Correlation and the pricing of risks

Given a pricing kernel we investigate the class of risks that are not priced by this kernel. Risks are random payoffs written on underlying uncertainties that may themselves either be random variables, processes, events or information filtrations. A risk is said to be not priced by a kernel if all derivatives on this risk always earn a zero excess return, or equivalently the derivatives may be priced without a change of measure. We say that such risks are not kernel priced. It is shown that reliance on direct correlation between the risk and the pricing kernel as an indicator for the kernel pricing of a risk can be misleading. Examples are given of risks that are uncorrelated with the pricing kernel but are kernel priced. These examples lead to new definitions for risks that are not kernel priced in correlation terms. Additionally we show that the pricing kernel itself viewed as a random variable is strongly negatively kernel priced implying in particular that all monotone increasing functions of the kernel receive a negative risk premium. Moreover the equivalence class of the kernel under increasing monotone transformations is unique in possessing this property.      

China and India： An Era of Escalating Economic Interaction

I. Historic Cultural and Economic Relations China and India are both ancient civilizations, with histories stretching over 5000 years. Their mutual relations are also ancient. China and India have long-term intellectual and cultural ties, which historically fell in the domain of religious scholars. These strong ties date back to the first century AD when Buddhism spread from India to China. The history of Buddhism chronicles detailed accounts of religious and cultural bonds between the t…     

The Psychology of Intertemporal Discounting: Why are Distant Events Valued Differently from Proximal Ones?

Research in intertemporal choice has been done in a variety of contexts, yet there is a remarkable consensus that future outcomes are discounted (or undervalued) relative to immediate outcomes. In this paper, we (a) review some of the key findings in the literature, (b) critically examine and articulate implicit assumptions, (c) distinguish between intertemporal effects arising due to time preference versus those due to changes in utility as a function of time, and (d) identify issues and questions that we believe serve as avenues for future research.     

Self‐similarity in long‐horizon returns

Asset returns incorporate new information via the effects of independent and possibly identically distributed random shocks. They may also incorporate long memory effects related to the concept of self‐similarity. The two approaches are here combined. In addition, methods are proposed for estimating the contribution of each component and evidence supporting the presence of both components in both the physical and risk‐neutral distributions is presented. Furthermore, it is shown that long‐horizon returns may be nonnormal when there is a self‐similar component. The presence of a self‐similar component also questions positive equity biases over the longer term.     

The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

Using a GARCH approach, we estimate a time–varying two–factor international asset pricing model for the weekly equity index returns of 16 OECD countries. We find significant time–variation in the exposure (beta) of country equity index returns to the world market index and in the risk–adjusted excess returns (alpha). We then explain these world market betas and alphas using a number of country–specific macroeconomic and financial variables with a panel approach. We find that several variables including imports, exports, inflation, market capitalisation, dividend yields and price–to–book ratios significantly affect a country's exposure to world market risk. Similar conclusions are obtained by using lagged explanatory variables, and thus these variables may be useful as predictors of world market risks. Several variables also significantly impact the risk–adjusted excess returns over this time period. Our results are robust to a number of alternative specifications. We further discuss some economic hypotheses that may explain these relationships.     

Contemporary Phase of Globalization: Does It Have a Serious Downside?

Abstract

There are many who logically or illogically regard the contemporary phase of economic globalization as a negative, harmful, destructive, marginalizing and malevolent influence. Notwithstanding its positive welfare implications, it has been a serious source of national, regional and global economic problems for many economies, both developing and advance industrial ones. Partial blame for the fall 2008 meltdown of the global financial market does justly go to globalization. It is also blamed for uneven distribution of income within and between countries. Consequently global policy environment has turned globalization-unfriendly. Without negating the affirmative aspects of globalization and its welfare-enhancing contributions, this article focuses on the negative aspects of the contemporary phase of economic globalization.     

A Kiss of Life for the Withering Doha Round of the Multilateral Trade Negotiations?

Abstract

Notwithstanding the gallant intensions, the Doha Round of multilateral trade negotiations (MTNs) proved to be egregiously problem-prone. It went down in the history of multilateral trade as the first round to be suspended. Potsdam was the final link in this chain of breakdowns. While the G-8 leaders supported the DDA, their trade delegations did not seem to abide by the public pronouncements of their leaders. This article delves into the anatomy of this failure and points toward the salient factors that led to it. There is an imperious need for resuscitating the Doha Round and for the key players to be flexible and take some decisive steps forward. The round is too important for the community of trading economies to be allowed to collapse. Revival is a possible and credible objective. A two-stage revival process is suggested in this article.     

The Chinese and Indian Economies: Comparing the Comparables

Both China and India were noted for their prowess and prosperity in the remote past, but in the recent past they went into a precipitous decline and became marginal economies, known for large impoverished masses and economic stagnation. Early in the 21st century, China and India are once again being seen as two emerging economic powers of the global economy. The closing decades of the 20th century were remarkable for both the economies. China in particular turned in a stellar economic performance. In the beginning of the 21st century, it was even being seen as the economic super power of the future. It has emerged as a low-cost manufacturing juggernaut invading global markets in a sizeable array of products, with a high and rapidly rising level merchandise exports and imports. In comparison, India's post-1991 growth performance has shown improvement. Although its success in the services sector exports is noteworthy, its economic performance did not match that of China. The economic weight of China and its integration into the global economy is going to continue to increase, and India could follow suit. This article compares and contrasts the two emerging-market economies of Asia, their soaring global significance and global integration and draws policy related lessons from it.