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| Author | : Harjoat Singh Bhamra |
| Publisher | : |
| Total Pages | : 74 |
| Release | : 2013 |
| Genre | : Capital assets pricing model |
| ISBN | : |
| Author | : Nicolae Garleanu |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2020 |
| Genre | : |
| ISBN | : |
We develop a tractable asset-pricing framework characterized by imperfect risk sharing among cohorts, who experience different levels of integrated life-time endowments. While all asset-pricing implications stem from the heterogeneity of consumption among investors, cross-sectional measures of inequality are non-volatile, only weakly related to asset prices, and far more persistent than the price-to-dividend ratio. We show how to identify a marginal agent's consumption growth in this framework by utilizing cross-sectional information. Our proposed notion of marginal-agent consumption growth exhibits different and more volatile low-frequency variation than the aggregate consumption growth per capita, which is normally used in representative agent models. These low frequency movements in our measure of marginal agent consumption growth can explain a large portion of the low frequency movements in real interest rates and, when combined with recursive preferences, can account quantitatively for the stylized asset-pricing facts (high market price of risk, equity premium, volatility, and return predictability).
| Author | : Tony Berrada |
| Publisher | : |
| Total Pages | : |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
We consider a pure exchange economy where the drift of aggregate consumption is unobservable. Agents with heterogeneous beliefs and preferences act competitively on financial and goods markets. We discuss how equilibrium market prices of risk differ across agents, and in particular we discuss the properties of the market price of risk under the physical (objective) probability measure. We propose a number of specifications of risk aversions and beliefs where the market price of risk is much higher, and the riskless rate of return lower, than in the equivalent full information economy (homogeneous and heterogeneous preferences) and thus can provide an(other) answer to the equity premium and risk-free rate puzzles. We also derive a representation of the equilibrium volatility and numerically assess the role of heterogeneity in beliefs. We show that a high level of stock volatility can be obtained with a low level of aggregate consumption volatility when beliefs are heterogeneous. Finally, we discuss how incomplete information may explain the apparent predictability in stock returns and show that in-sample predictability cannot be exploited by the agents, as it is in fact a result of their learning processes.
| Author | : Nicolae B. Gârleanu |
| Publisher | : |
| Total Pages | : 60 |
| Release | : 2020 |
| Genre | : Assets (Accounting) |
| ISBN | : |
We develop a tractable asset-pricing framework characterized by imperfect risk sharing among cohorts, who experience different levels of integrated life-time endowments. While all asset-pricing implications stem from the heterogeneity of consumption among investors, cross-sectional measures of inequality are non-volatile, only weakly related to asset prices, and far more persistent than the price-to-dividend ratio. We show how to identify a marginal agent's consumption growth in this framework by utilizing cross-sectional information. Our proposed notion of marginal-agent consumption growth exhibits different and more volatile low-frequency variation than the aggregate consumption growth per capita, which is normally used in representative agent models. These low frequency movements in our measure of marginal agent consumption growth can explain a large portion of the low frequency movements in real interest rates and, when combined with recursive preferences, can account quantitatively for the stylized asset-pricing facts (high market price of risk, equity premium, volatility, and return predictability).
| Author | : Suleyman Basak |
| Publisher | : |
| Total Pages | : 32 |
| Release | : 2004 |
| Genre | : Assets (Accounting) |
| ISBN | : |
| Author | : Andrew B. Abel |
| Publisher | : |
| Total Pages | : 35 |
| Release | : 1989 |
| Genre | : |
| ISBN | : |
| Author | : Markus Konrad Brunnermeier |
| Publisher | : |
| Total Pages | : 48 |
| Release | : 2007 |
| Genre | : Assets (Accounting) |
| ISBN | : |
Human beings want to believe that good outcomes in the future are more likely, but also want to make good decisions that increase average outcomes in the future. We consider a general equilibrium model with complete markets and show that when investors hold beliefs that optimally balance these two incentives, portfolio holdings and asset prices match six observed patterns: (i) because the cost of biased beliefs are typically second-order, investors typically hold biased assessments of probabilities and so are not perfectly diversified according to objective metrics; (ii) because the costs of biased beliefs temper these biases, the utility costs of the lack of diversification are limited; (iii) because there is a complementarity between believing a state more likely and purchasing more of the asset that pays off in that state, investors over-invest in only one Arrow-Debreu security and smooth their consumption well across the remaining states; (iv) because different households can settle on different states to be optimistic about, optimal portfolios of ex ante identical investors can be heterogeneous; (v) because low-price and low-probability states are the cheapest states to buy consumption in, overoptimism about these states distorts consumption the least in the rest of the states, so that investors tend to overinvest in the most skewed securities; (vi) finally, because investors with optimal expectations have higher demand for more skewed assets, ceteris paribus, more skewed asset can have lower average returns.
| Author | : Eduard Dubin |
| Publisher | : |
| Total Pages | : 38 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
We explicitly solve for the aggregate asset prices in a discrete-time general-equilibrium endowment economy with two agents who differ with respect to their preferences for risk aversion and sensitivity to habit, either internal or external. We compute equilibrium quantities -- equity premium, equity return volatility, Sharpe ratio, interest rate, interest rate volatility, and asset holdings -- via a generalized algorithm of Dumas and Lyasoff (2012, JF). Generalization addresses time-nonseparability of utility function induced by habit. We find that internal habits produce equilibrium asset prices that are more consistent with historically observed aggregate prices relative to external-habit preferences.
| Author | : Hersh Shefrin |
| Publisher | : Elsevier |
| Total Pages | : 636 |
| Release | : 2008-05-19 |
| Genre | : Business & Economics |
| ISBN | : 0080482244 |
Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stock market activity. Incorporating the latest research and theory, Shefrin offers both a strong theory and efficient empirical tools that address derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio. The book provides a series of examples to illustrate the theory. The second edition continues the tradition of the first edition by being the one and only book to focus completely on how behavioral finance principles affect asset pricing, now with its theory deepened and enriched by a plethora of research since the first edition
| Author | : Julian Veil |
| Publisher | : GRIN Verlag |
| Total Pages | : 22 |
| Release | : 2021-04-13 |
| Genre | : Business & Economics |
| ISBN | : 3346385280 |
Seminar paper from the year 2021 in the subject Business economics - Investment and Finance, grade: 1,0, University of Frankfurt (Main) (Finanzen), language: English, abstract: This paper aims to explain the countercyclical behavior of the equity risk premium and the stock return volatility by introducing an external habit formation feature in the standard representative-agent consumption-based asset pricing model, in form of the so called “catching up with the Joneses” preferences. These preferences imply that the relative risk aversion of the agents in the economy is constant over time and varies across the agents, which generates an endogenous wealth process, that in turn creates a countercyclical behavior in the risk premium and the conditional stock return volatility. As the agents with lower risk aversion distribute a greater fraction of their wealth to risky assets, their wealth decreases relatively more in reaction to cyclical downturns, shifting the aggregate wealth towards more risk averse individuals. These more risk averse agents, however, demand a higher compensation for risk, leading to an increase of the aggregate equity risk premium in response to a fall in stock prices. One of the most studied topics in modern economics are the market mechanisms that lead to the determination of asset prices in an economy. The empirical research indicates that there is a link between the historically observed asset prices and macroeconomic developments. One of the most important observations are the countercyclical behavior of the equity risk premium and the stock return volatility, implying that the excess return of common stocks over the risk-free rate during business cycle troughs is significantly higher than during expansions.
