Measuring The Risk Return Tradeoff With Time Varying Conditional Covariances
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| Author | : Esben Hedegaard |
| Publisher | : |
| Total Pages | : 57 |
| Release | : 2014 |
| Genre | : Analysis of covariance |
| ISBN | : |
We examine the prediction of Merton's intertemporal CAPM that time varying risk premiums arise from the conditional covariances of returns on assets with the return on the market and other state variables. We find a positive and significant price of risk for the covariance with the market return that is driven by the time series variation in the conditional covariances, and the risk-premium on the market remains positive and significant after controlling for additional state variables. Our method estimates the risk-return tradeoff in the ICAPM using multiple portfolios as test assets.
| Author | : Esben Hedegaard |
| Publisher | : |
| Total Pages | : 57 |
| Release | : 2014 |
| Genre | : Analysis of covariance |
| ISBN | : |
We examine the prediction of Merton's intertemporal CAPM that time varying risk premiums arise from the conditional covariances of returns on assets with the return on the market and other state variables. We find a positive and significant price of risk for the covariance with the market return that is driven by the time series variation in the conditional covariances, and the risk-premium on the market remains positive and significant after controlling for additional state variables. Our method estimates the risk-return tradeoff in the ICAPM using multiple portfolios as test assets.
| Author | : Martin Lettau |
| Publisher | : |
| Total Pages | : 84 |
| Release | : 2001 |
| Genre | : Rate of return |
| ISBN | : |
| Author | : H. Kent Baker |
| Publisher | : Oxford University Press |
| Total Pages | : 701 |
| Release | : 2013-01-17 |
| Genre | : Business & Economics |
| ISBN | : 0199754659 |
Understanding the current state of affairs and tools available in the study of international finance is increasingly important as few areas in finance can be divorced completely from international issues. International Finance reflects the new diversity of interest in international finance by bringing together a set of chapters that summarizes and synthesizes developments to date in the many and varied areas that are now viewed as having international content. The book attempts to differentiate between what is known, what is believed, and what is still being debated about international finance. The survey nature of this book involves tradeoffs that inevitably had to be made in the process given the vast footprint that constitutes international finance. No single book can cover everything. This book, however, tries to maintain a balance between the micro and macro aspects of international finance. Although each chapter is self-contained, the chapters form a logical whole that follows a logical sequence. The book is organized into five broad categories of interest: (1) exchange rates and risk management, (2) international financial markets and institutions, (3) international investing, (4) international financial management, and (5) special topics. The chapters cover market integration, financial crisis, and the links between financial markets and development in some detail as they relate to these areas. In each instance, the contributors to this book discuss developments in the field to date and explain the importance of each area to finance as a field of study. Consequently, the strategic focus of the book is both broad and narrow, depending on the reader's needs. The entire book provides a broad picture of the current state of international finance, but a reader with more focused interests will find individual chapters illuminating on specific topics.
| Author | : Alberto Gianluca Paolo Rossi |
| Publisher | : |
| Total Pages | : 155 |
| Release | : 2011 |
| Genre | : Asset allocation |
| ISBN | : 9781124703749 |
This dissertation presents three stand-alone contributions to the fields of theoretical and empirical asset pricing. The first chapter presents a theoretical model in which the attention investors pay to the stock market varies over time. This feature is obtained by introducing information costs into a continuous-time model of asset allocation with time-varying investment opportunities. My model explains why investors do not trade uniformly through time. It also rationalizes why agents do not modify their portfolio allocations gradually with the arrival of new information, but rather alternate extended periods of inertia (no-trade) with brief moments of action where asset allocations are updated according to the current state of the economy. The second chapter analyzes the role of information in the context of financial market predictions. I employ a novel semi-parametric method known as Boosted Regression Trees (BRT) to forecast stock returns and volatility at the monthly frequency. The framework allows me to generate forecasts on the basis of a large set of predictor variables without incurring over-fitting related problems. My results indicate that expanding the conditioning information set results in greater out-of-sample predictive accuracy compared to the standard models proposed in the literature and that the forecasts generate profitable portfolio allocations even when market frictions are considered. The third chapter (co-authored with Allan Timmermann) analyzes the limitations of parametric models in evaluating the relation between risk and return. By taking advantage of the flexible and semi-parametric nature of Boosted Regression Trees, we find evidence of a nonmonotonic relation between conditional volatility and expected stock market returns. At low and medium levels of conditional volatility there is a positive risk-return trade-off, but this relation is inverted at high levels of volatility. This finding helps explain the absence of a consensus in the empirical literature on the sign of the risk-return trade-off. We propose a new measure of risk based on the conditional covariance between observations of a broad economic activity index and stock market returns. Using this broader covariance-based risk measure, we find clear evidence of a positive and monotonic risk-returns trade-off.
| Author | : Robert A. Jarrow |
| Publisher | : |
| Total Pages | : 472 |
| Release | : 1998 |
| Genre | : Derivative securities |
| ISBN | : |
Written by a number of authors, this text is aimed at market practitioners and applies the latest stochastic volatility research findings to the analysis of stock prices. It includes commentary and analysis based on real-life situations.
| Author | : Wayne Ferson |
| Publisher | : MIT Press |
| Total Pages | : 497 |
| Release | : 2019-03-26 |
| Genre | : Business & Economics |
| ISBN | : 0262351307 |
An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.
| Author | : Alberto Giovannini |
| Publisher | : |
| Total Pages | : 56 |
| Release | : 1988 |
| Genre | : Business enterprises |
| ISBN | : |
Recent empirical work indicates that, in a variety of financial markets, both conditional expectations and conditional variances of returns are time- varying. The purpose of this paper is to determine whether these joint fluctuations of conditional first and second moments are consistent with the Sharpe-Lintner-Mossin capital-asset-pricing model. We test the mean-variance model under several different assumptions about the time-variation of conditional second moments of returns, using weekly data from July 1974 to December 1986, that include returns on a portfolio composed of dollar, Deutsche mark, Sterling, and Swiss franc assets, together with the US stock market. The model is estimated constraining risk premia to depend on the time-varying conditional covariance matrix of the residuals of the expected returns equations. The results indicate that estimated conditional variances cannot explain the observed time-variation of risk premia. Furthermore, the constraints imposed by the static CAPH are always rejected.
| Author | : Riccardo Rebonato |
| Publisher | : John Wiley & Sons |
| Total Pages | : 864 |
| Release | : 2005-07-08 |
| Genre | : Business & Economics |
| ISBN | : 0470091401 |
In Volatility and Correlation 2nd edition: The Perfect Hedger and the Fox, Rebonato looks at derivatives pricing from the angle of volatility and correlation. With both practical and theoretical applications, this is a thorough update of the highly successful Volatility & Correlation – with over 80% new or fully reworked material and is a must have both for practitioners and for students. The new and updated material includes a critical examination of the ‘perfect-replication’ approach to derivatives pricing, with special attention given to exotic options; a thorough analysis of the role of quadratic variation in derivatives pricing and hedging; a discussion of the informational efficiency of markets in commonly-used calibration and hedging practices. Treatment of new models including Variance Gamma, displaced diffusion, stochastic volatility for interest-rate smiles and equity/FX options. The book is split into four parts. Part I deals with a Black world without smiles, sets out the author’s ‘philosophical’ approach and covers deterministic volatility. Part II looks at smiles in equity and FX worlds. It begins with a review of relevant empirical information about smiles, and provides coverage of local-stochastic-volatility, general-stochastic-volatility, jump-diffusion and Variance-Gamma processes. Part II concludes with an important chapter that discusses if and to what extent one can dispense with an explicit specification of a model, and can directly prescribe the dynamics of the smile surface. Part III focusses on interest rates when the volatility is deterministic. Part IV extends this setting in order to account for smiles in a financially motivated and computationally tractable manner. In this final part the author deals with CEV processes, with diffusive stochastic volatility and with Markov-chain processes. Praise for the First Edition: “In this book, Dr Rebonato brings his penetrating eye to bear on option pricing and hedging.... The book is a must-read for those who already know the basics of options and are looking for an edge in applying the more sophisticated approaches that have recently been developed.” —Professor Ian Cooper, London Business School “Volatility and correlation are at the very core of all option pricing and hedging. In this book, Riccardo Rebonato presents the subject in his characteristically elegant and simple fashion...A rare combination of intellectual insight and practical common sense.” —Anthony Neuberger, London Business School
| Author | : Alberto G. P. Rossi |
| Publisher | : |
| Total Pages | : 58 |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
Using a flexible econometric approach that avoids imposing restrictive modeling assumptions, we find evidence of a non-monotonic relation between conditional volatility and expected stock market returns: At low-to-medium levels of conditional volatility there is a positive trade-off between risk and expected returns, but this relationship gets inverted at high levels of volatility as observed during the recent financial crisis. We propose a new measure of risk based on the conditional covariance between daily observations of a broad economic activity index and stock returns. Using this covariance measure, we find clear evidence of a monotonically increasing risk-return trade-off. Our finding of a non-monotonic mean-volatility relation helps explain the absence of a consensus in the empirical literature on the sign of the risk-return trade-off. At the same time, our finding that the expected return is a monotonically rising function of the conditional covariance measure also suggests that a positive risk-return relation can be established once a better measure of risk is used.
