the impact of fat tails on equilibrium rates of return and term premia abstract we investigate the impact of ignoring fat tails observed in the empirical distributions of macroeconomic time series on the equilibrium implications of the consumption based asset pricing model with habit formation fat tails in the empirical distributions of consumption growth rates are modeled as a dampened power law process that nevertheless guarantees finiteness of moments of all orders this renders model implied mean equilibrium rates of return and equity and term premia finite comparison with a benchmark gaussian process reveals that accounting for fat tails lowers the model implied mean risk free rate by 20 percent raises the mean equity premium by 80 percent and the term premium by 20 percent bringing the model implications closer to their empirically observed counterparts fat tails also increase the model implied volatility of the risk free rate and the equity premium

review essay on charles f manski s public policy in an uncertain world analysis and decisions public policy setting often involves quantitative choices with quantitative outcomes yet unqualified statements about the precise consequences of alternative choices characterize much of the policy analysis bearing on these decisions public policy in an uncertain world analysis and decisions by charles f manski characterizes and richly illustrates the nature of this unwarranted certitude it details specific constructive alternatives on which the economics profession has achieved varying degrees of consensus those in our profession charged with the education of future policy analysts should consider using it and how to round out its presentation of decision making from their own perspective jel d02 d04 d80 e61

reversing disbursement rates to estimate stationary wealth processes for endowments with recursive preferences endowments have been accused of hoarding their wealth however the theoretically ideal spending plan remains unclear and in practice endowments follow a range of rules here we derive and estimate the optimal spending plans of an infinitely lived charity or endowment with an epstein zin weil utility function given general markovian returns to wealth we analyse two special cases first where spending is a power function of last period s wealth and second where the endowment uses payout smoothing via non linear least squares we estimate the optimal spending rate and the elasticity of inter temporal substitution for an endowment with a typical diversified portfolio and for a portfolio of hedge funds in a new approach we use maximum entropy methods to characterize the returns distribution of an endowment whose spending plan conforms with the optimality condition we confirm that the estimated returns distribution is largely consistent with the optimal spending plan

spillovers from the usa to stock markets in asia a quantile regression approach this article analyses return spillovers from the usa to stock markets in asia by means of quantile regressions traditional studies consider spillovers as effects of the conditional means of foreign returns onto the conditional means of chronologically succeeding domestic markets returns we by contrast study the full range of quantiles of the conditional distribution of the domestic markets returns this enables us to document the detailed structure of spillovers across return quantiles generally we find spillovers from the usa to asia to be negative specifically however we reveal an asymmetric structure of spillovers with an increasing negative magnitude from lower to upper return quantiles theoretically this pattern is consistent with an asymmetric overreaction of traders in asia to news from the us market extensions from the baseline model further suggest the presence of contagion throughout the financial crisis of 2007 2008 as well as of calm down effects over weekends

political uncertainty and stock market returns evidence from the 1995 quebec referendum abstract in this study we investigate the short run effect of the 30 october 1995 quebec referendum on the common stock returns of quebec firms our results show that the uncertainty surrounding the referendum outcome had an impact on stock returns of quebec firms we also find that the effect of the referendum varied with the political risk exposure of quebec firms that is the structure of assets and principally the degree of foreign involvement jel classification g14 g15

price reversals bid ask spreads and market efficiency we examine the behavior of common stock prices after a large change in price occurs during a single trading day and find evidence that the stock market appears to have overreacted especially in the case of price declines however the magnitude of the overreaction is small compared to the bid ask spreads observed for the individual stocks in the sample we interpret this finding as being consistent with a market that is efficient after transactions costs are considered

a quality adjusted price index for personal computers this study estimates quality adjusted price indexes for personal computers three separate hedonic models are estimated using data from 1 841 personal computers over the period 1984 1991 in addition to the traditional linear model a nonlinear model is developed and estimated the nonlinear model is parsimonious in parameters allows time varying attribute prices and can be estimated using a pooled data set the results indicate that nominal quality adjusted prices of mail order firms declined at an average annual rate of 24 62 quality adjusted prices of major manufacturers declined at a slower rate

on welfare frameworks and catastrophic climate risks recent theoretical work in the economics of climate change has suggested that climate policy is highly sensitive to fat tailed risks of catastrophic outcomes weitzman 2009 68 such risks are suggested to be an inevitable consequence of scientific uncertainty about the effects of increased greenhouse gas concentrations on climate criticisms of this controversial result fall into three categories the first suggests that it may be irrelevant to cost benefit analysis of climate policy the second challenges the fat tails assumption and the third questions the behavior of the utility function assumed in the result this paper analyses these critiques and suggests that those in the first two categories have formal validity but that they apply only to the restricted setup of the original result which may be extended to address their concerns they are thus ultimately unconvincing critiques in the third category are shown to be robust however they open up new ethical and empirical challenges for climate economics that have thus far been neglected how should we value catastrophes as a society i demonstrate that applying results from social choice to this problem can lead to counterintuitive results in which society values catastrophes as infinitely bad even though each individual s utility function is bounded finally i suggest that the welfare functions traditionally used in climate economics are ill equipped to deal with climate catastrophes in which population size changes drawing on recent work in population ethics i propose an alternative welfare framework with normatively desirable properties which has the effect of dampening the contribution of catastrophes to welfare

operational and reputational risk in the european banking industry the market reaction to operational risk events abstract in this paper i study the stock market reaction to the announcement of operational losses in european financial companies accounting for the effect of the nominal loss amount allows for an examination of the reputational damage caused by operational loss events the analysis is based on a sample of 136 operational losses stemming from a database of the association of german public sector banks bundesverband offentlicher banken vob all operational loss events affect european financial institutions with settlements reported by the press between january 2000 and december 2009 in line with previous literature i find a significant negative stock price reaction to the first press announcement of operational losses results show that the stock market also reacts negatively to the settlement announcement as losses are confirmed and the loss amount is known even after accounting for the nominal loss amount cumulative abnormal returns are negative following the date of the initial news article and the settlement date indicating damages to the reputation of the firm suffering the operational loss multivariate regression results suggest that reputational damages are rather influenced by firm characteristics than characteristics of the operational loss event companies with a high ratio of liabilities to total assets suffer more severe damages to reputation from operational losses than companies with more equity

risk return tradeoff in u s stock returns over the business cycle in the empirical finance literature findings on the risk return tradeoff in excess stock market returns are ambiguous in this study i develop a new qualitative response qr generalized autoregressive conditional heteroskedasticity in mean garch m model combining a probit model for a binary business cycle indicator and a regime switching garch m model for excess stock market return with the business cycle indicator defining the regime estimation results show that there is statistically significant variation in the u s excess stock returns over the business cycle however consistent with the conditional intertemporal capital asset pricing model icapm there is a positive risk return relationship between volatility and expected return independent of the state of the economy

a market microstructure explanation for predictable variations in stock returns following large price changes prior empirical evidence of predictable variations in stock returns following large price changes is found to be at least in part driven by the sample selection bias arising from the systematic movement of closing transaction prices within the bid ask spread by using the average of the bid ask prices in the sample selection process the price reversal on the day following the events day 1 disappears for a short run period after day 1 however systematic abnormal return patterns are still observed these short run price reversals persist even after controlling for the influence of systematic trading patterns around the events however investigation of contrarian investment profits from these short run price reversals shows that the average abnormal returns are not large enough to cover the transaction price movement between the bid and ask prices

theoretical relations between risk premiums and conditional variances many statistical models of time varying risk premiums including the autoregressive conditional heteroscedasticity arch in mean attempt to exploit a relation between risk premiums and conditional variances or covariances of asset returns we examine this relation in numerical versions of a dynamic asset pricing theory and show that it can be increasing decreasing flat or nonmonotonic its shape depends on both the preferences of the representative agent and the stochastic structure of the economy without additional structure the theory does not provide either a general foundation for arch in mean specifications or a simple interpretation of their parameters

following the leader a study of individual analysts earnings forecasts abstract this paper develops and tests procedures for ranking the performance of security analysts based on the timeliness of their earnings forecasts the abnormal trading volume associated with these forecasts and forecast accuracy our framework provides an objective assessment of analyst quality that differs from the standard approach which uses survey evidence to rate analysts we find that lead analysts identified by our measure of forecast timeliness have a greater impact on stock prices than follower analysts further we find that performance rankings based on forecast timeliness are more informative than rankings based on abnormal trading volume and forecast accuracy we also present evidence that analyst s forecast revisions are correlated with recent stock price performance suggesting that security analysts use publicly available information to revise their earnings forecasts

endogenous risk in a portfolio balance rational expectations model of the deutschemark dollar rate abstract a portfolio balance model of the dm s rate under rational expectations is specified in which systematic risk induced deviations from uncovered interest parity are allowed this leads to a reduced from containing a potentially time varying risk premium which we approximate and estimate using an arch in mean approach the maximum likelihood estimator and a lagrande multiplier test for arch in mean are developed the estimation results indicate a small but non negligible time varying risk premium

the estimation of demand parameters in hedonic price models this paper shows that the econometric problem of estimating hedonic demand parameters is not a standard identification problem caused by demand supply interaction as has been often assumed estimation procedures based on this assumption lead to biased results the hedonic estimation problem is instead caused by the endogeneity of both prices and quantities when households face a nonlinear budget constraint an instrumental variables solution to this problem is suggested using instruments that exogenously shift the budget constraint

what to show on the wine labels a hedonic analysis of price drivers of sicilian wines unlike previous literature we construct a hedonic model of wine price that incorporates all the main categories of variables simultaneously to enable a better evaluation of their importance on wine price formation a comprehensive model has the advantage of providing more reliable estimates of the attributes implicit prices thereby facilitating firms pricing and improving effectiveness of wine production and marketing decisions we utilize two different datasets of sicilian wines collecting data from influential wine guides our results suggest that wine price strongly depends on objective features such as vintage alcoholic content geographical origin grape variety producer size and cellaring potential in addition use of containers like tonneaux and barrique positively affects prices whereas use of concrete containers has a negative influence no univocal indications emerge with regard to the effect of the type of company type of viticulture and firm age as for sensorial characteristics our a

short term reaction of stock markets in stressful circumstances abstract in this paper we document the short term stock price behaviour following a period of stock market stress we focus on price behaviour using daily market indexes from 39 stock exchanges over the period 1989 1998 our results are not consistent with the overreaction hypothesis we find positive negative abnormal price performance in the short term window up to 10 days following positive negative price shocks our analysis also highlights differences between developed and emerging markets we show that the post shock abnormal performances are significantly larger for emerging markets but that this momentum behaviour is markedly less in the late 1990s we find the size of the after shock tremors to be related to market liquidity with larger post shock price changes in less liquid markets

nonstationary expected returns abstract recent evidence reveals significant negative serial correlation in aggregate market wide stock returns we extend this result to relative market adjusted returns demonstrating negative serial correlation in five year returns we then test two competing explanations 1 market mispricing and 2 changing expected returns in an efficient market the tests are conducted using the capital asset pricing model to estimate relative returns the evidence suggests that negative serial correlation in relative returns is due almost entirely to variation in relative risks and therefore expected relative returns through time we document substantial relative risk shifts particularly for extreme performing stocks

systematic share price fluctuations after bankruptcy filings and the investors who drive them beginning in the 1990s firms often continue to trade on the major national exchanges after chapter 11 bankruptcy filings for bankruptcies filed from 1993 2003 we find that the more negative the filing period price reaction the more favorable the immediate post filing returns on average this reversal is not attributable to bid ask bounce it holds after controlling for other factors associated with post filing returns and it appears more attributable to the activities of large traders than to small traders supplementary tests reveal that the pattern of post filing returns differs significantly for bankruptcies filed in bull versus bear markets bankruptcies filed during the 1993 to 1999 bull market enjoy substantial but short lived reversals averaging one third of the filing period price plunge these reversals are inconsistent with efficient assimilation of the bankruptcy information in contrast we find no evidence of post filing reversals for bankruptcies filed from 2000 to 2003

risk return and equilibrium a revisit this paper reports the results of tests of the major implications of the two parameter capital asset pricing model the findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935 82 these nonlinearities cannot be ascribed to previously documented anomalies related to firm size or january seasonality moreover the test results appear to be sensitive to the choice of the proxy for the market portfolio

the risk and required return of common stock following major price innovations this paper presents empirical evidence demonstrating that the risk and expected returns of common stocks typically change in the aftermath of large price movements when temporary changes in uncertainty follow major financial events subsequent stock returns should be positively correlated with the shift in return volatility this prediction is strongly supported by the data on more than 9 100 daily price change events during 1962 1985 moreover the data also suggest that ex ante returns on common stocks may incorporate a premium for increases in parameter uncertainty associated with the events

the determinants of asymmetric volatility volatility in equity markets is asymmetric contemporaneous return and conditional return volatility are negatively correlated in this article i develop an asymmetric volatility model where dividend growth and dividend volatility are the two state variables of the economy the model allows both the leverage effect and the volatility feedback effect the two popular explanations of asymmetry the model is estimated by the simulated method of moments i find that both the leverage effect and volatility feedback are important determinants of asymmetric volatility and volatility feedback is significant both statistically and economically the relationship between stock price and its volatility has long interested financial researchers empirically returns and conditional variance of next period s returns are negatively correlated that is negative positive returns are generally associated with upward downward revisions of the conditional volatility this empirical phenomenon is often referred to as asymmetric volatility in the literature see engle and ng 1993 zakoian 1994 and wu and xiao 1999 the presence of asymmetric volatility is most apparent during stock market crashes when a large decline in stock price is associated with a significant increase in market volatility formal econometric models have been developed by researchers to capture asymmetric volatility for example asymmetric arch models of nelson 1991 and glosten jagannathan and runkle 1993 have been found to significantly outperform their counterparts that do not accommodate the asymmetry moreover continuous time stochastic volatility models generally produce estimates of a negative correlation between return and return volatility bakshi cao and chen 1997 and bates 1997 for a review of the literature on asymmetric volatility see bekaert

information trading volume and international stock return comovements evidence from cross listed stocks we investigate the joint dynamics of returns and trading volume of 556 foreign stocks cross listed on u s markets heterogeneous agent trading models rationalize how trading volume reflects the quality of traders information signals and how it helps to disentangle whether returns are associated with portfolio rebalancing trades or information motivated trades based on these models we hypothesize that returns in the home u s market on high volume days are more likely to continue to spill over into the u s home market for those cross listed stocks subject to the risk of greater informed trading our empirical evidence provides support for these predictions which confirms the link between information trading volume and international stock return comovements that has eluded previous empirical investigations

the benefit cost ratio as a decision criteria when managing catastrophes previous work has shown that when projects are non marginal it creates an interdependence among projects this implies that policies to manage catastrophes should not be evaluated in isolation but in conjunction with each other as long as relative risk aversion is sufficiently high the benefits of averting one catastrophe depend positively on the background risk created by other catastrophes this specific bias makes it possible to create upper and lower boundaries on the willingness to pay to manage catastrophes and the optimal policy these boundaries can be used to make inferences on which catastrophes should be averted and not and in which order the upper and lower boundaries depend only on the individual catastrophe s benefit cost ratio and the coefficient of risk aversion which both are easy to identify using standard economic frameworks

innovation and price the case of digital cameras this study examines a hedonic regression model of digital camera prices using data collected from an internet price comparison service we find that a small number of product characteristics explains most of the variation in camera prices in addition the model demonstrates substantial downward pressure on camera prices during the time period considered we also examine technological innovation shocks to determine their impact on product prices we find that the corresponding price reaction exhibits gradual adjustment over time providing evidence of some degree of anticipation of the innovation as well as a post innovation price shock this study also demonstrates the power of web based shopping services as a new and novel source of data for econometric analysis

a simple state contingent pricing rule for complex intertemporal externalities abstract some externalities such as global warming involve complex relationships between emissions and an environmental state variable with effects over lags of uncertain length coming up with theoretically motivated and practical policy options in such cases has proven difficult deterministic intertemporal general equilibrium models yield what appear to be feasible optimal price paths but only by assuming away many key uncertainties nor do they specify how the possibility of new information should affect the policy path bayesian models allow limited uncertainty and optimal learning based on observed effects of policy changes but suggest a discouraging delay before optimal policy can be identified a full insurance model suggests that risk aversion and fat tailed probabilities of catastrophe imply an implausibly or at least impractically large risk premium implying that practical policy decisions depend so critically on uncertain parameters as to be unavoidably arbitrary this paper proposes an entirely new approach based on the observation that the situation giving rise to a complex intertemporal externality also yields an observable state variable that contains information relevant to the identification of the optimal policy path i derive a simple transformation by which the state variable can yield a good approximation to the optimal externality price i outline assumptions sufficient to yield the transformation and present numerical examples that illustrate its ability to follow linear and nonlinear first best price paths a specific application to greenhouse gases is proposed

bond and stock returns in a simple exchange model this paper studies asset pricing in a general equilibrium representative agent exchange model the assumptions of isoelastic period utility and lognormal endowment allow the derivation of closed form solutions for asset returns without restricting the serial correlation of the log endowment risk premiums on stocks and real bonds are found to be simple functions of relative risk aversion the variance of the log endowment innovation and the weights in the moving average representation of the log endowment the paper analyzes the sign of term premiums the size of the equity premium and the effect of taste shocks on asset prices

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

time varying betas and risk premia in the pricing of forward foreign exchange contracts abstract this paper specifies the single beta capital asset pricing model for the pricing of forward foreign exchange contracts from the point of view of a u s investor parametric specification of the betas as arch like processes explicitly allows for time variation as well as sign variation of the risk premium in the forward foreign exchange market i estimate the model jointly for four currencies using a generalized method of moments procedure the results show significant time variation for the betas and tests of the overidentifying restrictions are generally favorable to the model

volatility persistence and stock valuations some empirical evidence using garch summary in this paper issues of volatility persistence and the changing risk premium in the stock market are investigated using the garch estimation technique we get a point estimate of the index of relative risk aversion of 4 5 and confirm the existence of changing equity premiums in the us during 1962 1985 the persistence of shocks to the stock return volatility is so high that the data cannot reject a non stationary volatility process specification the results of this paper are consistent with malkiel and pindyck s hypothesis that it is the unforseen rise ini the investment uncertainty during 1974 that causes the market to plunge

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

tests of international capm with time varying covariances we perform maximum likelihood estimation of a model of international asset pricing based on capm we test the restrictions imposed by capm against a more general asset pricing model the betas in our capm vary over time as the supplies of assets change and as the conditional covariances or returns on those assets change we let the covariances change over time as a function of macroeconomic data and an alternative model allows the covariances to follow a multivariate arch process we also can identify a modified capm model with measurement error we find that the estimated capm performs much better when variances are not constant over time nonetheless capm is rejected in favour of the lessrestricted model of asset pricing

on the size distribution of macroeconomic disasters confidence interval of 2 to 4 the results are robust to uncertainty about the values of the disaster probability and the equity premium and can accommodate seemingly paradoxical situations in which the equity premium may appear to be infinite

asymmetric return dynamics and technical trading strategies abstract we investigate the profitability of technical trading strategies based on an asymmetric reverting property of stock returns we identify an asymmetry in return dynamics for daily returns on the s p 500 index return dynamics evolve along a positive negative unconditional mean after a prior positive negative return the trading strategies based on this asymmetry generate a positive return for buy signals a negative return for sell signals and a positive return for the spread between buy and sell signals our results imply that the observed asymmetry in return dynamics is the main source of profitability for the implied strategies thereby corroborating arguments for the usefulness of technical trading strategies

the effects of trading halts on price discovery for nyse stocks this article uses intraday data for the year 1992 to investigate the effect of trading halts on price discovery for stocks traded on the new york stock exchange the results show that the degree of benefits from trading halts depends on the types of halts and significance of the news items it is found that trading halts reduce price dispersion when trading is halted due to imbalance in order flows such a positive effect is robust to the significance of news items trading halts can help price discovery when trading is halted due to the fact that some significant news items already hit the market and investors need more time to digest the impacts on price in contrast when officials call for the halt due to the pending news release with little significance trading halts actually inject more noise into the prices and undermine the price discovery process overall the results are consistent with the argument by exchanges that trading halts help dissipate information and facilitate the price discovery pr

seminonparametric estimation of conditionally constrained heterogeneous processes asset pricing applications the overidentifying restrictions of the intertemporal capital asset pricing model are usually rejected when tested using data on consumption growth and asset returns particu larly when additively separable constant relative risk utility is attributed to the representa tive agent this article investigates the extent to which specification error can explain these rejections the empirical strategy is limited information maximum likelihood in conjunc tion with seminonparametric expanding parameter space representations for both the law of motion and utility we find that consumption growth and asset returns display conditional heterogeneity but this fact does not account for rejection of the overidentifying restrictions as might be anticipated from the work of hansen singleton and others using generalized method of moments methods we also find that expansion of the parameter space in the direction of nonseparable utility causes the overidentifying restrictions to be accepted our estimation strategy provides information on the manner in which the restrictions distort the law of motion in particular imposition of additively separable constant relative risk aversion utility causes the conditional variance of consumption growth to be overpredicted the conditional covariance of asset returns with consumption growth to be overpredicted and an equity premium imposition of nonseparable seminon parametric utility causes distortion in these same directions though the distortions are much smaller which is consistent with the outcomes of the tests of the restrictions

us presidential elections and implied volatility the role of political uncertainty abstract this paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during us presidential election cycles using monthly iowa electronic markets data over five elections we document that stock market uncertainty as measured by the vix volatility index increases along with positive changes in the probability of success of the eventual winner the association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty these findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy

learning and climate feedbacks optimal climate insurance and fat tails we study the effect of potentially severe climate change on optimal climate change policy accounting for learning and uncertainty in the climate system in particular we test how fat upper tailed uncertainty over the temperature change from a doubling of greenhouse gases the climate sensitivity affects economic growth and emissions policy in addition we examine whether and how fast uncertainties could be diminished through bayesian learning our results indicate that while overall learning is slow the mass of the fat tail diminishes quickly since observations near the mean provide evidence against fat tails we denote as partial learning the case where the planner rejects high values of the climate sensitivity with high confidence even though significant uncertainty remains fat tailed uncertainty without learning reduces current emissions by 38 relative to certainty indicating significant climate insurance or paying to limit emissions today to reduce the risk of very high temperature changes is optimal however learning reduces climate insurance by about 50 the optimal abatement policy is strongly influenced by the current state of knowledge even though greenhouse gas ghg emissions are difficult to reverse non fat tailed uncertainty is largely irrelevant for optimal emissions policy

sources of gains to shareholders from bankruptcy resolution abstract using a logistic regression model we identify the characteristics of firms whose shareholders are likely to benefit from bankruptcy resolution that is winners losers are firms whose shareholders experience positive negative excess returns after bankruptcy filing we find that winners are relatively smaller firms with higher proportions of convertible debt tend to file for bankruptcy for strategic reasons have low share ownership concentration and suffer comparatively larger pre filing stock price declines among winners shareholder returns are greater for firms that have higher levels of private debt and research and development r d expenditures and operate in more concentrated industries in addition our analysis indicates that an ex ante trading strategy of purchasing bankrupt stocks with a greater than 50 probability of being a winner on the day after bankruptcy filing and holding the stocks for a year on an average can generate average compounded and excess compounded holding period returns of 71 and 42 respectively

volume and autocovariances in short horizon individual security returns this article tests for the relations between trading volume and subsequent returns patterns in individual securities short horizon returns that are suggested by such articles as blume easley and o hara 1994 and campbell grossman and wang 1993 using a variant of lehmann s 1990 contrarian trading strategy we find strong evidence of a relation between trading activity and subsequent autocovariances in weekly returns specifically high transaction securities experience price reversals while the returns of low transactions securities are positively autocovarying overall information on trading activity appears to be an important predictor of the returns of individual securities

internal rationality imperfect market knowledge and asset prices we present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning agents are internally rational i e maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future but agents may not be externally rational i e may not know the true stochastic process for payoff relevant variables beyond their control this includes future market outcomes and fundamentals we apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors expectations of the price and dividend in the next period rather than by expectations of the discounted sum of dividends as a result learning about price behavior affects market outcomes while learning about the discounted sum of dividends is irrelevant for equilibrium prices stock prices equal the discounted sum of dividends only after making very strong assumptions about agents market knowledge

risk aversion uncertain information and market efficiency abstract this paper develops and tests the uncertain information hypothesis as a means of explaining the response of rational risk averse investors to the arrival of unanticipated information the theory predicts that following news of a dramatic financial event both the risk and expected return of the affected companies increase systematically and that prices react more strongly to bad news than good an empirical investigation of over 9000 marketwide and firm specific events produces results consistent with these predictions we conclude that the market reacts to uncertain information in an efficient if not instantaneous manner

a reconsideration of hedonic price indexes with an application to pc s this paper compares hedonic to matched model indexes matched model indexes are averages of the price changes of goods that remain on sampled stores shelves since goods that disappear tend to have falling market values matched model indexes select from the right tail of price changes the bls can construct hedonic indexes that correct for this selection and are justified by standard arguments in an empirical study of pc s hedonics produce sharp price declines while matched model indexes are near zero also though there are modifications to hedonics that seem desirable they are not those in current use

stock returns following large one day declines evidence on short term reversals and longer term performance we examine stock returns following large one day price declines and find that the bid ask bounce and the degree of market liquidity explain short term price reversals further we do not find evidence consistent with the overreaction hypothesis we observe that securities with large one day price declines perform poorly over an extended time horizon while the concept of market overreaction has been noted for many years its formal description and examination is a relatively recent area of study debondt and thaler 1985 define the overreaction hypothesis as the overresponse to new information this hypothesis suggests that extreme movements in stock prices are followed by movements in the opposite direction to correct the initial overreaction and that the greater the magnitude of initial price change the more extreme the offsetting reaction one manner in which the overreaction hypothesis has been studied is the analysis of stock returns following large one day stock price declines brown harlow and tinic 1988 and atkins and dyl 1990 find significant reversals for stocks that experience one day price declines focusing on extreme price movements bremer and sweeney 1991 examine returns following one day price declines of 10 percent or more for fortune 500 firms that are in the center for research in security prices crsp data files they find significant positive three day abnormal returns over the period 1962 to 1986 and note that this three day recovery is inconsistent with stock prices fully and quickly reflecting relevant information they also suggest that market illiquidity may partially explain their findings the purpose of this study is to explain security return behavior following large one day declines our primary objective is to explore the role of the bid ask bounce market liquidity and overreaction in explaining price reversals in the three day period immediately following large one day declines large one day price declines are likely to be associated with substantial selling pressure enhancing the probability that a closing transaction is at a

factors affecting the take off of innovative technologies evidence from digital cameras while technological innovations are important for many industries take off sales for innovative products can have long lead times due to a variety of factors this article identifies the main parameters affecting digital camera take off sales in the us between 2001 and 2004 the study constructs an empirical model for film and digital camera shipments and finds that digital cameras primarily served as a substitute for low end film compacts rather than high end film single lens reflex slr cameras also growth in household pc ownership and windows xp market share were the main contributing factors to the decline of film cameras with pc penetration rate as the most important factor for digital camera diffusion

the econometric analysis of models with risk terms summary in this paper we have attempted to provide an integrated approach to the estimation of models with risk terms it was argued that there exist orthogonality conditions between variables in the information set and higher order moments of the unanticipated variable density these could be exploited to provide consistent estimators of the parameters associated with the risk term specifically it was recommended that an iv estimator should be applied with instruments constructed from the information set four existing methods commonly used to estimate models with risk terms are examined and applications of the techniques are made to the estimation of the risk term in the us c exchange market and the effects of price uncertainty upon production

a markov model of heteroskedasticity risk and learning in the stock market abstract we examine a variety of models in which the variance of a portfolio s excess return depends on a state variable generated by a first order markov process a model in which the state is known to economic agents is estimated it suggests that the mean excess return moves inversely with the level of risk we then estimate a model in which agents are uncertain of the state the estimates indicate that agents are consistently surprised by high variance periods so there is a negative correlation between movements in volatility and in excess returns

risk and return abstract this paper examines the seasonality in the basic relationship between expected return and risk during 1935 82 the results reveal that the positive relationship between return and risk is unique to january the risk premiums during the remaining eleven months are not significantly different from zero

risk inflation and the stock market most explanations for the decline in share values over the past two decades have focused on the concurrent increase in inflation this paper considers an alternative explanation a substantial increase in the riskiness of capital investments we show that the variance of firms real gross marginal return on capital has increased significantly increasing the relative riskiness of investors returns on equity and that this can explain a large part of the market decline we also assess the effects of increase in the mean and variance of the inflation rate and a decline in firms expected return on capital this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

the impact of ceo turnover on equity volatility this study investigates the effect on stock price volatility of a significant event in the life of the firm a change in its ceo we find significant long lived increases in volatility following ceo turnover after controlling for firm characteristics and marketwide volatility these increases are larger after forced departures and outside successions following voluntary departures stock prices also respond more strongly to earnings announcements following turnovers these results are consistent with more informative signals of value driving the increased volatility helping resolve two sources of uncertainty possible changes in the firm s strategy and doubt about the successor ceo s ability

predictable patterns after large stock price changes on the tokyo stock exchange this paper extends to japanese stocks recent research on short term stock price adjustment to new information using standard methodologies we find that stock returns of firms included in the nikkei 300 tend to be significantly positive after large price decreases this is similar to the pattern observed for american stocks in other research the pattern remains when returns are adjusted for market movements and exists independently of the october 1987 market break we find little evidence of significant patterns following large stock price increases we also find little evidence that non transaction prices explain the persistent significant returns observed following large price decreases on the tokyo stock exchange we conjecture that broker dealers and tse member firms respond to large price decreases not by trading for their own profit but rather by selectively supplying liquidity to their preferred retail customers we conclude that ordinary investors probably cannot earn economic profits from these statistically significant patterns

exact solution of asset pricing models with arbitrary shock distributions abstract the paper provides an exact solution to standard asset pricing models for any distribution of shocks to endowment s growth rate it determines the conditions that guarantee the existence of a stationary bounded equilibrium and examines these conditions for an edgeworth expansion distribution of the shocks the results are extended to the case of multivariate asset pricing models

hedonic price indexes and the distribution of buyers across the product space an application to mainframe computers 2000 hedonic price indexes and the distribution of buyers across the product space an application to mainframe computers applied economics vol 32 no 14 pp 1801 1808

predictable events and excess returns the case of dividend announcements abstract this paper hypothesizes that the risk per unit of time and the required rate of return are higher than normal during an event period whose timing can be predicted consistent with this hypothesis this paper presents empirical evidence indicating that the unconditional mean rate of return the variance of stock returns and their systematic risk are higher than usual during dividend announcement periods however the documented increases in the systematic risk are not large enough to fully explain the excess returns this finding is puzzling and hard to reconcile with existing theory

asset returns and state dependent risk preferences we propose a consumption based capital asset pricing model with state dependent risk aversion the corresponding risk premium includes consumption risk and the risk associated with variations in preferences our model can be estimated without specifying the functional form linking risk aversion with state variables the estimates are based on markov chain monte carlo estimation of exact discrete time parameterizations for linear diffusion processes we find estimates for relative risk aversion that are reasonable by usual standards correlated with both consumption and returns and indicative of an additional preference risk of holding the assets

are stock price reversals really asymmetric a note abstract one of the enigmatic findings about the stock market overreaction effect is that it is asymmetric we argue that this apparent anomaly may be entirely illusory resulting from the peculiar properties of returns the test period return on a contrarian portfolio is not always a satisfactory measure of the strength of price reversals this also renders interportfolio comparisons about the symmetry of reversals more difficult we develop an alternative measure the reversal coefficient which takes account of this deficiency some empirical corroboration is also provided

volatility risk and the value premium evidence from the french stock market this paper documents that systematic volatility risk is an important factor that drives the value premium observed in the french stock market using returns on at the money straddles written on the cac 40 index as a proxy for systematic volatility risk i document significant differences between volatility factor loadings of value and growth stocks furthermore when markets are classified into expected booms and recessions volatility factor loadings are also time varying when expected market risk premium is above its average i e during expected recessions value stocks are seen riskier than their growth counterparts this implies in bad times investors shift their preferences away from value firms instead they use growth stocks as hedges against deteriorations in their wealth during those times the findings are in line with the predictions of rational asset pricing theory and support a flight to quality explanation

differential information and security market equilibrium we propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parame ters of alternative securities in contrast with earlier work we show that parameter uncer tainty or estimation risk can have an effect upon market equilibrium under reasonable conditions securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured ceteris paribus the initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions we provide theoretical support for the empirical examination of at least three proxies for relative information period of listing number of security returns observations available and divergence of analyst opinion

return predictability following large price changes and information releases abstract we examine return behavior following large price change events unconditional post event abnormal returns are found to be unimportant as we condition on other criteria related to the quality of information like volume and public announcements the abnormal returns become large the type of news provides further refinement if the news relates to earnings or analyst recommendations then the 20 day abnormal returns become much larger ranging from 3 to 4 for positive events and about 2 25 for negative events finally an out of sample trading strategy confirms investor under reaction and generates significant abnormal annualized returns of the order of 12 18

the persistence of volatility and stock market fluctuations this paper examines the potential influence of changing volatility in stock market prices on the level of stock market prices it demonstrates that volatility is only weakly serially correlated implying that shocks to volatility do not persist these shocks can therefore have only a small impact on stockmarket prices since changes in volatility affect expected required rates of return for relatively short intervals these findings lead us to be skeptical of recent claims that the stock market s poor performance during the 1970 s can be explained by volatility induced increases in risk premia this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

the reversal of large stock price decreases extremely large negative 10 day rates of return are followed on average by largerthan expected positive rates of return over following days this price adjustment lasts approximately 2 days and is observed in a sample of firms that is largely devoid of methodological problems that might explain the reversal phenomenon while perhaps not representing abnormal profit opportunities these reversals present a puzzle as to the length of the price adjustment period such a slow recovery is inconsistent with the notion that market prices quickly reflect relevant information recent research on stock returns has uncovered a substantial number of empirical findings that are broadly inconsistent with popular asset pricing models for example keim and stambaugh 1985 cross 1973 french 1980 gibbons and hess 1981 and rogalski 1984 find evidence of day ofthe week and weekend effects on stock returns while banz 1981 and reinganum 1983 find evidence of a size effect this paper presents evidence of another empirical puzzle consider the behavior of a firm s rate of return on days after it has experienced a large negative one day rate of return less than say 10 observed daily stock returns after such an extreme event are significantly larger than average on following days for a 10 fall the return above average is 1 773 for the day after and rises cumulatively to 2 215 by the second day this multiple day price adjustment is observed in a sample of firms that is largely devoid of methodological problems that might explain the reversal phenomenon the major interest of this phenomenon is the long recovery period of the stock price reversal such a slow recovery is inconsistent with the notion that market prices fully and quickly reflect relevant information

on the stability of the constant relative risk aversion crra utility under high degrees of uncertainty growth models under uncertainty and constant relative risk aversion crra utility are fragile in explaining consumers choice as equilibrium consumption is dependent on distributional assumptions we show that under semi nonparametric distributions general equilibrium models are stable as the existence of expected utility is guaranteed

stock return predictability despite low autocorrelation abstract this paper shows that short horizon stock returns can be predicted to a much greater degree by past price movements than would be anticipated given their low autocorrelation this raises doubts over the reliability of the autocorrelation statistic as a measure of stock market predictability

stock returns asymmetric volatility risk aversion and business cycle some new evidence i introduction most asset pricing models starting with intertemporal capital asset pricing model of merton 1973 suggest a positive relation between risk and return for the aggregate stock market there is an extensive empirical literature that has tried to establish the existence of such a trade off between risk and return for stock market indexes unfortunately the results have been inconclusive often the relation between risk and return has been found insignificant and sometimes even negative recently it has been debated whether risk aversion is state dependent and whether it is procyclical or countercyclical in this article we explore the role of the business cycle in the relation between risk and return for the aggregate stock market specifically by employing asymmetric generalized autoregressive conditional heteroskedasticity in mean models agarch m markov switching models and a simple theoretical equilibrium framework we explore how these three related issues excess stock returns volatility and risk aversion are affected by business cycles as noted by fama 1990 of many possible forces that drive the stock market real economic activities represented by business cycles could be an important one since they are highly related to major stock pricing factors market volatility and the psychology of investors particularly investors attitude toward risk an interesting observation about excess stock return is that it is time varying over business cycles and significantly higher in boom periods 1 according to our estimates for the sample period 1926 2001 presented in table 1 the mean excess stock return is 0 8963 mo in boom periods and 0 3247 mo in recession periods the excess stock return tends to be very high in the boom period because stock returns remain relatively high with increasing dividend payments another interesting observation about the stock market is that the volatility of excess stock return is also time varying over business cycles and significantly lower in boom periods our estimates of standard deviation of monthly stock excess return for the sample period 1926 2001 are 4 6 in the boom period and 8 2 in the recession period these estimates imply that the excess return risk relation is time varying over the business cycle since the coefficient of variance or standard deviation in the conditional mean equation is usually interpreted as being closely related to the coefficient of relative risk aversion as argued by merton 1980 our finding suggests a potential time varying risk aversion 2 there is a general agreement that investors within a given time period require a larger expected return from a security that is riskier however there seems to be no relationship between risk and return over time as such whether or not investors require a larger risk premium for investing in a security during periods when the security is more risky relatively remains inconclusive at first glance it may appear that rational risk averse investors would require a relatively larger risk premium during times when the payoff from the security is more risky a larger risk premium may not be required however because times that are relatively more risky could coincide with times in which investors are better able to bear particular types of risk further a larger risk premium may not be required because investors may want to save relatively more during periods when the future is more risky 3 hence a positive as well as a negative sign for the correlation between the conditional mean and the conditional variance of the excess return on stocks would be consistent with existing theories since there are conflicting predictions about the intertemporal trade off between risk and return it is important to empirically characterize the nature of this relation according to merton 1980 the coefficient of variance or the standard deviation in the conditional mean equation which is called volatility feedback is usually interpreted as the coefficient of relative risk aversion

evidence on stock market overreaction 1986 evidence on stock market overreaction financial analysts journal vol 42 no 4 pp 74 77

the effect of discretionary price control decisions on equity values abstract the macro literature presents conflicting evidence on the effects of price controls in this study the fact that the macro economic effect of wage and price controls is the aggregation of the micro economic effects is used to implement a different approach to measure the effects of price controls the effect of price controls is inferred from examining the impact of discretionary regulatory decisions on the equity values of individual firms during phase ii of nixon s economic stabilization program the empirical results indicate that violators of the regulations incurred significant abnormal losses that were unrelated to the explicit penalties this suggests that implicit penalties were imposed on offending firms the analysis of price increase decisions provides weak evidence that these price commission decisions had an impact on equity values

a note on some limitations of crra utility abstract in a standard environment for choice under uncertainty with constant relative risk aversion crra the existence of expected utility is fragile with respect to changes in the distributions of random variables changes in prior information or the assumption of rational expectations

is bad news cause of asymmetric volatility response a note this article uses a direct test of the impact of economic news on stock volatility the main interest is to test whether the asymmetric response of volatility can be due to the effect of bad news to do this this study takes items of news into account as exogenous variables the analysis is divided into two stages each of which uses different items of news as exogenous variables additional to the information provided by the residuals the first stage uses more exhaustively classified information whereas the second considers daily information as a global sign this study finds that bad news is responsible for most of the observed asymmetric behaviour of variance further this study detects that the gjr model adequately captures the impact of bad news when traders are not ready to carry out a time consuming analysis of the information

is the market price of risk infinite abstract in a bayesian model a rational expectations euler equation involves a learning wedge that disconnects the consumer s imrs from the rational expectations pricing kernel the wedge is extremely volatile and explains the high volatility of the rational expectations pricing kernel

hedonic prices and implicit markets estimating demand and supply functions for differentiated products in choosing the level of quality to purchase the buyer of a differentiated product also chooses a point on the marginal price schedule for that product hence in general the demand functions for product characteristics cannot be consistently estimated by ordinary least squares market equilibrium results in a matching of characteristics of demanders and suppliers this matching restricts the use of buyer and seller characteristics as instruments when estimating demand and supply functions for product characteristics the paper develops these issues a stochastic structure for hedonic equilibrium models is then proposed identification results are presented and estimation procedures are outlined

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

on the existence of expected utility with crra under stur abstract this note shows that in a standard framework for choice under uncertainty expected utility fails to exist with constant relative risk aversion crra when the endowment follows a stochastic unit root stur process

stock returns and volatility most asset pricing models postulate a positive relationship between a stock portfolio s expected returns and risk which is often modeled by the variance of the asset price this paper uses garch in mean models to examine the relationship between mean returns on a stock portfolio and its conditional variance or standard deviation after estimating a variety of models from daily and monthly portfolio return data we conclude that any relationship between mean returns and own variance or standard deviation is weak the results suggest that investors consider some other risk measure to be more important than the variance of portfolio returns

conditional variance and the risk premium in the foreign exchange market abstract we investigate the existence of a risk premium in the foreign exchange market based on the conditional variance of market forecast errors the forecast errors are assumed to follow the arch process introduced by engle 1982 estimation and diagnostic testing of the model are discussed and results are presented for the currencies of the united kingdom france germany japan and switzerland