Download or read book Time Varying Inflation Risk and Stock Returns written by Martijn Boons and published by . This book was released on 2019 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that inflation risk is priced in stock returns and that inflation risk premia in the cross-section and the aggregate market vary over time, even changing sign as in the early 2000s. This time variation is due to both price and quantities of inflation risk changing over time. Using a consumption-based asset pricing model, we argue that inflation risk is priced because inflation predicts real consumption growth. The historical changes in this predictability and in stocks' inflation betas can account for the size, variability, predictability and sign reversals in inflation risk premia.

Download or read book Time Varying Inflation Risk and the Cross Section of Stock Returns written by Dominic Burkhardt and published by . This book was released on 2014 with total page 77 pages. Available in PDF, EPUB and Kindle. Book excerpt: I provide empirical evidence indicating that inflation risk is time-varying and priced in the cross-section of individual stocks in the U.S. and UK equity markets. I establish that the way inflation risk is priced in equity markets is closely related to the cyclicality of inflation. I show that the market price of inflation shocks is positive (negative) in the cross-section of individual stocks when inflation is procyclical (countercyclical) and hence comoves positively (negatively) with measures of economic activity. As a consequence, risk premiums on stocks with positive/negative exposure to inflation shocks depend on whether the economy is in a pro- or countercyclical inflation regime. A zero-investment strategy that goes long low (high) inflation-beta stocks and short high (low) inflation-beta stocks when inflation is countercyclical (procyclical) yields economically large and statistically significant return premiums in both markets, even after controlling for well-known risk-factors.

Download or read book Time varying Risk Premia and the Cross Section of Stock Returns written by Hui Guo and published by . This book was released on 2002 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

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 Time Varying Risk Aversion and Unexpected Inflation written by Michael W. Brandt and published by . This book was released on 2009 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We formulate a consumption-based asset pricing model in which aggregate risk aversion is time-varying in response to both news about consumption growth (as in a habit formation model) and news about inflation. We estimate our model and explore its pricing implications on the term structure of interest rates and the cross-section of stock returns. Our empirical results support the hypothesis that aggregate risk aversion varies in response to news about inflation. The induced time-variation in risk aversion does not appear to proxy for inflation uncertainty or economic growth.

Download or read book Habit Production and the Cross section of Stock Returns written by Andrew Y. Chen and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Stock Market Price of Inflation Risk and Its Variation Over Time written by Martijn Boons and published by . This book was released on 2014 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: The inflation risk premium (IRP) in the U.S. stock market varies over time. We use individual stocks to estimate the IRP, because this provides us with a heterogeneous cross-section of exposures. We find that the IRP is a significant -5.5% since the 1960s, but reverses to an insignificant positive value in the recent decade. Consistent with this reversal, we find that the IRP is more negative in recessions historically, but more positive in the two latest recessions. We show that both the introduction of Treasury Inflation Protected Securities (TIPS) in 1997, an attractive alternative inflation hedge, and a reversal in the covariance between inflation and the real economy at the end of the 1990s contribute to this reversal. These findings are consistent with inflation as a state variable in the intertemporal capital asset pricing model (ICAPM).

Download or read book Interest Rate Risk Inflation and the Cross Section of Stock Returns written by Heungju Park and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We posit that the pricing mechanism of interest rate risk is contingent upon the prevailing inflation levels; in times of high (low) inflation, a positive (negative) shock to interest rates is indicative of a negative economic state. In line with this proposition, we introduce a conditional interest rate factor, defined as the shock to interest rates multiplied by the standardized inflation level. The proposed single factor effectively indicates the states of both raising interest rates to combat inflation and lowering interest rates to counteract a recession. We find supporting evidence that interest rate risk is not unconditionally priced, but rather contingent upon inflation. Specifically, the sensitivity of stock returns to interest rate innovation cannot account for the cross-section of stock returns, but when interacted with standardized inflation, it produces significant cross-sectional return differences, even after controlling for standard risk factors. Moreover, when examining standard equity portfolios as test assets, our conditional interest rate factor outperforms its unconditional counterpart in terms of pricing performance, as measured by R2 and absolute pricing error, and is comparable to the Fama-French three-factor model. Finally, we provide further validation for our proposed factor by demonstrating its ability to predict future consumption growth and achieving a Sharpe ratio comparable to the tangency portfolio.

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 Essays on the Cross sectional and Time series Behavior of Stock Returns written by Vinod Chandrashekaran and published by . This book was released on 1994 with total page 256 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Empirical Asset Pricing written by Turan G. Bali and published by John Wiley & Sons. This book was released on 2016-02-26 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: “Bali, Engle, and Murray have produced a highly accessible introduction to the techniques and evidence of modern empirical asset pricing. This book should be read and absorbed by every serious student of the field, academic and professional.” Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago and 2013 Nobel Laureate in Economic Sciences “The empirical analysis of the cross-section of stock returns is a monumental achievement of half a century of finance research. Both the established facts and the methods used to discover them have subtle complexities that can mislead casual observers and novice researchers. Bali, Engle, and Murray’s clear and careful guide to these issues provides a firm foundation for future discoveries.” John Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University “Bali, Engle, and Murray provide clear and accessible descriptions of many of the most important empirical techniques and results in asset pricing.” Kenneth R. French, Roth Family Distinguished Professor of Finance, Tuck School of Business, Dartmouth College “This exciting new book presents a thorough review of what we know about the cross-section of stock returns. Given its comprehensive nature, systematic approach, and easy-to-understand language, the book is a valuable resource for any introductory PhD class in empirical asset pricing.” Lubos Pastor, Charles P. McQuaid Professor of Finance, University of Chicago Empirical Asset Pricing: The Cross Section of Stock Returns is a comprehensive overview of the most important findings of empirical asset pricing research. The book begins with thorough expositions of the most prevalent econometric techniques with in-depth discussions of the implementation and interpretation of results illustrated through detailed examples. The second half of the book applies these techniques to demonstrate the most salient patterns observed in stock returns. The phenomena documented form the basis for a range of investment strategies as well as the foundations of contemporary empirical asset pricing research. Empirical Asset Pricing: The Cross Section of Stock Returns also includes: Discussions on the driving forces behind the patterns observed in the stock market An extensive set of results that serve as a reference for practitioners and academics alike Numerous references to both contemporary and foundational research articles Empirical Asset Pricing: The Cross Section of Stock Returns is an ideal textbook for graduate-level courses in asset pricing and portfolio management. The book is also an indispensable reference for researchers and practitioners in finance and economics. Turan G. Bali, PhD, is the Robert Parker Chair Professor of Finance in the McDonough School of Business at Georgetown University. The recipient of the 2014 Jack Treynor prize, he is the coauthor of Mathematical Methods for Finance: Tools for Asset and Risk Management, also published by Wiley. Robert F. Engle, PhD, is the Michael Armellino Professor of Finance in the Stern School of Business at New York University. He is the 2003 Nobel Laureate in Economic Sciences, Director of the New York University Stern Volatility Institute, and co-founding President of the Society for Financial Econometrics. Scott Murray, PhD, is an Assistant Professor in the Department of Finance in the J. Mack Robinson College of Business at Georgia State University. He is the recipient of the 2014 Jack Treynor prize.

Download or read book Geopolitical Risk on Stock Returns Evidence from Inter Korea Geopolitics written by Seungho Jung and published by International Monetary Fund. This book was released on 2021-10-22 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate how corporate stock returns respond to geopolitical risk in the case of South Korea, which has experienced large and unpredictable geopolitical swings that originate from North Korea. To do so, a monthly index of geopolitical risk from North Korea (the GPRNK index) is constructed using automated keyword searches in South Korean media. The GPRNK index, designed to capture both upside and downside risk, corroborates that geopolitical risk sharply increases with the occurrence of nuclear tests, missile launches, or military confrontations, and decreases significantly around the times of summit meetings or multilateral talks. Using firm-level data, we find that heightened geopolitical risk reduces stock returns, and that the reductions in stock returns are greater especially for large firms, firms with a higher share of domestic investors, and for firms with a higher ratio of fixed assets to total assets. These results suggest that international portfolio diversification and investment irreversibility are important channels through which geopolitical risk affects stock returns.

Download or read book Essays on Macroeconomic Risks and Stock Prices written by Fernando Manuel Duarte and published by . This book was released on 2011 with total page 159 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis, I study the relationship between macroeconomic risks and asset prices. In the first chapter, I establish that inflation risk is priced in the cross-section of stock returns: stocks that have low returns during inflationary times command a risk premium. I estimate a market price of inflation risk that is comparable in magnitude to the price of risk for the aggregate market. Inflation is therefore a key determinant of risk in the cross-section of stocks. The inflation premium cannot be explained by either the Fama-French factors or industry effects. Instead, I argue the premium arises because high inflation lowers expectations of future real consumption growth. To formalize and test this hypothesis, I develop a consumption-based general equilibrium model. The model generates a price of inflation risk consistent with my empirical estimates, while simultaneously matching the joint dynamics of consumption and inflation, the aggregate equity premium, and the level and slope of the yield curve. In the second chapter, with L. Kogan and Dmitry Livdan, we study the relation between returns on the aggregate stock market and aggregate real investment. While it is well known that aggregate investment rate is negatively correlated with subsequent excess stock market returns, we find that it is positively correlated with future stock market volatility. Thus, conditionally on past aggregate investment, the mean-variance tradeoff in aggregate stock returns is negative. We interpret these patterns within a general equilibrium production economy. In our model, investment is determined endogenously in response to two types of shocks: shocks to productivity and preference shocks affecting discount rates. Preference shocks affect expected stock returns, aggregate investment rate, and stock return volatility in equilibrium, helping model reproduce the empirical relations between these variables. Thus, our results emphasize that the time-varying price of aggregate risk plays and important role in shaping the aggregate investment dynamics. In the third chapter, with S. Parsa, we show a novel relation between the institutional investors' intrinsic trading frequency-a commonly used proxy for the investors's investment horizon- and the cross-section of stock returns. We show that the 20% of stocks with the lowest trading frequency earn mean returns that are 6 percentage points per year higher than the 20% of stocks that have the highest trading frequency. The magnitude and predictability of these returns persist or even increase when riskadjusted by common indicators of systematic risks such as the Fama-French, liquidity or momentum factors. Our results show that the characteristics of stockholders affect expected returns of the very securities they hold, supporting the view that heterogeneity among investors is an important dimension of asset prices. JEL classification: E31, E44, G12

Download or read book Analyzing the Time Varying Stock Market Risk Return Relation written by C. N. V. Krishnan and published by . This book was released on 2011 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the stock market risk-return relation over the period from 1927 to 2005. We empirically implement the Intertemporal Capital Asset Pricing Model (ICAPM) using a cross-section of stock and bond portfolios, and allow for the market price of risk to be time-varying. We show that including bond portfolios in the estimation not only significantly changes the time-series estimates of the market price of risk, but also makes the correlation between conditional stock-market variance and the variance component of expected market return positive.

Download or read book Can US Stocks Provide a Safe Haven from Interest and Inflation Risk written by María de la O. González Pérez and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Cointegration Causality and Forecasting written by Halbert White and published by Oxford University Press, USA. This book was released on 1999 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: A collection of essays in honour of Clive Granger. The chapters are by some of the world's leading econometricians, all of whom have collaborated with and/or studied with both) Clive Granger. Central themes of Granger's work are reflected in the book with attention to tests for unit roots and cointegration, tests of misspecification, forecasting models and forecast evaluation, non-linear and non-parametric econometric techniques, and overall, a careful blend of practical empirical work and strong theory. The book shows the scope of Granger's research and the range of the profession that has been influenced by his work.

Download or read book NBER Macroeconomics Annual 1992 written by Olivier Blanchard and published by MIT Press. This book was released on 1992 with total page 312 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is the seventh in a series of annuals from the National Bureau of Economic Research that are designed to stimulate research on problems in applied economics, to bring frontier theoretical developments to a wider audience, and to accelerate the interaction between analytical and empirical research in macroeconomics. Contents What Shall We Do Today? Goals and Signposts in the Operation of Monetary Policy, Ben S. Bernanke and Frederic S. Mishkin - A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore, Alwyn Young - International Trade and the Wage Structure, Steven J. Davis - Imperfect Information and Macroeconomic Analysis, Joseph E. Stiglitz and Bruce Greenwald - Asset Pricing Lessons for Macroeconomics, Lars P. Hansen and John H. Cochrane - Postmortem on the Debt Crisis, Daniel Cohen