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- Risk Management With Stress Testing: Implications For Portfolio Selection And Asset Pricing
- Stress Testing ST is often used by banks and securities firms to set risk exposure limits. Accordingly, a model is examined with an agent who faces K binding ST constraints and another who does not. Four results were obtained. First, the constrained agent's optimal portfolio exhibits (K+2)-fund separation. Second, the...
- White papers 2006-06-22
- Using Expectations to Test Asset Pricing Models
- This paper employs analysts' expected rates of return and provides evidence on the relation between these expectations and firm attributes. The assumption that these expectations are unbiased estimates of market-wide expected rates of return allows circumventing the use of realized rates of return and providing evidence on the predictions emanating...
- White papers 2004-05-01
- Time Orientation and Asset Prices
- The paper analyzes a general-equilibrium asset pricing model where a small subset of the consumers/investors has a short-run "urge to save". That is, their attitudes toward consumption in the long run is a standard one they do place zero weight on consumption far enough out in the future but their...
- White papers 2001-04-01
- Direct Preferences for Wealth, the Risk Premium Puzzle, Growth, and Policy Effectiveness
- This paper considers social status, the spirit of capitalism, fiscal policies, and asset pricing in a stochastic model of growth. With specific assumptions on the production technology, preferences, and stochastic shocks, the paper derives the explicit solutions to the growth rates of consumption and savings and equilibrium returns on all...
- White papers 2000-05-05
- Owner-Occupied Housing in the Presence of Adjustment Costs: Implications for Asset Pricing and Nondurable Consumption
- The paper generalizes the Grossman and Laroque (1990) model of optimal consumption and portfolio allocation in the context in which a durable good or house subject to adjustment costs is both an argument of the utility function and a component of wealth. The analytical model shows that if the covariance...
- White papers 2001-10-01
- Homogeneity Hypothesis in the Context of Asset Pricing Models: The Quadratic Market Model
- This paper proposes a two factor model for asset pricing. The paper formulates a model of asset returns that in addition to the traditional market return term includes also the square of the market return to account for risk originating from co-skewness with the market portfolio. The quadratic term is...
- White papers 2000-10-29
- Existence of Solutions and Asset Pricing Bubbles in General Equilibrium Models
- This paper analyses the problem represented by the presence of speculative bubbles on asset prices in general equilibrium models. The main results concerning the existence of solutions in inter-temporal general equilibrium models are summarized, and then the specific problem of asset pricing is discussed. In particular, the theoretical results concerning...
- White papers 2003-01-01
- Specification Tests of International Asset Pricing Models
- This study evaluates the cross-sectional pricing performances of several international asset pricing models. When betas and risk premiums are constant over business cycles, none of the models can pass the specification test. By allowing time-varying betas and risk premiums in conditional models, most models can pass the specification test. Finally...
- White papers 2003-02-01
- Real Estate and Its Role in Asset Pricing
- This study examines whether residential and commercial real estate risks carry positive risk premiums. Real estate assets have been excluded from most of the empirical asset pricing literature because of perceived data and measurement problems. This paper shows, on the contrary, that the available data are sufficient to capture risks...
- White papers 2002-01-29
- Housing, Consumption, and Asset Pricing
- This paper builds an equilibrium asset pricing model with housing consumption. Agents care about the composition of a consumption basket that contains shelter and other goods. The presence of composition risk increases the mean and variance of excess stock returns and lowers the risk free rate. Stock prices exhibit mean...
- White papers 2003-05-01
- Asset Pricing Puzzles: Evidence From Options Markets
- This paper proposes and implements a consumption-based pricing kernel stochastic discount factor testing methodology that focuses on the covariance between the pricing kernel and asset squared excess returns. This covariance has an intuitive economic interpretation as a risk-neutral variance risk-premium, i.e. the difference between the risk-neutral return variance and the...
- White papers 2001-04-01
- A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation or Cross-sectional Heterogeneity?
- This paper studies the asset pricing implications of a parsimonious two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of inter-temporal substitution. The parameter values for the model are taken from the business cycle literature and, in particular, are not calibrated...
- White papers 2003-09-01
- Assessing Asset Pricing Anomalies
- The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that the anomaly is genuine rather than merely apparent. The analysis takes account of the fact that the parameters of both the underlying asset pricing model and the anomalous returns...
- White papers 2000-07-28
- Risk, Mispricing, and Asset Allocation: Conditioning on Dividend Yield
- In the asset pricing literature, time-variation in market expected excess return captured by financial ratios like dividend yield is typically viewed as a reflection of either changing risk, related to the business cycle, or irrational mispricing. This paper develops Bayesian methods to examine the interaction between the data and an...
- White papers 2001-12-01
- Stochastic Discount Factor Bounds With Conditioning Information
- This paper compares the sampling properties of different versions of HJ bounds that use conditioning information in the form of a given set of lagged instruments. HJ describe one way to use conditioning information. Their approach is to multiply the original returns by the lagged variables, and much of the...
- White papers 2002-02-01
- Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance
- Three concepts: stochastic discount factors, multi-beta pricing and mean variance efficiency, are at the core of modern empirical asset pricing. This paper reviews these paradigms and the relations among them, concentrating on conditional asset pricing models where lagged variables serve as instruments for publicly available information. The different paradigms are...
- White papers 2003-01-01
- Tax Changes and Asset Pricing: Time-Series Evidence
- The effective tax rate on equity securities has fluctuated considerably in the U.S. between 1917-2004. This study investigates whether personal taxes on equity securities are related to stock valuations using the time-series variation in tax burdens. The paper finds an economically and statistically significant relationship between asset valuations and personal...
- White papers 2005-11-01
- Asset Pricing With Idiosyncratic Risk and Overlapping Generations
- The paper shows that for idiosynratic risk to matter for asset pricing the shocks must be highly persistent and become more volatile during economic contractions. It shows that data from the Panel Study on Income Dynamics PSID are consistent with these requirements. The results are based on econometric methods which...
- White papers 2001-05-01
- Ambiguity, Information Quality and Asset Pricing
- When ambiguity averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are...
- White papers 2004-05-27
- The Price Is (Almost) Right
- Most previous research tests market efficiency and asset pricing models using average abnormal trading profits on dynamic trading strategies, and typically rejects the joint hypothesis. This article measures the ability of a simple risk model and the efficient-market hypothesis to explain the level of stock prices. First, it finds that...
- White papers 2003-12-01
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