Financial Crises and Risk Premia*

2017 ◽  
Vol 132 (2) ◽  
pp. 765-809 ◽  
Author(s):  
Tyler Muir
Keyword(s):  
Financial Crises ◽  
Asset Prices ◽  
Risk Premia ◽  
Expected Returns ◽  
Behavioral Models ◽  
Pricing Models ◽  
Aggregate Consumption ◽  
Consumption Volatility ◽  
International Panel ◽  
Asset Pricing Models

Abstract I analyze the behavior of risk premia in financial crises, wars, and recessions in an international panel spanning over 140 years and 14 countries. I document that expected returns, or risk premia, increase substantially in financial crises, but not in the other episodes. Asset prices decline in all episodes, but the decline in financial crises is substantially larger than the decline in fundamentals so that expected returns going forward are large. However, drops in consumption and consumption volatility are fairly similar across financial crises and recessions and are largest during wars, so asset pricing models based on aggregate consumption have trouble matching these facts. Comparing crises to “deep” recessions strengthens these findings further. By disentangling financial crises from other bad macroeconomic times, the results suggest that financial crises are particularly important to understanding why risk premia vary. I discuss implications for theory more broadly and discuss both rational and behavioral models that are consistent with the facts. Theories where asset prices are related to the health of the financial sector appear particularly promising.

The Determinants of Risk Premia on the Italian Stock Market: Empirical Evidence on Common Factors in Asset Pricing Models

2013 ◽  
Vol 42 (2) ◽  
pp. 103-133
Author(s):  
PAOLA BRIGHI ◽  
STEFANO d'ADDONA ◽  
ANTONIO CARLO FRANCESCO DELLA BINA
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Empirical Evidence ◽  
Common Factors ◽  
Risk Premia ◽  
Pricing Models ◽  
Asset Pricing Models

scholarly journals Testing Beta-Pricing Models Using Large Cross-Sections

2019 ◽  
Vol 33 (6) ◽  
pp. 2796-2842 ◽  
Author(s):  
Valentina Raponi ◽  
Cesare Robotti ◽  
Paolo Zaffaroni
Keyword(s):  
Cross Sections ◽  
Risk Premia ◽  
Expected Returns ◽  
Firm Characteristics ◽  
Pricing Models ◽  
Cross Sectional ◽  
Misspecified Models ◽  
Oxford University ◽  
Fama French Factors ◽  
Published Paper

Abstract We propose a methodology for estimating and testing beta-pricing models when a large number of assets is available for investment but the number of time-series observations is fixed. We first consider the case of correctly specified models with constant risk premia, and then extend our framework to deal with time-varying risk premia, potentially misspecified models, firm characteristics, and unbalanced panels. We show that our large cross-sectional framework poses a serious challenge to common empirical findings regarding the validity of beta-pricing models. In the context of pricing models with Fama-French factors, firm characteristics are found to explain a much larger proportion of variation in estimated expected returns than betas. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Using Stocks or Portfolios in Tests of Factor Models

2019 ◽  
Vol 55 (3) ◽  
pp. 709-750 ◽  
Author(s):  
Andrew Ang ◽  
Jun Liu ◽  
Krista Schwarz
Keyword(s):  
Asset Pricing ◽  
Risk Premia ◽  
Factor Models ◽  
Idiosyncratic Volatility ◽  
Standard Errors ◽  
Coefficient Estimates ◽  
Pricing Models ◽  
Cross Sectional ◽  
Factor Loadings ◽  
Asset Pricing Models

We examine the efficiency of using individual stocks or portfolios as base assets to test asset pricing models using cross-sectional data. The literature has argued that creating portfolios reduces idiosyncratic volatility and allows more precise estimates of factor loadings, and consequently risk premia. We show analytically and empirically that smaller standard errors of portfolio beta estimates do not lead to smaller standard errors of cross-sectional coefficient estimates. Factor risk premia standard errors are determined by the cross-sectional distributions of factor loadings and residual risk. Portfolios destroy information by shrinking the dispersion of betas, leading to larger standard errors.

Linear Beta Pricing with Inefficient Benchmarks

2013 ◽  
Vol 03 (01) ◽  
pp. 1350004 ◽  
Author(s):  
George Diacogiannis ◽  
David Feldman
Keyword(s):  
Asset Pricing ◽  
Market Risk ◽  
Expected Returns ◽  
Pricing Model ◽  
Pricing Models ◽  
Expected Return ◽  
Risk Premiums ◽  
Asset Pricing Models ◽  
Current Asset ◽  
Mean Variance

Current asset pricing models require mean-variance efficient benchmarks, which are generally unavailable because of partial securitization and free float restrictions. We provide a pricing model that uses inefficient benchmarks, a two-beta model, one induced by the benchmark and one adjusting for its inefficiency. While efficient benchmarks induce zero-beta portfolios of the same expected return, any inefficient benchmark induces infinitely many zero-beta portfolios at all expected returns. These make market risk premiums empirically unidentifiable and explain empirically found dead betas and negative market risk premiums. We characterize other misspecifications that arise when using inefficient benchmarks with models that require efficient ones. We provide a space geometry description and analysis of the specifications and misspecifications. We enhance Roll (1980), Roll and Ross's (1994), and Kandel and Stambaugh's (1995) results by offering a "Two Fund Theorem," and by showing the existence of strict theoretical "zero relations" everywhere inside the portfolio frontier.

scholarly journals Inference on Risk Premia in Continuous-Time Asset Pricing Models

2020 ◽  
Author(s):  
Yacine Ait-Sahalia ◽  
Dacheng Xiu ◽  
Jean Jacod
Keyword(s):  
Asset Pricing ◽  
Continuous Time ◽  
Risk Premia ◽  
Pricing Models ◽  
Asset Pricing Models

scholarly journals Inference on Risk Premia in Continuous-Time Asset Pricing Models

2020 ◽  
Author(s):  
Yacine Ait-Sahalia ◽  
Jean Jacod ◽  
Dacheng Xiu
Keyword(s):  
Asset Pricing ◽  
Continuous Time ◽  
Risk Premia ◽  
Pricing Models ◽  
Asset Pricing Models

Long-Term Scarring from the Financial Crisis

2009 ◽  
Vol 210 ◽  
pp. 36-38 ◽  
Author(s):  
Ray Barrell
Keyword(s):  
Financial Crisis ◽  
Financial Crises ◽  
Asset Prices ◽  
Banking Sector ◽  
Oecd Countries ◽  
Risk Premia ◽  
Crisis Period ◽  
Permanent Effect ◽  
Output Costs

It is useful to look at the distinction between transitory and permanent effects of a crisis. Financial crises normally bring on a recession, and the output costs can be large, as Hoggarth and Saporta (2001) discuss. In the majority of cases since 1970 in the OECD countries output returns to its trend level and there is no permanent effect. However, there may have been a permanent scar on the level of output in Japan after its crisis in the early 1990s, making the crisis and subsequent recession much more costly. This may reflect the nature and length of the crisis, as the banking sector was left to flounder for some years before its rescue toward the end of the crisis period. This appears to have left a permanent scar because risk premia were subsequently higher, and real asset prices have not fully recovered.

scholarly journals Asset pricing models and economic risk premia: A decomposition

2010 ◽  
Vol 17 (1) ◽  
pp. 54-80 ◽  
Author(s):  
Pierluigi Balduzzi ◽  
Cesare Robotti
Keyword(s):  
Asset Pricing ◽  
Risk Premia ◽  
Economic Risk ◽  
Pricing Models ◽  
Asset Pricing Models
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