Behavior Of Asset Prices Research Articles

Monetary Policy Shock and Financial Market Responses: An Empirical Study of Exchange Rate, Gold and International Equity Market

The asset pricing behavior around Rate Decision of The Central Bank is both an important and interesting Economic phenomenon. Predicting the direction and level of asset prices are important activities in the real world practice for investors. In this paper, I applied the Linear, Non-linear and Time Series methods to estimate the short term price change of several financial markets after the rate decision of FOMC in U.S. Fed by examine the data from 1990 to 2013. Our finding is that part of the asset pricing behavior is predictable conditional on the information set of rate decision. The unexpected part of hiking and cutting of benchmark overnight interest rate have significant influence on some asset classes. In the linear estimation parts, I found that the 1 basis point unexpected cut of the Fed Fund rate by the Fed Reserve in U.S. will drive 11 ticks rise of gold prices with significant level of 0.01. In the non-linear estimation parts, if the Fed Reserve cut its interest rate unexpectedly by 125 basis points, the probability that the Japanese Yen rises will be about 0.91, gold price rises will be about 0.80, the HangSeng Index rises will be 1.00, and the TSE rises will be about 0.98. My results are consistent with the hypothesis of rational behavior of economic agents in financial market and the related theory such as UIP(Uncovered Interest Rate Parity), Gold price as a prediction of inflation and international transmission of monetary policy through equity market.

Liquidity-Adjusted Price-Dividend Ratios and Expected Returns

This paper proposes a liquidity-adjusted dividend-ratio model by generalizing static liquidity-adjusted asset pricing theory. We show that log stock prices, dividends, and price impact are cointegrated and define their linear combination as liquidity-adjusted price-dividend ratios. By employing vector autoregressive models, we show that expected future price impact has a significant effect on asset prices. By further decomposing it into permanent and transitory price impacts, we show that they make asset prices more speculative and smooth, respectively. We also show that news about the transitory price impact contributes to a considerable degree of stock market volatility. Our implications can help better understand the speculative behavior of asset prices and thus explain the unusual stock market phenomenon in the late 1990s.

Biased Beliefs, Asset Prices, and Investment: A Structural Approach

ABSTRACTWe structurally estimate a model in which agents’ information processing biases can cause predictability in firms’ asset returns and investment inefficiencies. We generalize the neoclassical investment model by allowing for two biases—overconfidence and overextrapolation of trends—that distort agents’ expectations of firm productivity. Our model's predictions closely match empirical data on asset pricing and firm behavior. The estimated bias parameters are well identified and exhibit plausible magnitudes. Alternative models without either bias or with efficient investment fail to match observed return predictability and firm behavior. These results suggest that biases affect firm behavior, which in turn affects return anomalies.

Intraday Anomalies and Market Efficiency: A Trading Robot Analysis

One of the leading criticisms of the Efficient Market Hypothesis (EMH) is the presence of so-called “anomalies”, i.e. empirical evidence of abnormal behaviour of asset prices which is inconsistent with market efficiency. However, most studies do not take into account transaction costs. Their existence implies that in fact traders might not be able to make abnormal profits. This paper examines whether or not anomalies such as intraday or time of the day effects give rise to exploitable profit opportunities by replicating the actions of traders. Specifically, the analysis is based on a trading robot which simulates their behaviour, and incorporates variable transaction costs (spreads). The results suggest that trading strategies aimed at exploiting daily patterns do not generate extra profits. Further, there are no significant differences between sub-periods (2005-2006 – “normal” , 2007- 2009 – “crisis” , 2010-2011 – “post-crisis).

A NOTE ON THE FORWARD AND THE EQUITY PREMIUM PUZZLES: TWO SYMPTOMS OF THE SAME ILLNESS?

We build a stochastic discount factor—SDF—using U.S. domestic financial data only, and provide evidence that it accounts for stylized facts about foreign markets that escape SDFs generated by consumption-based models. When our SDF is interpreted as the projection of the pricing kernel from a fully specified model in the space of returns, our results indicate that a model that accounts for the behavior of domestic assets goes a long way toward accounting for the behavior of foreign asset prices. In our tests, we address predictability, a defining feature of the forward premium puzzle—FPP—by using instruments that are known to forecast excess returns in the moment restrictions associated with Euler equations both in the equity and in the foreign markets.

Complex dynamics in equilibrium asset pricing models with boundedly rational, heterogeneous agents

We study a simple model based upon the Lucas framework where heterogeneous agents behave rationally in a fully intertemporal setting but do not know other investors' personal preferences, wealth or investment portfolios. As a consequence, agents initially do not know the equilibrium asset pricing function and must make guesses, which they update via adaptive learning with constant gain. We demonstrate that even in this simple environment the economy can, depending on parameters, exhibit either stable convergence to equilibrium, or chaotic dynamical behavior of asset prices and trading volume without converging to the rational expectations equilibrium of the Lucas model. This contradicts the assertion that the Lucas model is stable in the face of modest deviations from the strong assumptions required to compute the equilibrium. © 2013 Wiley Periodicals, Inc. Complexity 19: 38–55, 2014

Saving-based asset-pricing

This paper explores the implications of a novel class of preferences for the behavior of asset prices. Following a suggestion by Marshall (1920), we entertain the possibility that people derive utility not only from consumption, but also from the very act of saving. These “saving-based” preferences are related to models of habit formation and the spirit of capitalism, but incorporate the feature that people have anticipatory habits because they care about the future accumulation of wealth. We derive the Euler equations for these preferences and estimate them with GMM. Our estimates suggest that the preference for saving is economically significant.

Asset Pricing and Monetary Policy

This paper examines the role of money in understanding the behavior of asset prices and whether and how monetary policy should react to asset prices such as stock prices and equity premiums from the vantage point of risk sharing. To do so, I introduce money via the form of transaction cost into a production economy with limited stock market participation where agents with lower inter-temporal elasticity of substitution (IES), called non-stockholders, have no access to stock market. In addition to facilitating transactions of consumption goods, money also redistributes wealth by counter-cyclically transferring resources from stockholders to non-stockholders, the main role of non-state contingent bonds. The benchmark model resolves quantitatively the risk premium puzzle and the risk-free return puzzle, matches macroeconomic behavior such as volatilities of output, consumption and investment, and is in line with empirically documented facts about money growth, ination and asset prices in literature. This model is then used to evaluate alternative policies for money growth rates. I nd that monetary policies are welfare improving for both stockholders and non-stockholders if they reduce equity premiums in the economy. These policies include a lower expected money growth, a pro-cyclical money growth rate, and growth rates of money being positively reacting to equity prices or equity premiums, all of which enhance the precautionary saving role of money.

On the Effectiveness of Candlestick Chart Analysis for the Brazilian Stock Market

Several techniques have been developed in pursuit of understanding the behavior of the financial market, in an attempt to predict the asset pricing behavior. The candlestick chart created in the 18th century is one of these techniques. In 2006, Greg Morris conducted a study on the effectiveness of this technique for the U.S. capital market. However, no similar work was done for the Brazilian market. In this paper, the behavior of part of the Brazilian capital market was studied using sixteen candlestick patterns. We considered the data series of ten stocks between 2005 and 2009, totaling approximately 40% of Ibovespa (São Paulo Stock Exchange Index) turnover. The frequency of confirmation of each pattern was measured along seven exchange sessions after occurrence of such pattern, and results were compared to those presented by Morris. Additionally, adjustments of the observed proportions of hits were tested for their statistical significance. Results found in the frequential analysis showed a discrepancy in relation to Morris's study. Likewise, in statistical analysis few patterns have confirmed the behavior expected of them. In at least one case the trend expressed by data, although significant, was contrary to the original interpretation of the pattern. Therefore, direct application of patterns developed for other markets, times or actions is not recommended. Such results do not allow for an affirmation that candlestick patterns have the power to predict future behavior of stocks traded in the Ibovespa stock market. However, we found statistically significant evidence of the predictive ability of some patterns, which may indicate that the technique must be adapted to the market where it is intended to be used. The main contributions of this paper are a partial replication of Morris’ study for a set of stocks traded in the Brazilian market, and a statistical analysis of the effectiveness of candlestick patterns as predictors of the behavior of those stocks.Click here and insert your abstract text.

Hopf Bifurcation Analysis in a Chartist-Fundamentalist Model with Time-Delays

This paper studies the dynamic behavior of asset prices using a chartist - fundamentalist model with two speculative markets. To this effect, we employ a differential system with delays similar to Dibeh (2007) to describe the price dynamics and we assume that the two markets are coupled via diffusive coupling terms. We study two different time delay cases, namely when both markets experience the same time delay, and when the time delay is different across markets. First, we theoretically determine that the equilibrium exists and investigate its stability. Second, we establish the general conditions for the existence of local Hopf bifurcations and extensively analyze their direction and stability. The common conclusion from both the delay scenarios we consider is that coupled speculative markets with heterogeneous agents in each, but with different price dynamics, can be synchronized through diffusive coupling. Finally, we provide some numerical illustrations to confirm our theoretical findings.

The Persistence of Long-Run Abnormal Returns Following Stock Repurchases and Offerings

The long-run abnormal returns following both stock repurchases and seasoned equity offerings disappear for the events in 2003–2012. The disappearance is associated with the changing market environment: increased institutional investment, decreased trading costs, improved liquidity, and enhanced regulations on corporate governance and information disclosure. In response to the more efficient pricing of stocks, firms become less opportunistic in stock repurchases and offerings. Recent events of stock repurchases and offerings are motivated more by business-operating reasons than to exploit mispricing. Both external market factors and internal firm factors contribute to the disappearance of the postevent abnormal returns. Our findings on the recent events contrast with those of earlier studies and shed light on how the changing market environment affects both asset pricing and corporate behavior. This paper was accepted by Wei Jiang, finance.

Equilibrium Theory with Link Portfolios

Portfolio constraints often prevent financial derivatives from being synthetically created by primitive assets and thus, open a way for the 'redundant' assets to participate in expanding risk-sharing opportunities. They bring about peculiar portfolios, called 'link portfolios,' at an aggregate level. Link portfolios make no monetary payoff in equilibrium but may account for feasibility of optimal portfolios in constrained asset markets. They are abundant enough to form a linear subspace. This fact has two implications. First, they have null market value in equilibrium because they are marginally useless once the feasibility of optimal portfolios is met. Second, they are free but may have impact on the welfare of agents in equilibrium. Such elusive behavior of link portfolios blocks extending the conventional approach to equilibrium analysis to constrained asset markets. It has remained unresolved for a long time to verify the existence of equilibrium with general forms of convex portfolio constraint. This is because the literature fails to recognize the presence of link portfolios in constrained asset markets and thus, do justice to the analysis of their equilibrium behavior. The paper shows the existence of equilibrium in two-period constrained asset markets with link portfolios. This result is built on the fundamental theorem of portfolio decomposition which allows us to explicate the behavior of equilibrium asset prices and capture the risk-sharing role of link portfolios in equilibrium.

An investigation of Forex market efficiency based on detrended fluctuation analysis: A case study for Iran

The efficient market hypothesis (EMH) states that asset prices fully reflect all available information. As a result, speculators cannot predict the future behavior of asset prices and earn excess profits at least after adjusting for risk. Although initial tests of the EMH were performed on stock market data, the EMH was soon applied to other markets including foreign exchange (FX). This study uses the detrended fluctuation analysis (DFA) technique to test 01:12:2005–18:04:2010 Iranian Rial/US Dollar exchange rate time series data to see if it can be explained by the weak form of the EMH. Moreover, to determine changes in the degree of inefficiency over time, the whole period has been divided into four subperiods. The study shows that the Iranian Forex market (the Rial/Dollar case) is weak-form inefficient over the whole period and in each of the subperiods. However, the degree of inefficiency is not constant over time. The findings suggest that profitable risk-adjusted trades could be made using past data.

The arrival of public information and asset price behavior in emerging markets: evidence from stock market in Pakistan

This study investigates the role of public information on stock market activity and asset return using daily data for the period January 2006 - July 2011. The role of information dissemination related to Semi-strong form of efficiency is tested. This study attempts to explore the relationship between publicly available information taken from KSE website and aggregate measures of market activity that is market returns and trading volume. The empirical result indicates that news is positively related to trading volume and the returns at market level. However, at firm level the results are mixed. The relationship is robust in case of trading volume but not with market returns. However, the observed relationship between news and market activity is not particularly strong. This shows the difficulty in linking volume and volatility to the observed measure of information. At the same time it implies the importance of factors other than public information in driving the stock market activity.

The Persistence of Long-Run Abnormal Stock Returns: Evidence from Stock Repurchases and Offerings

Evidence suggests that the stock market in the recent decade becomes more efficient. We investigate its implications on asset pricing and corporate decisions, taking stock repurchases and SEOs as the experiment subjects. Consistent with the improved market efficiency, we find that the long-run abnormal returns following these two events, which are robust in the early period, disappear in the recent decade. In response to a more efficient market, fewer firms conduct stock repurchases or seasoned offerings for the purpose of market-timing. Our findings highlight a dynamic view on market efficiency and its implications on asset pricing and corporate behavior. JEL classification: G12, G14, G32, G35

Rumors in Financial Markets

This paper develops a dynamic model of asset price behavior based upon the arrival and diffusion of rumors in a securities market. The model is based upon a time-homogeneous pure birth process in which the number of informed and uninformed traders varies probabilistically over time as learning occurs. Traders become informed by observing the original source of information or through communication with an individual who has ‘heard’ the information already, both of which are probabilistic events. Price changes result from trades that occur when an individual hears and acts on the information. Rumors can contain true or false information. False rumors ultimately are corrected. Results from simulating the model yield log price changes similar to actual intraday common stock returns.

Biased Beliefs, Asset Prices, and Investment: A Structural Approach

We structurally estimate a model in which agents' information processing biases can cause predictability in firms’ asset returns and investment inefficiencies. We generalize the neoclassical investment model by allowing for two biases -- overconfidence and over-extrapolation of trends -- that distort agents' expectations of firm productivity. Our model’s predictions closely match empirical data on asset pricing and firm behavior. The estimated bias parameters are well-identified and exhibit plausible magnitudes. Alternative models without either bias or with efficient investment fail to match observed return predictability and firm behavior. These results suggest that biases affect firm behavior, which in turn affects return anomalies.

Accelerating the Calibration of Stochastic Volatility Models

Option valuation models keep advancing toward greater versatility and realism, by introducing more-flexible stochastic processes and more-complex payoff structures. Allowing stochastically time-varying volatility and jumps in the returns process, the volatility process, or both greatly broadens the range of asset price behavior that can be incorporated in the pricing model. One of the key mathematical tools for solving more-complicated models is the use of characteristic functions and related transform methods. But these tools require computing integrals in the complex domain, which is complicated and has some potential pitfalls. Several different numerical solution techniques are used, including direct integration with an approach such as Gaussian quadrature, the Fast Fourier Transform (FFT), or fractional FFT. In this article, Kilin reviews these methods and proposes a computational enhancement to the basic Gaussian quadrature approach that speeds it up substantially by storing intermediate results and reusing the saved values rather than recomputing them each time. In the direct comparison reported here, the modified quadrature approach was around 30 times faster than FFT and 15 times faster than fractional FFT. <b>TOPICS:</b>Options, VAR and use of alternative risk measures of trading risk, accounting and ratio analysis

Japan's Bubble, the USA's Bubble and China's Bubble

AbstractThis paper compares the three recent episodes of boom and bust cycles in asset prices: Japan in the late 1980s to the 1990s; the USA since the mid‐1990s; and China during the past decade. Although we have not yet seen a collapse of Chinese property prices, their increases so far are comparable to those in the other two episodes and a careful comparative study is warranted. The present paper first examines the behavior of asset prices, of property prices in particular, in the three cases, and highlights some similarities. The paper emphasizes the role played by extremely easy monetary policy in generating bubble‐like asset price behavior in the three cases. The reason for easy monetary policies is investigated. In the US case, the monetary authority was concerned about the risk of deflation in the early to mid‐2000s. The experiences of Japan and China are quite similar in that the monetary authorities of both countries were seriously concerned about the possible deflationary effects of exchange rate appreciation on the economy. The implications of such a finding for the future of Chinese macroeconomic policy are discussed.

The dynamic behaviour of asset prices in disequilibrium: a survey

This article surveys boundedly rational heterogeneous agent (BRHA) models of financial markets. We give particular emphasis to the role of the market clearing mechanism used, the utility function of the investors, the interaction of price and wealth dynamics, and calibration of this class of models. Due to agents' behavioural features and market noise, the BRHA class of models are both non-linear and stochastic. We show that BRHA models produce both a locally stable fundamental equilibrium corresponding to that of the standard paradigm, as well as instability with a consequent rich range of possible complex behaviours that are analysed by both simulation and deterministic bifurcation analysis. A calibrated model is able to reproduce quite well the stylised facts of financial markets. The BRHA framework seems able to better accommodate market features such as fat tails, volatility clustering, large excursions from the fundamental and bubbles than the standard financial market paradigm.