A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.
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Results 7 resources
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We test the conditional consumption-CAPM using asset holders’ consumption and find that the time variation in the prices of asset holders’ consumption risk is procyclical. This puzzling time variation is at odds with the implication of existing consumption-based equilibrium asset pricing models. We show that our finding is a salient feature of the data observed in multiple asset classes (aggregate equity market, equity portfolios, bond portfolios, and commodities portfolios), using different measures of consumption (household survey data and high-frequency retail shopping data) and alternative empirical methodologies.
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The paper investigates the portfolio allocation effects of increased asset co-movements during market downturns. We develop a model for the stock price process that allows for increased and asymmetric dependence between extreme return realizations. We isolate the portfolio hedging demands that arise due to extreme co-movements and find a substantial shift of the portfolio holdings toward the risk-free asset. We demonstrate that accounting for dependence between extreme events in portfolio decisions leads to significant economic gains that stem primarily from intertemporal hedging motives. These findings are robust along alternative modeling assumptions of extreme co-movements and conditional correlation.
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Using detailed loan holding data of Collateralized Loan Obligations (CLOs), we document empirical evidence for the fire sale of leveraged loans due to leverage constraints on CLOs. Constrained CLOs are forced to sell loans downgraded to CCC or below, and thus loans widely held by constrained CLOs experience temporary price depreciation. This instability is exacerbated by diversification requirements. As the CLO market grows, each CLO’s effort to diversify its portfolio leads to similarity in loan holdings among CLOs, and thus their leverage constraints simultaneously bind. CLOs’ overlapping loan holdings spread idiosyncratic shocks to large borrowers to the overall leveraged loan market.
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Most extant structural credit risk models underestimate credit spreads—a shortcoming known as the credit spread puzzle. We consider a model with priced stochastic asset risk that is able to fit medium‐ to long‐term spreads. The model, augmented by jumps to help explain short‐term spreads, is estimated on firm‐level data and identifies significant asset variance risk premia. An important feature of the model is the significant time variation in risk premia induced by the uncertainty about asset risk. Various extensions are considered, among them optimal leverage and endogenous default.
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A growing body of evidence suggests that the benefits of international diversification via developed markets have declined dramatically. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of emerging countries' economic activity. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries' overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.
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Assessments of the trade-off theory have typically compared the present value of tax benefits to the present value of bankruptcy costs. We verify that this comparison overwhelmingly favors tax benefits, suggesting that firms are under-leveraged. However, when we allow firms to experience even modest (e.g., 1–2% annualized) financial distress costs prior to bankruptcy, the cumulative present value of such costs can easily offset the tax benefits.
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We provide results for the valuation of European-style contingent claims for a large class of specifications of the underlying asset returns. Our valuation results obtain in a discrete time, infinite state space setup using the no-arbitrage principle and an equivalent martingale measure (EMM). Our approach allows for general forms of heteroskedasticity in returns, and valuation results for homoskedastic processes can be obtained as a special case. It also allows for conditional nonnormal return innovations, which is critically important because heteroskedasticity alone does not suffice to capture the option smirk. We analyze a class of EMMs for which the resulting risk-neutral return dynamics are from the same family of distributions as the physical return dynamics. In this case, our framework nests the valuation results obtained by Duan (1995) and Heston and Nandi (2000) by allowing for a time-varying price of risk and nonnormal innovations. We provide extensions of these results to more general EMMs and to discrete-time stochastic volatility models, and we analyze the relation between our results and those obtained for continuous-time models.
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