Knowledge that Transforms

Using asset market data, as well as theoretical relations between investors’ preferences, option-implied, risk-neutral, probability distribution functions (PDFs,) and index-implied, actual, PDFs, this paper extracts a time-series of investors’ relative risk aversion (RRA) functions. Based on results recently derived by Benninga and Mayshar (2000), these functions are used to recover the evolution of risk preferences heterogeneity. Applying non-parametric estimation on European call options written on the S & P500 index, we find that: (i) the RRA functions are decreasing; and (ii) the constructed risk preferences heterogeneity series is positively correlated in a static, as well as a dynamic, setup with a prevalent proxy for investors heterogeneity, namely, the spread between auction- and market-yields of Treasury bills.

This paper examines a multiperiod production economy where investors do not observe the realizations of productivity factors or security expected returns. Unlike previous work, which expresses the equilibrium conditions as functions of unobservable (to both real-world investors and empiricists) moments of the distributions of returns, we express the equilibrium real rate as a function of the observable sample paths of realizations of returns. We provide a framework for empirically testing this and other asset pricing models without outside-the-model econometric assumptions needed for producing the unobservable moments of returns. We construct versions of the restrictions for any time interval between observations.

Many interest rates are as volatile as exchange rates and thus represent an equally important source of risk for corporations. While this is true not only for financial institutions, but for other corporations as well, little is known about the interest rateexposure of nonfinancial firms. Consequently, this paper investigates the impact of interest rate risk on a large sample of nonfinancial corporations. It presents empirical evidence for the existence of linear and nonlinear exposures with regard to movements invarious interest rate variables. The interest rate exposure is empirically determinedbymeasures of firm liquidity, but not by financial leverage.

Using standard Industrial Organization tools, we analyze the relation between competition in arm's length financial markets and the prevalence of close bank-firms ties. We show how the degree of competition between financial intermediaries affects the intensity of relationships between banks and client firms, and explore the idea that investment in bank-firm relationships can be used strategically by incumbent multi-product (universal) banks to limit competition in arm's length markets. The analysis implies that reforms designed to facilitate entry of new intermediaries may actually induce incumbent banks to increase investment in relationship banking, so that regulatory entry barriers are replaced by entry barriers created endogenously, namely, there is “path dependence” in the market structure of financial systems. This result suggests that increased (potential) competition in the financial services industry will not always destroy bank-firm relationships but, on the contrary, may actually strengthen them.

Comment on ‘A Wealth Based Explanation for Earnings Conservatism’ Get access Simon Benninga Simon Benninga Search for other works by this author on: Oxford Academic Google Scholar Review of Finance, Volume 5, Issue 3, 2001, Pages 351–352, https://doi.org/10.1023/A:1013834904395 Published: 01 December 2001

This paper presents a theory of initial public offerings based on the idea that the optimal ownership structure of a company changes over the life cycle of the firm. Insiders take the company public when they have lost the comparative advantage over outsiders in gathering information to evaluate the firm's growth prospects. The size of the share sold to the public depends on the relative abilities of the market and insiders to gather this information and on the frictions in the going-public process. Intermediaries help to reduce these frictions and lead to a more efficient allocation if IPOs are conducted more frequently. Discrimination between different classes of investors may be beneficial. Learning by the market about projects in a new industry can lead to a clustering of new issues (hot issue markets).

In this paper I assess the degree of similarity in the cross-sectional pricing of Internet and non-Internet stocks during the tumultuous year of 2000. Despite large differences in their economic fundamentals, I find that the equity market values of Internet firms with immaterial web traffic, firms that are randomly selected, and firms that went public at the same time as Internet firms are similarly related to analysts' forecasts of earnings in 2001 and the long-term rate of growth in earnings. This is not the case for firms with intensive web traffic. I also find that at the peak of Internet prices in March 2000 the market rewarded losses of web-traffic-intensive firms but did not reward profits, while after the peak the market reversed its view, rewarding profits but not losses. Beyond earnings, web traffic is significantly positively priced both at and after the Internet peak. However, I find no evidence that two proxies for supply and demand forces – the degree of public float and short interest – are value-relevant for Internet firms. Overall, I argue that there are enough similarities in the cross-sectional pricing of Internet and non-Internet firms to make it unlikely that the pricing of Internet stocks during 2000 was entirely irrational. Moreover, any irrationality in the prices of Internet stocks cannot be linked to public float and short interest.

This paper examines a multiperiod production economy where investors do not observe the realizations of productivity factors or security expected returns. Unlike previous work, which expresses the equilibrium conditions as functions of unobservable (to both real-world investorsand empiricists) moments of the distributions of returns, we express the equilibrium real rate asa function of the observable sample paths of realizations of returns. We provide a framework for empirically testing this and other asset pricing models without outside-the-model econometric assumptions needed for producing the unobservable moments of returns. We construct versions of the restrictions for any time interval between observations. JEL codes: E43, G12, D92, D80, D51

This study examines the effects on the stock market unitary risk premium and volatility associated with the listing of stock and stock index derivatives in Switzerland. Based on a univariate GARCH (1,1) specification of the stock index variance and a time-varying unitary risk premium representation, we can reject the hypothesis that stock and stock index derivatives listings do not affect the total risk premium. Contrarily to previous empirical evidence, we find that derivatives listings affect both the conditional market returns’ variance and the unitary risk premium through structural shocks. The gradual market completion hypothesis is further corroborated in that, cumulatively, the three stock and stock index options futures derivatives listings reduced the unitary risk premium while the marginal impact of each successive listing decayed.

Under the assumptions of the Consumption-based Capital Asset Pricing Model (CCAPM), Pareto optimal consumption allocations are characterized by each agent's consumption process being adapted to the filtration generated by the aggregate consumption process of the economy. The wealth processes of the agents, however, are adapted to the finer filtration generated by aggregate consumption and the conditional distribution of future aggregate consumption. Therefore, in order to achieve pareto optimal consumption allocations, a sufficiently varied set of assets must exist such that any wealth process adapted to this finer filtration can be implemented by dynamically trading in that set of assets. We provide sufficient conditions for the existence of such a set of assets based on dynamically trading contingent claims on aggregate consumption. In addition, we give sufficient conditions for the existence of equilibria in a dynamically effectively complete market in which agents are only able to trade in contingent claims on aggregate consumption, the market portfolio of firms, and a (numeraire) zero-coupon bond. We demonstrate the role of short- and long-term contingent claims on aggregate consumption for the implementation of Pareto optimal allocations inthe presence of short- and long-term risks. In addition, in the presence of personal risks, we demonstrate the role of insurance contracts.