the economy and the origin of uncertainty. I develop a general equilibrium model with imperfect risk sharing and two sources of uncertainty shocks: (i) cash-flow uncertainty shocks, which affect the idiosyncratic volatility of firms' productivity, and (ii) growth uncertainty shocks, which affect the idiosyncratic variability of firms' investment opportunities. My model deviates from the neoclassical setting in one respect: firms' investment policies are set by the experts who are subject to a moral hazard problem and thus must maintain an non-diversified ownership stake in the firm. As a result, risk sharing between experts and other investors is imperfect. Limited risk sharing distorts equilibrium investment choices, firm valuation, and prices of risk in equilibrium relative to the frictionless benchmark. In the calibrated model, the risk premium on growth uncertainty shocks is negative under poor risk sharing conditions and positive otherwise. Moreover, the cross-sectional spread in valuations between value and growth stocks loads positively on the growth uncertainty shocks under poor risk sharing conditions and negatively otherwise. Empirical tests support these predictions of the model. The second chapter is based on the joint work Chen, Dou, and Kogan (2015), in which we propose a new quantitative measure of model fragility, based on the tendency of a model to over-fit the data in sample with poor out-of-sample performance. We formally show that structural economic models are fragile when the cross-equation restrictions they impose on the baseline statistical model appear excessively informative about combinations of model parameters that are otherwise difficult to estimate. We develop an analytically tractable asymptotic approximation to our fragility measure which we use to identify the problematic parameter combinations. Using these asymptotic results, we diagnose fragility in asset pricing models with rare disasters and long-run consumption risk. The third chapter is based on the joint work Dou and Verdelhan (2015), which presents a two-good, two-country real model that replicates the basic stylized facts on equity excess returns and real interest rates. In the model, markets are incomplete. In each country, workers cannot participate in financial markets whereas investors trade domestic and foreign stocks, as well as an international bond. The investors' asset positions are subject to a borrowing constraint, along with a short-selling constraint on equity. Foreign and domestic agents differ in their elasticity of inter temporal substitution and in their risk-aversion. A time-varying probability of a global disaster implies time-varying risk premia in asset markets, and therefore large and time-varying expected valuation effects on international asset positions. The model highlights the role of market incompleteness and heterogeneity across countries in accounting for the volatility of equity and debt international capital flows.

Download or read book Optimal Execution of Real options in Illiquid and Incomplete Markets written by Wajahat H. Gilani and published by . This book was released on 2016 with total page 91 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation, consists of three essays on the problem of quantifying optimal stopping policies for a multi-period investment, where transition probabilities and the investment value itself are uncertain. These models are applicable to entrepreneurs in the technology sector and any investment where option based approach can be taken. In the first chapter, I convert the multi-period investment into a partially observable Markov decision process model with bayesian learning. I assume that the core process of the investment value is not observable during the multi-period investment process but can be observed only in its final state if the decision to exploit the investment is made. I assume that the probability distribution between the observed demand levels and the underlying value is known. Since this POMDP model is difficult to solve with dynamic programming because of the size of the possible states, we introduce a heuristic based on marginal profit gains at each state. With the marginal profit heuristic we can calculate the minimum probability threshold of the unobservable state, in a 2-state model, that is the optimal stopping for the process. In the second chapter, I drop the assumption of knowing the probability distribution between the observable demand and unobservable underlying value of the state to the investment, and replace it with a second type of demand level that when observed together with the first demand level imply certain values of the underlying investment. I introduce an algebraic logistic function that has the characteristics of a sigmoid distribution, to serve as an approximation of the probability of the underlying state, based on the observations of the two demand levels but the ratio between them quantify the probability, not a known distribution. Since this model has no defined transition matrix, I develop a best case heuristic, for the 2-state model, that finds a local optimal range, without the use of the Lambert function, and therefore optimal stopping point when a local optimal range does not exist. For the n-state model we define least-case heuristic, similar to the best-case heuristic, except m-local optimal ranges are defined, where m

Download or read book On Investments by Individuals Firms and Nations written by Darryll Hendricks and published by . This book was released on 1992 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on the Effect of Market Imperfections on Asset Prices and Investor Behavior written by Alan Douglas White and published by . This book was released on 1987 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Investment and Growth written by 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 Three Essays in Financial Economics written by Harry Charles DeAngelo and published by . This book was released on 1977 with total page 204 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Financial Market Design Liquidity and Long Term Equity Returns written by Pankaj K. Jain and published by . This book was released on 2002 with total page 324 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Corporate Finance and Investment with Incomplete Markets written by Peter Michael DeMarzo and published by . This book was released on 1989 with total page 254 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Uninsured Income Risk Lumpy Investment and Aggregate Demand written by Nathan Gaspar Zorzi and published by . This book was released on 2020 with total page 145 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three chapters on uninsured income risk, lumpy investment and aggregate demand. The first chapter analyzes the non-linear response of durable spending to income shocks. Empirically, the average marginal propensity to spend (MPC) on durable goods increases with the size of income changes. I investigate whether a canonical model of lumpy durable investment with incomplete markets can replicate this fact. I first clarify analytically the source of non-linearity in this model, and I show that its sign depends on the relative strength of the extensive and intensive margins of durable adjustment. In numerical exercises, I find that the extensive margin dominates quantitatively, so that the model generates the form of non-linearity observed in the data. However, the magnitudes predicted by this canonical model are substantially lower than their empirical counterparts. I suggest various avenues to improve the quantitative performance of the model. The second chapter investigates the general equilibrium implications of this form of nonlinearity. I recognize that durable spending is strongly pro-cyclical, that workers employed in durable sectors have a more cyclical labor income than those employed in nondurable sectors, and that workers are imperfectly insured against these fluctuations. In turn, the average MPC on durables increases with income changes, so that this redistribution of labor incomes across sectors has aggregate effects. To formalize and quantify this mechansim, I develop a heterogeneous agent New Keynesian (HANK) model with multiple sectors and lumpy durable adjustment. There is no labor mobility between sectors and financial markets are incomplete, so that durable workers are more exposed to aggregate shocks. I first show analytically that the interaction between cyclical investment and redistribution amplifies the aggregate response of durable spending during booms and dampens it during recessions. I then quantify the importance of this mechanism using my structural model. The third chapter focuses on the cyclical reallocation of workers across sectors or occupations. Specifically, I explore how uninsured income risk and liquidity frictions can hinder the efficient matching between workers and occupations. I investigate this question in a continuous-time Lucas-Prescott economy with incomplete markets. In this setting, uninsured income risk induces labor misallocation across occupations through two channels. First, it reduces workers’ incentives to search (ex ante) for an occupation where they have a strong comparative advantage. Second, it induces excess separation (ex post) by forcing productive households to leave their occupation when their liquidity buffers are depleted. In general equilibrium, labor misallocation exacerbates endogeneously the effect of uninsured income risk, by depressing the value of equity that workers use as liquidity buffers

Download or read book Essays in Empirical Finance written by Simon Straumann and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three independent papers. The first paper investigates the role of incomplete investor information in financial innovations. We analyze the information that structured product issuers provide to the investors and find that issuers have an information advantage over investors regarding two important valuation parameters: volatility and dividends. This advantage allows issuers to push overpriced securities to investors and induces them to design products with large information frictions. The insights are of systemic importance because they suggest that product issuers' behavior increases information frictions in the financial system. The second paper examines the role of obfuscation in the market for structured products. By exploiting the staggered adoption of a price disclosure policy, I show that issuers subject to price disclosure significantly increase the complexity of their products. Further, I provide evidence that complexity significantly reduces the price elasticity of demand, thus raising the concern that complexity induces social welfare costs. The third paper proposes an explanation for the empirically documented relation between the value factor and the investment factor of the Fama-French five-factor model: Investors observing that a firm decreases its investment perceive the firm as riskier, and therefore adjust their valuations of the firm downwards. Consequently, the firm's book-to-market ratio increases. In support of this conjecture, we find considerable overlap between the factor-mimicking portfolios of the value and the investment factor. We show that this overlap is driven by stocks that experience an increase in their book-to-market ratios due to a decrease in their market values. Moreover, our results show that these value stocks behave like low investment stocks and thus earn a premium. Together with actual low investment stocks, these stocks are primarily responsible for.