A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.
- Topic classification is ongoing.
- Please kindly let me know [mingze.gao@mq.edu.au] in case of any errors.
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Results 38 resources
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This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed. Copyright 2003, Oxford University Press.
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This article introduces the concept of a statistical arbitrage opportunity (SAO). In a finite-horizon economy, a SAO is a zero-cost trading strategy for which (i) the expected payoff is positive, and (ii) the conditional expected payoff in each final state of the economy is nonnegative. Unlike a pure arbitrage opportunity, a SAO can have negative payoffs provided that the average payoff in each final state is nonnegative. If the pricing kernel in the economy is path independent, then no SAOs can exist. Furthermore, ruling out SAOs imposes a novel martingale-type restriction on the dynamics of securities prices. The important properties of the restriction are that it (1) is model-free, in the sense that it requires no parametric assumptions about the true equilibrium model, (2) can be tested in samples affected by selection biases, such as the peso problem, and (3) continues to hold when investors' beliefs are mistaken. The article argues that one can use the new restriction to empirically resolve the joint hypothesis problem present in the traditional tests of the efficient market hypothesis. Copyright 2003, Oxford University Press.
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In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification. Copyright 2003, Oxford University Press.
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This article is a critical survey of models designed for pricing fixed-income securities and their associated term structures of market yields. Our primary focus is on the interplay between the theoretical specification of dynamic term structure models and their empirical fit to historical changes in the shapes of yield curves. We begin by overviewing the dynamic term structure models that have been fit to treasury or swap yield curves and in which the risk factors follow diffusions, jump-diffusion, or have "switching regimes." Then the goodness-of-fit of these models is assessed relative to their abilities to (i) match linear projections of changes in yields onto the slope of the yield curve; (ii) match the persistence of conditional volatilities, and the shapes of term structures of unconditional volatilities, of yields; and (iii) to reliably price caps, swaptions, and other fixed-income derivatives. For the case of defaultable securities we explore the relative fits to historical yield spreads. Copyright 2003, Oxford University Press.
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We analyze how two dimensions of technological progress affect competition in financial services. While better technology may result in improved information processing, it might also lead to low-cost or even free access to information through, for example, informational spillovers. In the context of credit screening, we show that better access to information decreases interest rates and the returns from screening. However, an improved ability to process information increases interest rates and bank profits. Hence predictions regarding financial claims' pricing hinge on the overall effect ascribed to technological progress. Our results generalize to other financial markets where informational asymmetries drive profitability, such as insurance and securities markets. Copyright 2003, Oxford University Press.
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Using a new Bayesian method for the analysis of diffusion processes, this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative. The assumption of stationarity, which is common in the literature, represents a nontrivial prior belief about the shape of the drift function. This belief and the use of "flat" priors contribute strongly to the finding of nonlinear mean reversion. Implementation of an approximate Jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed. Finally, the article documents that nonlinear drift is primarily a feature of daily rather than monthly data, and that these data contain a transitory element that is not reflected in the volatility of longer-maturity yields. Copyright 2003, Oxford University Press.
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This article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment. The financing constraints are inferred from the investment Euler equation by assuming that the firm's stochastic discount factor is a function of the firm's financial position (specifically, the stock of liquid assets). The magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development. The size effect, business cycles, and legal environment effects are also considered. Copyright 2003, Oxford University Press.
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This article develops restrictions that arbitrage-constrained bond prices impose on the short-term rate process in order to be consistent with given dynamic properties of the term structure of interest rates. The central focus is the relationship between bond prices and the short-term rate volatility. In both scalar and multidimensional diffusion settings, typical relationships between bond prices and volatility are generated by joint restrictions on the risk-neutralized drift functions of the state variables and convexity of bond prices with respect to the short-term rate. The theory is illustrated by several examples and is partially extended to accommodate the occurrence of jumps and default. Copyright 2003, Oxford University Press.
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This article studies the impact of imperfect consumption risk sharing across countries on the formation of time-varying risk premiums in the foreign exchange market and on their cross-sectional differences. These issues are addressed within the framework of the Constantinides and Duffie (1996) model applied to a multicountry world. The article shows that the cross-country variance of consumption growth rates is counter-cyclical and that this feature of consumption data is mildly helpful for currency pricing. In particular, unlike the standard CCAPM, the new model is able to generate currency risk premiums at lower values of risk aversion and provide certain explanatory power for cross-sectional differences in currency returns. Copyright 2003, Oxford University Press.
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We compare and contrast some existing ordinary least squares (OLS)- and generalized method of moments (GMM)-based tests of asset pricing models with a new more general test. This new test is valid under the assumption that returns are elliptically distributed, a necessary and sufficient assumption of the linear capital asset pricing model (CAPM). This new test fails to reject the CAPM on a dataset of stocks sorted by market valuations, whereas similar tests constructed from OLS and GMM estimation methods reject the linear CAPM. We also find that outliers reduce the OLS-estimated mispricing of the linear CAPM on monthly returns sorted by previous performance, that is, momentum. Monte Carlo evidence supports superior size and power properties of the new test relative to OLS- and GMM-based tests. Copyright 2003, Oxford University Press.
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