1,721,119 research outputs found
Pessimistic beliefs under rational learning: Quantitative implications for the equity premium puzzle
No full textIn the presence of infrequent but observable structural breaks, we show that a model in which the representative agent is on a rational learning path can generate high equity premia and low risk-free interest rates. When the model is calibrated to US consumption growth data, average risk premia and bond yields similar to those displayed by post-depression US historical experience are generated for low levels of risk aversion. Even ruling out pessimistic beliefs, recursive learning inflates the equity premium without requiring a strong curvature of the utility function. Simulations reveal that other moments of equilibrium asset returns are easily matched, like excess volatility, the presence of ARCH effects and long-run predictability. These findings are robust to a number of details of the experiments, such as the number and dating of the break
High equity premia and crash fears - Rational foundations
No full textWe show that in a Lucas endowment economy in which the process for dividends is described by a lattice tree subject to infrequent but observable structural breaks, in equilibrium recursive rational learning may inflate the equity risk premium and reduce the risk-free interest rate for low levels of risk aversion. The key condition for these results to obtain is the presence of sufficient initial pessimism. The relevance of these findings is magnified by the fact that under full information our artificial economy cannot generate asset returns matching the empirical evidence for any positive relative risk aversion. Copyright Springer-Verlag Berlin/Heidelberg 2006Rational learning, Equity premium, Structural breaks.,
Can linear predictability models Time Bull and Bear Real Estate Markets? Out-of-sample evidence from REIT portfolios
No full textA recent literature has shown that REIT returns contain strong evidence of bull and bear dynamic regimes that may be best captured using nonlinear econometric models of the Markov switching type. In fact, REIT returns would display regime shifts that are more abrupt and persistent than in the case of other asset classes. In this paper we ask whether and how simple linear predictability models of the vector autoregressive (VAR) type may be extended to capture the bull and bear patterns typical of many asset classes, including REITs. We find that nonlinearities are so deep that it is impossibile for a large family of VAR models to either produce similar portfolio weights or to yield realized, ex-post out-of-sample long-horizon portfolio performances that may compete with those typical of bull and bear models. A typical investor with intermediate risk aversion and a 5-year horizon ought to be ready to pay an annual fee of up to 5.7 % to have access to forecasts of REIT returns that take their bull and bear dynamics into account instead of simpler, linear forecast
Arbitrage risk and a sentiment as causes of persistent mispricing: the European evidence
No full textWe investigate the relationship between risk-adjusted returns, arbitrage risk and arbitrage asymmetry, and investor sentiment in the European stock market. Under the assumption that idiosyncratic volatility (IVOL) causes arbitrage risk, we analyze the effects of IVOL on the abnormal returns of the Euro Stoxx 50 large cap constituents. After classifying the stocks in two mispricing categories, we uncover evidence of arbitrage risk especially in the overpriced group: the highest IVOL overpriced portfolio is the most overpriced, which implies persistent, subsequent risk-adjusted returns that slowly revert to zero. When the estimation is performed afresh separating the high- from the low-sentiment periods and controlling for macroeconomic conditions, we find evidence of a negative relation between investor sentiment and IVOL effects, which is yet more pronounced for the highest arbitrage-risk stocks. This is consistent with psychological biases strongly affecting the impact of arbitrage risk on the speed of correction of mispricing
Performance persistence and optimal asset allocation strategies
No full textThis study explores whether optimal asset allocation strategies, defined by permutations and combinations of different predictor variables, produce consistently superior performance for investors. We extend the literature by exploring whether such strategies benefit investors over the entire investment period or whether investors are forced to switch among alternative strategies over time. As benchmarks, we employ the 1/N (equally weighted) and the myopic (no predictability) strategies. Persistence tests suggest that no single optimal strategy outperforms the remaining optimal and benchmark strategies over the entire sample. However, in two out of three subsample periods, some optimal strategies persistently outperform the benchmarks
Essentials of time series for financial applications
No full textEssentials of Time Series for Financial Applications serves as an agile reference for upper level students and practitioners who desire a formal, easy-to-follow introduction to the most important time series methods applied in financial applications (pricing, asset management, quant strategies, and risk management). Real-life data and examples developed with EViews illustrate the links between the formal apparatus and the applications. The examples either directly exploit the tools that EViews makes available or use programs that by employing EViews implement specific topics or techniques. The book balances a formal framework with as few proofs as possible against many examples that support its central ideas. Boxes are used throughout to remind readers of technical aspects and definitions and to present examples in a compact fashion, with full details (workout files) available in an on-line appendix. The more advanced chapters provide discussion sections that refer to more advanced textbooks or detailed proofs
Can Commodity-Specific Factors Improve the Forecasting Power of Macroeconomic Variables for Commodity Futures Returns
No full textThe aim of this paper is to assess whether three well-known commodity-specific variables (basis, hedging pressure, and momentum) may improve the predictive power for commodity futures returns of models otherwise based on macroeconomic factors. We compute recursive, out-of-sample forecasts for the monthly returns of fifteen commodity futures, when estimation is based on a stepwise model selection approach under a probability-weighted regime-switching regression that identifies different volatility regimes. We systematically compare these forecasts with those produced by a simple AR(1) model that we use as a benchmark and we find that the inclusion of commodity-specific factors doesnot improve the forecasting power. We perform a back-testing exercise of a mean-variance investment strategy that exploits any predictability of the conditional risk premium of commodities, stocks, and bond returns, also consider transaction costs caused by portfolio rebalancing. The risk-adjusted performance of this strategy does not allow us to conclude that any forecasting approach outperforms the others. However, there is evidence that investment strategies based on commodity-specific predictors outperform the remaining strategies in the high-volatility state
Volatility as an alternative asset class: does it improve portfolio performance?
No full textWe investigate the potential role of Exchange Traded Products (Notes) as vehicles to trade volatility (here proxied by the VIX index) as an asset class in a fully optimizing asset allocation framework, subject to long-only constraints. In back-testing, recursive exercises based on an expanding window of data from February 2010 to February 2016, we find evidence that VIX should enter with non-negligible weight most portfolio strategies and that under many circumstances, long VIX positions may generate positive risk-adjusted performance benefits. However, the volatility positions that can be managed and traded through (one of) the most popular US exchange-traded notes (VXX) fails to deliver such realized, out-of-sample benefits under all utility functions and for a range of assumptions on investors’ risk aversion. Even though the turnover implied by VXX does not appear excessive, taking into account transaction costs worsens considerably its performance and even casts doubts as to whether volatility ought to be considered as an alternative asset class altogether. Direct strategies that trade appropriate futures on the VIX improve somewhat realized performance, but not enough to tilt over the balance of our conclusions
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