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 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 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 Moment Risk Premia and the Cross Section of Stock Returns written by Richard D. F. Harris and published by . This book was released on 2018 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the determinants of moment risk premia (MRP) and their relationship with stock returns. Stocks with high beta, idiosyncratic volatility and maximum return are associated with a high variance risk premium (VRP). The skew risk premium (SRP) is mainly driven by return reversals, the maximum return and idiosyncratic skewness, while the kurtosis risk premium (KRP) is associated with all firm characteristics. We find that both the VRP and SRP are negatively related to stock returns, while the KRP has no relation with stock returns. However, the negative relation between the SRP and stock returns is robust to the inclusion of firm-level variables, while the VRP is not.

Download or read book A Time varying Premium for Idiosyncratic Risk written by Daruo Xie and published by . This book was released on 2015 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: Merton (1987) predicts that idiosyncratic risk can be priced. I develop a simple equilibrium model of capital markets with information costs in which the idiosyncratic risk premium depends on the average level of idiosyncratic volatility. This dependence suggests that the idiosyncratic risk premium varies over time. I find that in U.S. markets, the covariance between stock-level idiosyncratic volatility and the idiosyncratic risk premium explains future stock returns. Stocks in the highest quintile of the covariance between the volatility and risk premium earn an average 3-factor alpha of 70 bps per month higher than those in the lowest quintile.

Download or read book Stock Returns and the Term Structure written by John Y. Campbell and published by . This book was released on 1985 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is well known that in the postwar period stockreturns have tended to be low when the short term nominal interest rate is high. In this paper I show that more generally the state of the term structure of interest rates predicts stock returns. Risk premia on stocks appear to move closely together with those on 20-year Treasury bonds, while risk premia on Treasury bills move somewhat independently. Average returns on 20-year bonds have been very low relative to average returns on stocks. I use these observations to test some simple asset pricing models. First I consider latent variable models in which betas are constant and risk premia vary with expected returns on a small number of unobservable hedge portfolios. The data strongly reject a single-latent-variable model. The last part of the paper examines the relationship between conditional means and variances of returns on bills, bonds and stocks. Bill returns tend to be high when their conditional variance is high, but there is a perverse negative relationship between stock returns and their conditional variance. A model is estimated which assumes that asset returns are determined by their time-varying betas with a fixed-weight "benchmark" portfolio of bills, bonds and stocks, whose return is proportional to its conditional variance. This portfolio is estimated to place almost all its weight on bills, indicating that uncertainty about nominal interest rates is important in pricing both short- and long-term assets

Download or read book Time Varying Risk Premium in Large Cross Sectional Equity Datasets written by Patrick Gagliardini and published by . This book was released on 2018 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop an econometric methodology to infer the path of risk premia from a large unbalanced panel of individual stock returns. We estimate the time-varying risk premia implied by conditional linear asset pricing models where the conditioning includes both instruments common to all assets and asset specific instruments. The estimator uses simple weighted two-pass cross-sectional regressions, and we show its consistency and asymptotic normality under increasing cross-sectional and time series dimensions. We address consistent estimation of the asymptotic variance by hard thresholding, and testing for asset pricing restrictions induced by the no-arbitrage assumption. We derive the restrictions given by a continuum of assets in a multi-period economy under an approximate factor structure robust to asset repackaging. The empirical analysis on returns for about ten thousands US stocks from July 1964 to December 2009 shows that risk premia are large and volatile in crisis periods. They exhibit large positive and negative strays from time-invariant estimates, follow the macroeconomic cycles, and do not match risk premia estimates on standard sets of portfolios. The asset pricing restrictions are rejected for a conditional four-factor model capturing market, size, value and momentum effects.

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 The Cross section and Time series of Stock and Bond Returns written by Stefan Dercon and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Value stocks have higher exposure to innovations in the nominal bond risk premium than growth stocks. Since the nominal bond risk premium measures cyclical variation in the market's assessment of future output growth, this results in a value risk premium provided that good news about future output lowers the marginal utility of wealth today. In support of this mechanism, we provide new historical evidence that low return realizations on value minus growth, typically at the start of recessions when nominal bond risk premia are low and declining, are associated with lower future dividend growth rates on value minus growth and with lower future output growth. Motivated by this connection between the time series of nominal bond returns and the cross-section of equity returns, we propose a parsimonious three-factor model that jointly prices the cross-section of returns on portfolios of stocks sorted on book-to-market dimension, the cross-section of government bonds sorted by maturity, and time series variation in expected bond returns. Finally, a structural dynamic asset pricing model with the business cycle as a central state variable is quantitatively consistent with the observed value, equity, and nominal bond risk premia.

Download or read book Volatility Risk Premium Risk Aversion and the Cross Section of Stock Returns written by Peter M. Nyberg and published by . This book was released on 2008 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We test if innovations in investor risk aversion are a priced factor in the stock market as is predicted by models incorporating habit formation in preferences. Our proxy for time-varying risk aversion is based on the volatility risk premium series constructed by Bollerslev et al. (2007). Time-series tests show that a mimicking portfolio tracking innovations in risk aversion partly captures the strong momentum effect in stock returns and produces only two significant alphas for 25 momentum portfolios. Furthermore, using 25 portfolios sorted on book-to-market and size as test assets in Fama-MacBeth regressions, our new factor together with the market factor explains 64% of the variation in average returns compared to 60% for the Fama-French three factor model. The new factor is generally significant with an estimated risk premium close to its time series mean also when industry portfolios and portfolios sorted on previous returns are included among the test assets.

Download or read book Habit Production and the Cross Section of Stock Returns written by Federal Reserve Federal Reserve Board and published by CreateSpace. This book was released on 2015-04-27 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: Solutions to the equity premium puzzle should inform us about the cross-section of stock returns. An external habit model with heterogeneous firms reproduces numerous stylized facts about both the equity premium and the value premium. The equity premium is large, time-varying, and linked with consumption volatility. The cross-section of expected returns is log-linear in B/M, and the slope matches the data. The explanation for the value pre-mium lies in the interaction between the cross-section of cash flows and the time-varying risk premium. Value firms are temporarily low produc-tivity firms, which will eventually experience high cash flows. The present value of these temporally distant cash flows is sensitive to risk premium movements. The value premium is the reward for bearing this sensitivity. Empirical evidence verifies that value firms have higher cash-flow growth. The data also show that value stock returns are more sensitive to risk premium movements, as measured by consumption volatility shocks.

Download or read book Portfolio Theory and Management written by Greg Filbeck and published by . This book was released on 2013 with total page 767 pages. Available in PDF, EPUB and Kindle. Book excerpt: This title examines the foundations of portfolio management with the contributions of financial pioneers up to the latest trends. The book discusses portfolio theory and management both before and after the 2007-2008 financial crisis. It takes a global focus by highlighting cross-country differences and practices.

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 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 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 Volatility written by Robert A. Jarrow and published by . This book was released on 1998 with total page 472 pages. Available in PDF, EPUB and Kindle. Book excerpt: Written by a number of authors, this text is aimed at market practitioners and applies the latest stochastic volatility research findings to the analysis of stock prices. It includes commentary and analysis based on real-life situations.