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on Financial Markets |
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Issue of 2015‒08‒30
thirteen papers chosen by |
| By: | Hou, Kewei (OH State University); Xue, Chen (University of Cincinnati); Zhang, Lu (OH State University) |
| Abstract: | This paper compares the Hou, Xue, and Zhang (2014) q-factor model and the Fama and French (2014a) five-factor model on both conceptual and empirical grounds. Four concerns cast doubt on the five-factor model: The internal rate of return often correlates negatively with the one-period-ahead expected return; the value factor seems redundant in the data; the expected investment tends to correlate positively with the one-period-ahead expected return; and past investment is a poor proxy for the expected investment. Empirically, the four-factor q-model outperforms the five-factor model, especially in capturing price and earnings momentum and profitability anomalies. |
| JEL: | G12 G14 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2015-05&r=all |
| By: | Bai, Hang (OH State University); Hou, Kewei (OH State University); Kung, Howard (London Business School); Zhang, Lu (OH State University) |
| Abstract: | Value stocks are more exposed to disaster risk than growth stocks. Embedding disasters into an investment-based asset pricing model induces strong nonlinearity in the pricing kernel. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples in which disasters are not materialized, and its relative success in samples in which disasters are materialized. The relation between pre-ranking market betas and average returns is flat in simulations, despite a strong positive relation between true market betas and expected returns. Evidence in the long U.S. sample from 1926 to 2014 lends support to the model's key predictions. |
| JEL: | G12 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2015-03&r=all |
| By: | Joel M. David; Ina Simonovska |
| Abstract: | Firm-level stock returns exhibit comovement above that in fundamentals, and the gap tends to be higher in developing countries. We investigate whether correlated beliefs among sophisticated, but imperfectly informed, traders can account for the patterns of return correlations across countries. We take a unique approach by turning to direct data on market participants’ information - namely, real-time firm-level earnings forecasts made by equity market analysts. The correlations of firm-level forecasts exceed those of fundamentals and are strongly related to return correlations across countries. A calibrated information-based model demonstrates that the correlation of beliefs implied by analyst forecasts leads to return correlations broadly in line with the data, both in levels and across countries - the correlation between predicted and actual is 0.63. Our findings have implications for market-wide volatility - the model-implied correlations alone can explain 44% of the cross-section of aggregate volatility. The results are robust to controlling for a number of alternative factors put forth by the existing literature. |
| JEL: | D8 G12 G15 G17 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21480&r=all |
| By: | Markku Lanne (University of Helsinki and CREATES); Henri Nyberg (University of Helsinki and University of Turku) |
| Abstract: | We explore the differences between the causal and noncausal vector autoregressive (VAR) models in capturing the real activity-stock return-relationship. Unlike the conventional linear VAR model, the noncausal VAR model is capable of accommodating various nonlinear characteristics of the data. In quarterly U.S. data, we find strong evidence in favor of noncausality, and the best causal and noncausal VAR models imply quite different dynamics. In particular, the linear VAR model appears to underestimate the importance of the stock return shock for the real activity, and the real activity shock for the stock return. |
| Keywords: | Noncausal VAR model, non-Gaussianity, generalized forecast error variance decomposition, business cycles, fundamentals. |
| JEL: | C32 C58 E17 E44 |
| Date: | 2015–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2015-36&r=all |
| By: | Lopez, Pier (Banqe de France); Lopez-Salido, J. David (Board of Governors of the Federal Reserve System (U.S.)); Vazquez-Grande, Francisco (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | A downward-sloping term structure of equity and upward-sloping term structures of interest rates arise endogenously in a general-equilibrium model with nominal rigidities and nonlinear habits in consumption. Countercyclical marginal costs exacerbate the procyclicality of dividends after a technology shock, and hence their riskiness, and generate countercyclical inflation. Marginal costs gradually fall after a negative technology shock as the price level increases sluggishly, so the payoffs of short-duration dividend claims (bonds) are more (less) procyclical than the payoffs of long-duration claims (bonds). The simultaneous presence of market and home consumption habits allows for uniting nonlinear habits and a production economy without compromising the ability of the model to fit macroeconomic variables. |
| Keywords: | Equity and bond yields; habit formation; nominal rigidities; structural term structure modeling |
| JEL: | E43 E44 G12 |
| Date: | 2015–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-64&r=all |
| By: | Mila Getmansky; Peter A. Lee; Andrew W. Lo |
| Abstract: | The hedge-fund industry has grown rapidly over the past two decades, offering investors unique investment opportunities that often reflect more complex risk exposures than those of traditional investments. In this article we present a selective review of the recent academic literature on hedge funds as well as updated empirical results for this industry. Our review is written from several distinct perspectives: the investor's, the portfolio manager's, the regulator's, and the academic's. Each of these perspectives offers a different set of insights into the financial system, and the combination provides surprisingly rich implications for the Efficient Markets Hypothesis, investment management, systemic risk, financial regulation, and other aspects of financial theory and practice. |
| JEL: | G01 G11 G12 G20 G23 G24 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21449&r=all |
| By: | Agarwal, Vikas; Green, T. Clifton; Ren, Honglin |
| Abstract: | Hedge fund flows chase alpha, yet they also follow returns attributable to traditional and exotic risk exposures. Investors appear more cognizant of exotic risks over time, with flows increasing their relative emphasis on returns from exotic betas in recent years. Investors also discriminate between which risks warrant high fees, with flows into high-fee funds being more likely to emphasize returns arising from exotic risks. Although we find strong evidence of persistence for alpha, persistence in hedge fund returns attributable to traditional and exotic risk exposures is modest, which suggests investors would benefit from employing more sophisticated risk models when evaluating fund performance. |
| Keywords: | Hedge Funds,Investor Flows,Alpha,Alternative Beta,Exotic Beta |
| JEL: | G11 G20 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1508&r=all |
| By: | Sabiou Inoua |
| Abstract: | In this paper we explain the wild fluctuations of financial prices from the intrinsic amplifying feedback of speculative supply and demand. Formally, we show that an asset return follows a multiplicative random growth with exogenous input, which is well-known to be a generic power-law generating process, and which could thus easily explain the well-established power-law distribution of returns, and other related variables. Moreover, the theory we develop here is a general framework where competing ideas can be discussed in a unified way. The dominant random walk model, for instance, is easily derived in this framework if we superimpose market clearing (central to neoclassical economics). It corresponds to the case where the feedback in price dynamics is ignored in favor of the external input, namely the random inflow of news from the real economy. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1508.02203&r=all |
| By: | Andreasen, Eugenia (University of Santiago of Chile); Valenzuela, Patricio (University of Chile) |
| Abstract: | This paper shows that financial openness significantly affects corporate and sovereign credit ratings, and that the magnitude of this effect depends on the level of development of the domestic financial market. Issuers located in less financially developed economies stand to benefit the most from opening up their capital accounts, whereas the impact of this effect decreases as the level of development of the domestic capital market improves. |
| JEL: | F34 G15 G38 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:upafin:15-06&r=all |
| By: | Doidge, Craig (University of Toronto); Karolyi, George Andrew (Cornell University); Stulz, Rene M. (OH State University and ECGI, Brussels) |
| Abstract: | The U.S. had 14% fewer exchange-listed firms in 2012 than in 1975. Relative to other countries, the U.S. now has abnormally few listed firms given its level of development and the quality of its institutions. We call this the "U.S. listing gap" and investigate possible explanations for it. We rule out industry changes, changes in listing requirements, and the reforms of the early 2000s as explanations for the gap. We show that the probability that a firm is listed has fallen since the listing peak in 1996 for all firm size categories though more so for smaller firms. From 1997 to the end of our sample period in 2012, the new list rate is low and the delist rate is high compared to U.S. history and to other countries. High delists account for roughly 46% of the listing gap and low new lists for 54%. The high delist rate is explained by an unusually high rate of acquisitions of publicly-listed firms compared to previous U.S. history and to other countries. |
| JEL: | G15 G20 G24 G30 G34 G38 O16 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2015-07&r=all |
| By: | Goodness C. Aye (Department of Economics, University of Pretoria); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | This study investigates the predictability of 11 industrialized stock returns with emphasis on the role of U.S. returns. Using monthly data spanning 1980:2 to 2014:12, we show that there exist multiple structural breaks and nonlinearities in the data. Therefore, we employ methods that are capable of accounting for these and at the same time date stamping the periods of causal relationship between the U.S. returns and those of the other countries. First we implement a subsample analysis which relies on the set of models, data set and sample range as in Rapach et al. (2013). Our results show that while the U.S. returns played a strong predictive role based on the OLS pairwise Granger causality predictive regression and news-diffusion models, it played no role based on the pooled version of the OLS model and its role based on the adaptive elastic net model is weak relative to Switzerland. Second, we implement our preferred model: a bootstrap rolling window approach using our newly updated data on stock returns for each countries, and find that U.S. stock return has significant predictive ability for all the countries at certain sub-periods. Given these results, it would be misleading to rely on results based on constant-parameter linear models that assume that the relationship between the U.S. returns and those of other industrialized countries are permanent, since the relationship is, in fact, time-varying, and holds only at specific periods. |
| Keywords: | Stock returns; predictability; structural breaks; nonlinearity; time varying causality; |
| JEL: | C32 G10 G15 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:emu:wpaper:15-07.pdf&r=all |
| By: | L. C. G. Rogers |
| Abstract: | The aim of this study is to devise numerical methods for dealing with very high-dimensional Bermudan-style derivatives. For such problems, we quickly see that we can at best hope for price bounds, and we can only use a simulation approach. We use the approach of Barraquand & Martineau which proposes that the reward process should be treated as if it were Markovian, and then uses this to generate a stopping rule and hence a lower bound on the price. Using the dual approach introduced by Rogers, and Haugh & Kogan, this approximate Markov process leads us to hedging strategies, and upper bounds on the price. The methodology is generic, and is illustrated on eight examples of varying levels of difficulty. Run times are largely insensitive to dimension. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1508.06117&r=all |
| By: | Sudharshan Reddy Paramati; Rakesh Gupta; Eduardo Roca |
| Keywords: | Bilateral trade linkages, stock market interdependence, AGDCC GARCH models, time series models |
| JEL: | G15 G01 C32 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:gri:fpaper:finance:201506&r=all |