Determination Of Asset Prices Research Articles

Investing in a leveraged world

PurposeThroughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis. Leveraging and deleveraging decisions affect household consumption. This study investigates the effect of the dynamics of household leverage and consumption on the stock market.Design/methodology/approachThe authors explore the relation between household leverage and consumption in the context of the consumption capital asset pricing model (CCAPM). The authors test the model's implication that leverage has a negative risk premium by transforming the asset pricing restriction into an unconditional linear factor model and estimate the model using the general method of moments procedure. The authors run time-series regressions to estimate individual stocks' exposures to leverage, and cross-sectional regressions to investigate the leverage risk premium.FindingsThe authors show that shocks to household debt have strong and lasting effects on consumption growth. The authors extend the CCAPM to accommodate this effect and find, using various test assets, a negative risk premium associated with household deleveraging. Looking at individual stocks the authors show that the deleveraging risk premium is not explained by well-known risk factors.Originality/valueThis paper contributes to the literature on the role of leverage in economics and finance by establishing a relation between household leverage and spending decisions. The authors provide novel evidence that households' leveraging and deleveraging decisions can be a fundamental and influential force in determining asset prices. Further, this paper argues that household leverage might explain the small, persistent, and predictable component in consumption growth hypothesised in the long-run risk asset pricing literature.

Market Structure and Firm Level Returns: The Indian Evidence

In addition to the standard risk factors suggested by asset pricing models, the extant literature shows mixed evidence of the impact of market structure on firm-level returns. Using data for 940 Indian firms listed on the Bombay Stock Exchange across 65 industries between FY 2010–11 to FY2018-19 and Lowess smoothing followed by a robust regression model with time fixed and industry effects, we find that firms in more concentrated industries earn lower returns, after controlling for the well-known determinants of asset prices. The relationship is stronger for firms that engage in non-price competition. Further, the explanatory power is better for industries with higher levels of concentration. Our study also provides an explanation on why firms operating in less concentrated environments are able to achieve high returns in the Indian context and provides important implications for both investors and the policymakers. Thus, the study is a novel attempt to examine the impact of not just the intensity of competition on firm level returns but also the type of competition in the case of a developing country, i.e. India.

Information loss in volatility measurement with flat price trading

A model of financial asset price determination is proposed that incorporates flat trading features into an efficient price process. The model involves the superposition of a Brownian semimartingale process for the efficient price and a Bernoulli process that determines the extent of flat price trading. The approach is related to sticky price modeling and the Calvo pricing mechanism in macroeconomic dynamics. A limit theory for the conventional realized volatility (RV) measure of integrated volatility is developed. The results show that RV is still consistent but has an inflated asymptotic variance that depends on the probability of flat trading. Estimated quarticity is similarly affected, so that both the feasible central limit theorem and the inferential framework suggested in Barndorff-Nielsen and Shephard (J Royal Stat Soc Ser B (Stat Methodol) 64:253–280, 2002) remain valid under flat price trading even though there is information loss due to flat trading effects. The results are related to work by Jacod (J Financ Econom 16:526–569, 2018) and Mykland and Zhang (Ann Stat 34:1931–1963, 2006) on realized volatility measures with random and intermittent sampling, and to ACD models for irregularly spaced transactions data. Extensions are given to include models with microstructure noise. Some simulation results are reported. Empirical evaluations with tick-by-tick data indicate that the effect of flat trading on the limit theory under microstructure noise is likely to be minor in most cases, thereby affirming the relevance of existing approaches.

A model of endogenous direct and indirect asset liquidity

Economists often say that certain types of assets, e.g., Treasury bonds, are very ‘liquid’. Do they mean that these assets are likely to serve as media of exchange or collateral (a definition of liquidity often employed in monetary theory), or that they can be easily sold in a secondary market, if needed (a definition of liquidity closer to the one adopted in finance)? We develop a model where these two notions of asset liquidity coexist, and their relative importance is determined endogenously in general equilibrium: how likely agents are to visit a secondary market in order to sell assets for money depends on whether sellers of goods/services accept these assets as means of payment. But, also, the incentive of sellers to invest in a technology that allows them to recognize and accept assets as means of payment depends on the existence (and efficiency) of a secondary market where buyers could liquidate assets for cash. The interaction between these two channels offers new insights regarding the determination of asset prices and the ability of assets to facilitate transactions and improve welfare. We also use our model to study the efficacy of recent policy interventions in asset markets.

Asset Pricing with Ambiguous Signals: An Experiment

This paper explores how ambiguous signals and ambiguity aversion influence individuals' expectations and the pricing of asset in experimental financial markets. In line with the theory of Epstein and Schneider (2008) we find that subjects' degree of ambiguity aversion is positively correlated with their expectations about the variance of ambiguous signals. These signals matter for the determination of asset prices. We find that the distribution of the excess return of the asset exhibits negative skewness, and that price volatility is significantly larger under ambiguous signals. Our findings provide evidence in support of the idea that ambiguous information and ambiguity aversion may be a source of negative skewness and excess volatility in financial markets.

Privatization by Auction: Determinants of Asset Prices in Kosovo

ABSTRACT The contribution of this paper is twofold. First, we use the administrative dataset of the Privatization Agency of Kosovo between 2003 and 2018 to analyze the factors affecting privatization prices. We identify the effects of five sets of variables: features of the auction process; Privatization Agency-related variables; buyer characteristics; asset characteristics; and election-related variables. Second, beyond this econometric investigation, we explore the complexities of the privatization process in Kosovo, in particular the Kosovo-specific factors that may have influenced the prices of privatized enterprises and assets. Policy implications suggest measures to enhance the credibility of the privatization process and related institutions.

Volatility Ambiguity, Consumption and Asset Prices

We formulate a stylized model that admits volatility ambiguity to the Lucas framework. The model specifies an economically motivated ambiguity penalty function that makes volatility ambiguity quantifiable with χ2-statistics, and allows for analytical solutions. The addition of volatility ambiguity greatly expands the range of possible equilibrium outcomes of the Lucas model with the well documented empirical regularity being the equilibrium outcome of a range of sensible combination of parameters. The paper shows that while return volatilities are much easier to estimate than expected returns and therefore have lower ambiguity than the ambiguity in mean returns, it nonetheless plays an important role in the equilibrium determination of asset prices.

Role of credit and monetary policy in determining asset prices: Evidence from emerging market economies

We examine the relative dominance of credit and monetary policy shocks in influencing asset prices in emerging markets. Estimates from panel VAR models for 22 EMEs provide evidence of a significant impact of bank credit on house prices in contrast to trivial impact on stock prices, possibly due to prudential regulations on banks’ exposure to stock markets. Contractionary monetary policy triggers sizeable and persistent decline in stock than housing prices as higher interest rates may render the funding of leverage costlier. Global shocks play an important role in explaining fluctuations in domestic stock prices rather than house prices since the latter class of asset is largely non-tradable across countries.

To Segregate or to Aggregate?: Uncovering the Real Effects of Credit in Housing Price Dynamics

Credit is a crucial instrument in asset price determination, yet existing research has produced conflicting evidence on its real impact, especially during episodes of heightened uncertainty. This paper develops a framework to show that by segregating credit into credit to the real economy and credit to the asset markets a clear picture of its real effects on housing demand and supply channels emerge. Through this mechanism, we establish a meaningful relationship between credit and housing prices. Using a quarterly dataset for nine industrialized countries, our panel VAR estimation shows that credit to the real economy and housing prices depict a positive bi-directional relationship, whereas credit to the asset markets exerts a negative but negligible impact on housing prices in the short-run, and a strong positive effect in the long-run. Robustness tests confirm our baseline predictions.

Valuation Risk Revalued

The recent asset pricing literature finds valuation risk is an important determinant of key asset pricing moments. Valuation risk is modelled as a time preference shock within Epstein-Zin recursive utility preferences. While this form of valuation risk appears to fit the data extremely well, we show the preference specification violates an economically meaningful restriction on the weights in the Epstein-Zin time-aggregator. The same model with the corrected preference specification performs nearly as well at matching asset pricing moments, but only if the risk aversion parameter is well above the accepted range of values used in the literature. When the corrected preference specification is combined with Bansal-Yaron long-run risk, the estimated model significantly downgrades the role of valuation risk in determining asset prices. The only significant contribution of valuation risk is to help match the volatility of the risk-free rate.

TESTING FOR SPECULATIVE BUBBLES USING SPOT AND FORWARD PRICES

AbstractThe probabilistic structure of periodically collapsing bubbles creates a gap between future spot and forward (futures) asset prices in small samples. By exploiting this fact, we use a recently developed recursive unit root test and rolling Fama regressions for detecting bubbles. Both methods do not rely on a particular model of asset price determination, are robust to explosive fundamentals, and allow date stamping. An application to U.S. dollar exchange rates provides evidence of bubbles during the interwar German hyperinflation, but not during the recent floating‐rate period. A further application to S&P 500 supports the existence of bubbles in the U.S. equity market.

Two Sellers of Information in Financial Markets

We examine sales of financial market information in an economy with two information sellers. In equilibrium, the two sellers form either orthogonal or overlapping clientele, depending on the similarity of the information to be sold. When the two sellers' information is very distinct and sellers have relatively large bargaining power in sharing trading profits, investors' information purchase behavior exhibits complementarity, leading to the possibility of multiple equilibria. This result connects the complementarity in signals to strategic complementarity in actions. We also show that the information-market structure is crucial in determining asset prices and financial market quality.

The “Sixth” Factor—A Social Media Factor Derived Directly from Tweet Sentiments

Institutional investors may have an unclear understanding of the role of social media in asset price determination. Although some of the top quant hedge funds use crowd-based information gleaned from tweets, this relationship may be opaque to the rest of our community. In this article, the authors attempt to clarify the confusion regarding social media sentiment and security return behavior. They show that, surprisingly, Tweet sentiments have significant power in explaining the time-series contemporaneous variation in daily stock returns, even in the presence of well-known equity factors. By examining direct tweet sentiments as provided by StockTwits, the authors claim to have identified a Social Media Factor , the “sixth” factor, and they highlight the distinctions vis-a-vis Fama–French’s factors.

An econometric model of the South African stock market

A wealth of literature exists concerning the modelling of stock markets, as well as the examination of the relationshiop between share price and various economic factors, both theoretically and empirically. However, most studies use data for developed countries in their analyses, while the literature moselling emerging stock markets in general, and the south African stock market in particular, is quite sparse. This study develops a structural theoretically founded model of the South African stock market that is estimated using co-integration and error-correction techniques. These techniques respectively estimate the long-term equilibrium or intrinsic value of the stock market, and the short-term fluctuations around the quilibrium level. According to the results, share prices are co-integrated with the variables dictated by the expected present value model of asset price determination. The short-term fluctuations are determined by various factors such as interest rates, a risk premium, the exchange rate, foreign stock market adn other variables.

Investor Attention and Stock Market Volatility

We investigate, in a theoretical framework, the joint role played by investors' attention to news and learning uncertainty in determining asset prices. The model provides two main predictions. First, stock return variance and risk premia increase with both attention and uncertainty. Second, this increasing relationship is quadratic. We empirically test these two predictions, and we show that the data lend support to the increasing relationship. The evidence for a quadratic relationship is mixed. Overall, our study shows theoretically and empirically that both attention and uncertainty are key determinants of asset prices.

Conditional distributions, exchangeable particle systems, and stochastic partial differential equations

On considère des équations aux dérivées partielles stochastiques (EDPS) dont les solutions sont des processus à valeurs dans les mesures de probabilité. Des processus à valeurs mesures de ce type apparaissent naturellement comme des mesures de De Finetti de systèmes infinis de particules échangeables et comme solutions de problèmes de filtrage. En particulier nous considérons un modèle de détermination du prix d’un actif par une famille de traders en compétition. L’évaluation de chaque trader sur l’actif est donnée par la solution d’une équation différentielle stochastique et ce système infini d’EDSs, supposé échangeable, est couplé par un bruit commun et par les prix des actifs. Dans le cadre le plus simple à un seul actif, le prix d’équilibre du marché à tout temps $t$ est donné par un quantile de la mesure de De Finetti déterminé par les évaluations du trader individuel. Dans le cadre à plusieurs actifs, les prix sont donnés essentiellement par la solution d’un problème d’attribution introduit par Shapley et Shubik. L’existence de solutions pour le système échangeable infini est obtenue par un argument d’approximation qui nécessite la dépendance continue des distributions des prix par rapport à la mesure de De Finetti associée. Ceci est vrai si la mesure de De Finetti donne une masse positive à tout ouvert non-vide. La solution de l’EDPS satisfaite par la mesure de De Finetti peut être interprétée comme la distribution conditionnelle de la solution d’une seule EDS donnée par le bruit commun et par le processus du prix. Sous des conditions faibles de non-dégénérescence des coefficients de l’EDS, on montre que la distribution conditionnelle donne une masse positive à tout ouvert non-vide, et sous des conditions légèrement plus fortes, on prouve qu’elle est absolument continue par rapport à la mesure de Lebesgue avec une densité strictement positive. Les résultats sur la distribution conditionnelle constituent la contribution technique principale et ils peuvent être aussi utilisés pour étudier les propriétés de la solution de l’équation de filtrage non-linéaire dans un cadre où le bruit du signal et celui de l’observation sont corrélés.

Financial Entanglement: A Theory of Incomplete Integration, Leverage, Crashes, and Contagion

We propose a unified model of limited market integration, asset-price determination, leveraging, and contagion. Investors and firms are located on a circle, and access to markets involves participation costs that increase with distance. Due to a complementarity between participation and leverage decisions, the market equilibrium may exhibit diverse leverage and participation choices across investors, even though investors are ex-ante identical. Small changes in market-access costs can cause a change in the type of equilibrium and lead to discontinuous price changes, de-leveraging, and portfolio flow reversals. Moreover, the market is subject to contagion, in that an adverse shock to investors in a subset of locations affects prices everywhere.

Bank capital and the macroeconomy: Policy considerations

We develop a macroeconomic model in which the balance sheet condition of financial institutions plays an important role in the determination of asset prices and economic activity. The financial intermediaries in our model are required to make investment commitments before a complete resolution of idiosyncratic funding risk that can be addressed only by costly refinancing, forcing them to behave in a risk-averse manner. The model shows that the balance sheet condition of intermediaries can drive asset values away from their fundamentals, causing aggregate investment and output to respond to shocks to intermediaries. We use this model to evaluate several public policies designed to address balance sheet problems at financial institutions. With regard to short-run policies, we find that capital injections conditioned upon voluntary recapitalization can be a more effective tool than asset purchases. With regard to long-run policies, we demonstrate that higher capital requirements can have sizable short-run effects on economic activity, and that a long transition period helps avoid undesirable side effects. Finally, we show that the marginal effects of policies can be larger during “crises” because of the nonlinear interactions between some financial frictions and policy actions.

Momentum Effect as Part of a Market Equilibrium

AbstractDoes the momentum effect arise naturally from the determination of asset prices in market equilibrium? We calibrate a standard endowment model of multiple assets under recursive preferences. The momentum effect partly comes from investors’ aversion to consumption risks. An unexpected dividend increase generates a positive return and increases the asset’s proportion of consumption, raising the correlation between its future dividend growth and consumption growth. This is compensated by a higher expected return, generating the momentum effect. The cross-sectional difference in expected returns is also a key contributor. The quantified model produces sizable momentum profits, often close to the observed profits.

Google’s Search Data and its Application in Finance

This paper examines the relationship of asset price determination via Google data. To capture this relation, I create a model and estimate several time series’ regressions. I use weekly data from 2004 to 2010 from 30 international banks. To my knowledge this is the first study which differentiates between Google’s search volume and Google’s search clicks. I show that asset prices are positively related to the rate of change in Google’s search volume, trading volume and the level of Google search clicks. Secondly, I demonstrate that the absolute level of Google’s search volume and Google’s search clicks behave differently regarding the asset price dynamics. Google’s search volume, which measures long-run searches, is negatively related while Google’s search clicks have a positive relationship to asset prices. Hence, Google’s data offer new insights on both measuring attention and pricing financial assets.