The Long Horizon Behavior Of Asset Prices In Heterogeneous Economies
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Author | : Semyon Malamud |
Publisher | : |
Total Pages | : 39 |
Release | : 2006 |
Genre | : |
ISBN | : |
We give a complete description of long horizon behavior of asset returns in economies populated by heterogeneous agents with arbitrary discount factors and risk aversions. We find that for every type of asset there is a corresponding dominant agent who determines the long run rate of return on the asset. For example, there is a (generically) unique agent who eventually consumes everything at infinite horizon and determines the long run short term interest rate. There is another agent who determines the expected return rate on holding equity forever. There is a third agent who determines the very long end of the interest rate term structure. It is shown that a large equity premium will result if the preferences of these dominant agents are sufficiently different. The interplay between these dominant agents generates countercyclical dynamics of equity premium and conditional variance of equity returns as well as procyclical dynamics of price-dividend ratios. We obtain sharp bounds (from above and below) for the yield curve, giving a complete answer to a question posed by Dumas (1989). Surprisingly, we find that discount factors and risk aversions of the dominant agents are positively correlated, in line with existing social experiments.
Author | : Yvan Lengwiler |
Publisher | : |
Total Pages | : 149 |
Release | : 2005 |
Genre | : |
ISBN | : |
We extend the Lucas asset pricing tree economy to a heterogeneous population. Perturbative methods are applied to explicitly calculate the second order response of returns to heterogeneity. We determine the status of various stylized facts. For example, we find that the equity premium always varies counter cyclically and that a sufficiently positive correlation between risk aversion and patience increases the risk premium and decreases the interest rate, thus giving another perspective on the equity premium and the risk-free rate puzzles. This motivates us to make a concrete social prediction. We also give a complete description of the infinite horizon behavior. First, there exists a (generically) unique agent who eventually consumes everything at infinite horizon. Second, there is another agent whose preferences determine the expected return rate of holding equity forever. There is a third agent whose preferences determine the very long end of the interest rate term structure. Finally, there is a fourth agent who determines the price of long maturity call options. It is shown that a large equity premium will result if the preferences of these dominant agents are sufficiently different. Moreover, arbitrarily small changes in the composition of the population can lead to large (discontinuous) changes of long (infinite) horizon expected returns. It is also shown that the conventional representative agent picture leads to incorrect predictions about the infinite horizon limit.
Author | : Blake LeBaron |
Publisher | : |
Total Pages | : |
Release | : 2013 |
Genre | : |
ISBN | : |
Author | : Thorsten Hens |
Publisher | : Elsevier |
Total Pages | : 607 |
Release | : 2009-06-12 |
Genre | : Business & Economics |
ISBN | : 0080921434 |
The models of portfolio selection and asset price dynamics in this volume seek to explain the market dynamics of asset prices. Presenting a range of analytical, empirical, and numerical techniques as well as several different modeling approaches, the authors depict the state of debate on the market selection hypothesis. By explicitly assuming the heterogeneity of investors, they present models that are descriptive and normative as well, making the volume useful for both finance theorists and financial practitioners. - Explains the market dynamics of asset prices, offering insights about asset management approaches - Assumes a heterogeneity of investors that yields descriptive and normative models of portfolio selections and asset pricing dynamics
Author | : Yeung Lewis Chan |
Publisher | : |
Total Pages | : 36 |
Release | : 2001 |
Genre | : Economics |
ISBN | : |
We analyze a general equilibrium exchange economy with a continuum of agents who have 'catching up with the Joneses' preferences and differ only with respect to the curvature of their utility functions. While individual risk aversion does not change over time, dynamic redistribution of wealth among the agents leads to countercyclical time variation in the Sharpe ratio of stock returns. We show that both the conditional risk premium and the return volatility are negatively related to the level of stock prices, as observed empirically. Therefore, our model exhibits many of the empirically observed properties of aggregate stock returns, e.g., patterns of autocorrelation in returns, the 'leverage effect' in return volatility and long-horizon return predictability. For comparison, otherwise similar representative agent economies with the same type of preferences exhibit counter-factual behavior, e.g., a constant Sharpe ratio of returns and procyclical risk premium and return volatility
Author | : Füllbrunn, Sascha |
Publisher | : Edward Elgar Publishing |
Total Pages | : 451 |
Release | : 2022-10-13 |
Genre | : Business & Economics |
ISBN | : 1800372337 |
With an in-depth overview of the past, present and future of the field, The Handbook of Experimental Finance provides a comprehensive analysis of the current topics, methodologies, findings, and breakthroughs in research conducted with the help of experimental finance methodology. Leading experts suggest innovative ways of designing, implementing, analyzing, and interpreting finance experiments.
Author | : John H. Cochrane |
Publisher | : Now Publishers Inc |
Total Pages | : 117 |
Release | : 2005 |
Genre | : Business & Economics |
ISBN | : 1933019158 |
Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Author | : Cars Hommes |
Publisher | : Elsevier |
Total Pages | : 836 |
Release | : 2018-06-27 |
Genre | : Business & Economics |
ISBN | : 0444641327 |
Handbook of Computational Economics: Heterogeneous Agent Modeling, Volume Four, focuses on heterogeneous agent models, emphasizing recent advances in macroeconomics (including DSGE), finance, empirical validation and experiments, networks and related applications. Capturing the advances made since the publication of Volume Two (Tesfatsion & Judd, 2006), it provides high-level literature with sections devoted to Macroeconomics, Finance, Empirical Validation and Experiments, Networks, and other applications, including Innovation Diffusion in Heterogeneous Populations, Market Design and Electricity Markets, and a final section on Perspectives on Heterogeneity. - Helps readers fully understand the dynamic properties of realistically rendered economic systems - Emphasizes detailed specifications of structural conditions, institutional arrangements and behavioral dispositions - Provides broad assessments that can lead researchers to recognize new synergies and opportunities
Author | : John H. Cochrane |
Publisher | : Princeton University Press |
Total Pages | : 560 |
Release | : 2009-04-11 |
Genre | : Business & Economics |
ISBN | : 1400829135 |
Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
Author | : Michael Joseph Dempsey |
Publisher | : World Scientific |
Total Pages | : 332 |
Release | : 2015-10-29 |
Genre | : Business & Economics |
ISBN | : 1783267011 |
Stock Markets, Investments and Corporate Behavior examines the nature of stock market growth and decline, the function of financial markets, and their implications for commercial companies. Traditionally, finance academics have attempted to understand financial markets and commercial companies as physicists approach their subject matter: with a set of laws in mind that govern the field. But finance is not physics. The academic's approach falsely assumes that financial markets can be understood as systems within which self-interested maximizers behave in logical ways that are coordinated by the invisible hand of the price mechanism. This book demonstrates that finance is more appropriately understood as a field in which investors and finance managers may or may not use rational calculations as the basis of their decision making.This book opens with an effective dismantling of the traditional mathematical approach used to understand and describe markets and corporate financial behavior. In its place, the mathematics of growth and decline is developed anew, while holding to the realization that the decisions of organizations rely on the choices of real people with limited information available to them. The book will appeal to all students who wish to reappraise their knowledge of finance in a thoughtful manner. Specifically, this book is designed to appeal to anyone who wishes to refine their understanding of the nature of stock markets and financial growth, optimal portfolio allocation, option pricing, asset valuation, corporate financial behavior, and what it means to be ethical in our financial institutions.