The Term Structures of Coentropy in International Financial Markets

2019 ◽  
Vol 65 (8) ◽  
pp. 3541-3558 ◽  
Author(s):  
Fousseni Chabi-Yo ◽  
Riccardo Colacito
Keyword(s):  
Financial Markets ◽  
Risk Model ◽  
Discount Factors ◽  
Model Free ◽  
Term Structures ◽  
Asset Pricing Models ◽  
Long Run ◽  
Stochastic Discount Factors ◽  
Permanent And Transitory Components ◽  
Long Run Risk

We propose a new entropy-based correlation measure (coentropy) to evaluate the performance of international asset pricing models. Coentropy captures the codependence of two random variables beyond normality. We document that the coentropy of international stochastic discount factors (SDFs) can be decomposed into a series of entropy-based correlations of permanent and transitory components of the SDFs. We employ the cross section of G-10 countries to obtain model-free estimates of all the components of coentropy at various horizons and we show that the generalization of the long-run risk model featuring two predictable components of consumption growth rates, global disasters, and recursive preferences can account for the composition of codependence at all horizons. This paper was accepted by Tomasz Piskorski, finance.

scholarly journals From Which Consumption-Based Asset Pricing Models Can Investors Profit? Evidence from Model-Based Priors

2020 ◽  
Author(s):  
Mathias S Kruttli
Keyword(s):  
Asset Pricing ◽  
Parameter Estimates ◽  
Pricing Models ◽  
Predictive Regression ◽  
Model Based ◽  
Asset Pricing Models ◽  
Long Run ◽  
Regression Parameters ◽  
Economic Constraints ◽  
Long Run Risk

Abstract This article analyzes whether consumption-based asset pricing models improve the excess returns forecasts of a hypothetical investor with access to these models from 1947 onwards. The investor imposes economic constraints derived from asset pricing models as model-based priors on predictive regression parameters through a Bayesian framework. Three models are considered: habit formation, long-run risk, and prospect theory. The model-based priors generally perform better than priors that shrink the parameter estimates to the historical average model and priors that impose a positive equity premium. This analysis helps to assess the value of consumption-based asset pricing models to investors.

Term Structure of Risk in Expected Returns

2021 ◽  
Author(s):  
Irina Zviadadze
Keyword(s):  
Asset Pricing ◽  
Term Structure ◽  
Expected Returns ◽  
Pricing Models ◽  
Structural Shocks ◽  
Risk Return ◽  
Asset Pricing Models ◽  
Long Run ◽  
Multiple Shocks ◽  
Long Run Risk

Abstract This paper develops a methodology to test structural asset pricing models based on their implications for the multiperiod risk-return trade-off. A new measure, the term structure of risk, captures the sensitivities of multiperiod expected returns to structural shocks. The level and slope of the term structure of risk can indicate misspecification in equilibrium models. I evaluate the performance of asset pricing models with long-run risk, consumption disasters, and variance shocks. I find that only a model with multiple shocks in the variance of consumption growth is consistent with the propagation of and compensation for risk in the aggregate stock market.

scholarly journals NONPARAMETRIC IDENTIFICATION OF POSITIVE EIGENFUNCTIONS

2014 ◽  
Vol 31 (6) ◽  
pp. 1310-1330 ◽  
Author(s):  
Timothy M. Christensen
Keyword(s):  
Asset Pricing ◽  
Habit Formation ◽  
Linear Operators ◽  
Nondegeneracy Condition ◽  
Pricing Models ◽  
Nonparametric Models ◽  
Asset Pricing Models ◽  
Long Run ◽  
Dynamic Asset Pricing ◽  
Long Run Risk

Important features of certain economic models may be revealed by studying positive eigenfunctions of appropriately chosen linear operators. Examples include long-run risk–return relationships in dynamic asset pricing models and components of marginal utility in external habit formation models. This paper provides identification conditions for positive eigenfunctions in nonparametric models. Identification is achieved if the operator satisfies two mild positivity conditions and a power compactness condition. Both existence and identification are achieved under a further nondegeneracy condition. The general results are applied to obtain new identification conditions for external habit formation models and for positive eigenfunctions of pricing operators in dynamic asset pricing models.

scholarly journals Optimists and Pessimists in (In)Complete Markets

2019 ◽  
Vol 55 (8) ◽  
pp. 2466-2499 ◽  
Author(s):  
Nicole Branger ◽  
Patrick Konermann ◽  
Christian Schlag
Keyword(s):  
Asset Pricing ◽  
Risk Model ◽  
Complete Markets ◽  
Jump Risk ◽  
Recursive Preferences ◽  
Aggregate Consumption ◽  
Market Incompleteness ◽  
Long Run ◽  
Insurance Product ◽  
Long Run Risk

We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters because the consumption claim resembles an insurance product against jump risk and effectively reproduces approximate spanning. In a long-run risk model with jumps in the long-run growth rate, market incompleteness affects speculation and investor survival. Jump and diffusive risks are more balanced regarding their importance, and therefore the consumption claim cannot reproduce approximate spanning.

TESTING THE LONG-RUN RISK MODEL: A KALMAN FILTER APPROACH

2018 ◽  
Vol 13 (04) ◽  
pp. 1850019
Author(s):  
JIANQIU WANG ◽  
KE WU
Keyword(s):  
Kalman Filter ◽  
Maximum Likelihood ◽  
Risk Model ◽  
Estimation Method ◽  
Model Performance ◽  
Empirical Support ◽  
Likelihood Estimation ◽  
Long Run ◽  
Filter Approach ◽  
Long Run Risk

This paper reevaluates the Long-Run Risk model proposed by Bansal and Yaron (2004) using the Kalman filter and Maximum Likelihood estimation method. Our findings show that the persistence of the small long-run predictable component in the consumption growth process is the key for the model performance. In our estimation exercises, if we relax the persistence restriction on the long-run risk parameter and adopt a Maximum Likelihood estimate, the Long-Run Risk model still requires a relative risk aversion at around 70 to fit the US data. However, we do not find strong empirical support for the persistence restriction from the data.

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