scholarly journals EQUILIBRIUM ASSET RETURNS IN FINANCIAL MARKETS

2019 ◽  
Vol 22 (02) ◽  
pp. 1850063 ◽  
Author(s):  
DILIP B. MADAN ◽  
WIM SCHOUTENS
Keyword(s):  
Financial Markets ◽  
Fixed Points ◽  
Asset Prices ◽  
Asset Returns ◽  
Expected Returns ◽  
Response Functions ◽  
Limit Laws ◽  
Return Distributions ◽  
Equilibrium Distributions ◽  
The Cost

Return distributions in the class of pure jump limit laws are observed to reflect numerous asymmetries between the upward and downward motions of asset prices. The return distributions are modeled by self-decomposable parametric laws with all parameters continuously responding to each other. Fixed points of the response functions define equilibrium distributions. The equilibrium distributions that can arise in practice are constrained by the level of return acceptability they may attain. As a consequence, expected returns are equated to risk measured by the cost of purchasing the negative of the centered return. The asymmetries studied include differences in scale, speed, power variation, excitation and cross-excitation.

A NOTE ON MONETARY POLICY, ASSET PRICES, AND MODEL UNCERTAINTY

2012 ◽  
Vol 16 (5) ◽  
pp. 777-790 ◽  
Author(s):  
Meixing Dai ◽  
Eleftherios Spyromitros
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Asset Prices ◽  
Inflation Rate ◽  
Asset Price ◽  
Optimal Monetary Policy ◽  
Macroeconomic Dynamics ◽  
High Preference ◽  
And Performance ◽  
The Cost

Using a macroeconomic model with asset prices, we analyze how optimal monetary policy and macroeconomic dynamics and performance are affected by a central bank's desire to be robust against model misspecifications. We show that a higher central bank preference for robustness implies a more aggressive reaction of the nominal interest rate to the expected future inflation rate and inflation shocks. The dynamic stability of the equilibrium is not modified for a sufficiently high preference for robustness. However, the speed of dynamic convergence is lower under robust control compared to a benchmark case without it and implies supplementary economic costs. Finally, an increase in the preference for robustness comes at the cost of higher macroeconomic and financial volatility in the presence of inflation shocks. It has no effect on the reaction of inflation, output gap, and asset price gap to shocks affecting goods and financial markets.

scholarly journals FALSE CONSCIOUSNESS IN FINANCIAL MARKETS: OR IS IT IN IVORY TOWERS?

2013 ◽  
Vol 4 (1) ◽  
pp. 19-30
Author(s):  
Adi Schnytzer ◽  
Sara Westreich
Keyword(s):  
Risk Aversion ◽  
Financial Markets ◽  
Risk Index ◽  
Recent Model ◽  
Economic Index ◽  
Expected Returns ◽  
False Consciousness ◽  
Risk Averse ◽  
Different Levels ◽  
Negative Expectations

In general, models in finance assume that investors are risk averse. An example of such a recent model is the pioneering work of Aumann and Serrano, which presents an economic index of riskiness of gambles which is independent of wealth and holds (as might be understood from the adjective “economic”) for exclusively risk averse investors. In their paper, they discuss gambles with positive expected returns which will be accepted or rejected by agents which different levels of risk aversion. The question never asked by the authors (and in most of the finance literature) is: Who is offering these attractive gambles? To arrive at an answer, we extend the Aumann-Serrano risk index in such a way that it accommodates gambles with either positive or negative expectations and is thus suitable for both the risk averse and risk lovers.  Once we allow for the existence of risk lovers, it may be shown that in financial markets, many gambles with negative expectations are taken either knowingly or unknowingly so that there are always people that act as if they are risk lovers. The paper concludes with a brief discussion of the implications of our result, in particular that gambling is by no means restricted to the casino or the track.

Boom and Bust Driven by Value-at-Risk

2019 ◽  
pp. 28-55
Author(s):  
Hyun Song Shin
Keyword(s):  
At Risk ◽  
Value At Risk ◽  
Hedge Fund ◽  
Balance Sheet ◽  
Asset Returns ◽  
Expected Returns ◽  
Capital Management ◽  
A Value ◽  
Boom And Bust

An example of a hedge fund illustrates a long-short strategy that maximises expected returns subject to a Value-at-Risk strategy. Balance sheet capacity depends on the measured volatility of asset returns and the book equity of the long-short hedge fund. The principles are illustrated by the case of Long Term Capital Management (LTCM).

scholarly journals Pricing Liquidity Risk with Heterogeneous Investment Horizons

2020 ◽  
pp. 1-36 ◽  
Author(s):  
Alessandro Beber ◽  
Joost Driessen ◽  
Anthony Neuberger ◽  
Patrick Tuijp
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Liquidity Risk ◽  
Asset Returns ◽  
Spillover Effects ◽  
Expected Returns ◽  
Pricing Model ◽  
Liquidity Premium ◽  
Asset Pricing Model ◽  
Illiquid Asset

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small.

scholarly journals CONNECTING THEORY AND EMPIRICS FOR ANIMAL SPIRITS, RETURNS AND INTEREST RATES: A CLARIFICATION OF “RISK-FREE RATES AND ANIMAL SPIRITS IN FINANCIAL MARKETS”

2017 ◽  
Vol 12 (01) ◽  
pp. 1750002 ◽  
Author(s):  
JUKKA ILOMÄKI
Keyword(s):  
Financial Markets ◽  
Interest Rates ◽  
Expected Returns ◽  
Animal Spirits ◽  
Empirical Results ◽  
Upper Limit ◽  
Risk Free Rate ◽  
Free Rate

I clarify and combine the results of Ilomäki (2016a) and Ilomäki (2016b) and find several interesting conclusions. First, the effect of the animal spirits component to the expected returns of investors depends on the risk-free rate. Second, there must be an upper limit for the risk-free rate, where the component that reduces the expected returns of informed investors in Ilomäki (2016a) disappears. Third, the empirical results of Ilomäki (2016b) indicates that the break-even level is as low as 3%.

The Collateral Composition Channel

2020 ◽  
Vol 12 (1) ◽  
pp. 41-75
Author(s):  
Frédéric Boissay ◽  
Russell Cooper
Keyword(s):  
Financial Markets ◽  
Large Volume ◽  
Financial Sector ◽  
Cash Flows ◽  
Creation Process ◽  
Collateral Constraints ◽  
Incentive Problems ◽  
The Cost ◽  
Asset Creation

Wholesale financial markets reallocate deposits. Because of incentive problems, these flows are limited by endogenous collateral constraints. The composition of collateral matters. The use of inside collateral creates a “collateral pyramid”: cash flows from one loan are pledged to secure another. Outside collateral, such as treasuries, stabilizes the pyramid. Through collateral pyramids the financial sector sustains a large volume of reallocation across banks, but at the cost of systemic panics. During panics, the safe asset creation process stalls, the pyramid collapses, collateral becomes scarce. Markets are more fragile when loans are secured by inside collateral. (JEL E32, E44, G01, G21)

Effects of Fiscal Policy on Credit Markets

2020 ◽  
Vol 110 ◽  
pp. 119-124 ◽  
Author(s):  
Alan J. Auerbach ◽  
Yuriy Gorodnichenko ◽  
Daniel Murphy
Keyword(s):  
Financial Markets ◽  
Interest Rates ◽  
Credit Markets ◽  
Local Economy ◽  
Government Contracts ◽  
Fiscal Stimulus ◽  
Access To Credit ◽  
Consumer Loans ◽  
Us Federal Government ◽  
The Cost

Credit markets typically freeze in recessions: access to credit declines, and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in US federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.

Renting Balance Sheet Space: Intermediary Balance Sheet Rental Costs and the Valuation of Derivatives

2020 ◽  
Vol 33 (11) ◽  
pp. 5051-5091 ◽  
Author(s):  
Matthias Fleckenstein ◽  
Francis A Longstaff
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Balance Sheet ◽  
Futures Market ◽  
The Other ◽  
Capital Regulation ◽  
Debt Overhang ◽  
Interest Rate Futures ◽  
The Interest Rate ◽  
The Cost

Abstract A long-standing asset pricing puzzle is that the funding rates in derivatives contracts often differ from those in cash markets. We propose that the cost of renting intermediary balance sheet space may help resolve this puzzle. We study a persistent basis in what is arguably the largest derivatives market, namely, the interest rate futures market. This basis is strongly related to exogenous measures of intermediary balance sheet usage and proxies for the balance sheet costs imposed by debt overhang problems and capital regulation. These results extend to the cash derivatives bases documented in many of the other largest financial markets.

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