HOW ASSET IRREVERSIBILITY INFLUENCES THE INVESTMENT‐UNCERTAINTY RELATIONSHIP

This paper examines how uncertainty affects firms' investments for varying degrees of asset irreversibility (i.e., the wedge between purchase price and liquidation value of an asset). To identify more or less irreversible capital goods, we exploit unique survey data on German manufacturing firms over the sample period 2004 to 2012 in which managers provide information on investments' purpose (capacity expansion, replacement, restructuring, rationalization, and other). Our results indicate that only investments into the most irreversible capital goods (capacity expansion) will decrease if uncertainty rises. We also find support for other channels, such as the financial friction or the market power channel, to explain the investment‐uncertainty relationship.     

Investors' Personality Influences Investment Decisions: Experimental Evidence on Extraversion and Neuroticism

The authors analyze the impact of individuals' degree of extraversion and neuroticism on their decision making in an experimental asset market. To establish this link between research on experimental asset markets and social psychology the authors use a unique approach that combines a questionnaire designed to assess individuals' degree of extraversion and neuroticism and an experimental asset market to assess individual financial decision making. The dataset combines 364 undergraduate business students' questionnaire responses and their trading behavior in the asset market. The authors find that extraversion and neuroticism significantly influence individuals' behavior in the experimental asset market. Specifically, more extraverted individuals pay higher prices for financial assets and they buy more financial assets when assets are overpriced than less extraverted individuals do. More neurotic individuals hold less risky assets in their financial portfolios than less neurotic individuals do. Although a large part of the explanatory power appears to be driven by gender differences, the authors still find significant impact of extraversion and neuroticism after controlling for gender effects. The study findings suggest that further research on financial markets could benefit from including personality of market participants as a crucial explanatory factor.     

A new ICEEMDAN-based transfer entropy quantifying information flow between real estate and policy uncertainty

We quantify the dependence between real estate indices and global economic policy uncertainty for 12 top-advanced countries. Generally, real estate investments are found to be highly risky to information flow from global economic policy uncertainty. amidst policy uncertainty, we find diversification, safe haven, and hedging prospects – based on the market conditions – at short term frequencies only, for the pairs between (a) Japan and the US; (b) Singapore and the US; (c) China and Canada; (d) China and Hong Kong. Our findings underscore market efficiency (inefficiency) at mid-and long-term (short-term) frequencies. In the presence of policy uncertainty, our findings underscore the operability of ingrained market dynamics between real estate investments in the mid-and long-term horizons. It is prudent for investors to combine real estate investments with other asset classes that are less risky to (or are positive recipients of) information flow from global EPU to hedge against adverse market shocks from any asset in the portfolio based on market conditions. Practically, not only should legislations be flexible to the changing market trends in the short term, but they should also be strategically crafted to retain the fundamental market dynamics between real estate investments in the mid-and long-term economic horizons.     

市场不确定性下的电影保底发行模式抉择机制探究

随着近年来不断增大的社交网络影响,电影市场中影片发行方式开始显现出其规避风险的特性.基于市场不确定性所带来的收益风险,在保底发行模式下考虑了一个电影制片方及一个影片发行方的多阶段博弈模型.研究发现,相较于传统的分账发行模式而言,保底发行模式牺牲了制片方的部分期望收益,但能够有效降低其市场风险.部分市场风险通过保底发行模式被转嫁给发行方,但同时,该模式为发行方带来更高的期望收益.此外,市场不确定性的提高会打击制片方的运营信心并使其降低前期努力投入,但是会促使发行方增加其努力投入以提高影片的最终票房.     

Asset return dynamics and the FX risk premium in a decentralized dealer market

The paper proposes a continuous time model of an FX market organized as a multiple dealership. The dealers have costly access to best available quotes. They interpret signals from the joint dealer-customer order flow and decide upon their own quotes and trades in the inter-dealer market. Each dealer uses the observed order flow to improve the subjective estimates of relevant aggregate variables, which are the sources of uncertainty. The risk factors are returns on domestic and foreign assets and the size of the cross-border dealer transactions in the FX market. These uncertainties have diffusion form and are dealt with according to the principles of portfolio optimization in continuous time. The model is used to explain the country, or risk, premium in the uncovered national return parity equation for the exchange rate. The two country premium terms that I identify in excess of the usual covariance term (consequence of the “Jensen inequality effect”) are: the dealer heterogeneity-induced inter-dealer market order flow component and the dealer Bayesian learning component. As a result, an “order flow-adjusted total return parity” formula links the excess FX return to both the “fundamental” factors represented by the differential of the national asset returns, and the microstructural factors represented by heterogeneous dealer knowledge of the aggregate order flow and the fundamentals.     

Rational Pessimism, Rational Exuberance, and Asset Pricing Models

The paper estimates and examines the empirical plausibility of asset pricing models that attempt to explain features of financial markets such as the size of the equity premium and the volatility of the stock market. In one model, the long-run risks (LRR) model of Bansal and Yaron, low-frequency movements, and time-varying uncertainty in aggregate consumption growth are the key channels for understanding asset prices. In another, as typified by Campbell and Cochrane, habit formation, which generates time-varying risk aversion and consequently time variation in risk premia, is the key channel. These models are fitted to data using simulation estimators. Both models are found to fit the data equally well at conventional significance levels, and they can track quite closely a new measure of realized annual volatility. Further, scrutiny using a rich array of diagnostics suggests that the LRR model is preferred.     

On the genesis of multinational foreign affiliate networks

Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm's success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance in a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere – with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially – investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of MNEs' foreign affiliate networks.     

Risk and intertemporal substitution: Livestock portfolios and off-take among Kenyan pastoralists

Most decisions involve variability in two dimensions: uncertainty across states of nature and fluctuations over time. The stakes involved in tradeoffs between these variability dimensions are especially high for the poor who have difficulty managing and recovering from shocks. We assume Epstein and Zin recursive preferences and estimate risk aversion and intertemporal substitution as distinct preferences using data from Kenyan herders. Results suggest that the assumption implicit in additive expected utility models that relative risk aversion (RRA) is the inverse of the elasticity of intertemporal substitution (EIS) is flawed. Specifically, our RRA and EIS estimates are consistent with a preference for the early resolution of uncertainty, which we believe is driven importantly by the instrumental value of early uncertainty resolution. This same preference pattern is consistent with asset smoothing in response to a dynamic asset threshold.     

Currency Exposure to Downside Risk: Which Fundamentals Matter?

I study whether or not countries' macroeconomic characteristics are systematically related to their currencies' exposure to the downside market risk. I find that the currency downside risk is strongly associated with the local inflation rate, real interest rate and net foreign asset position. Currencies of countries with high inflation and real interest rates and negative net foreign asset position (debtor countries) are more exposed to the downside risk whereas currencies of countries with low inflation and real interest rates and positive net foreign asset position (creditor countries) exhibit “safe haven” properties. The local real interest rate has the highest explanatory power in accounting for the cross‐section of currency exposure to the downside risk. This suggests that the high currency exposure to the downside risk is a consequence of investments in high‐yield risky countries and flight from them in “hard times”.     

Noise traders and smart money: Evidence from online searches

Traditional finance theory considers that the impact of noise traders' attention on asset prices is offset by attention from smart investors. This paper uses online search data to study the influence of noise traders and smart investors on stock returns and volatility. Adopting an original approach, we construct a proxy for smart investor attention based on investors' online search behavior provided by Wikipedia Page Traffic. We combine this new measure with a standard measure of noise traders' attention as proxied by Google Search Volume Index. We show for a sample of 87 French firms over the period 2008–2018 that only noise traders' attention influences stock returns. Noise traders' attention increases volatility by creating an extra risk that is priced into the market. Conversely, smart investors' attention decreases volatility because their presence stabilizes stock prices by reducing uncertainty. Our empirical results support a behavioral explanation of stock prices.     

Capital structure,asset utilization,profitability and growth in the Greek manufacturing sector

Greece's accession to the European Union (EU) has affected its economy and its manufacturing sector. Large-size enterprises (LSEs) form a small but vital part of Greek manufacturing and constitute a major component of the country's stock market. According to finance theory, the capital structure of a firm affects its capital cost and market value. This paper, by using dynamic panel data techniques, investigates the determinants of capital structure of LSEs in the Greek manufacturing sector. The findings suggest that asset utilization, gross and net profitability and total assets growth have a significant effect on the capital structure of LSEs. This has straightforward policy implications. Following recent economic developments, Greek firms are exposed to a stronger competition in the EU and global markets, but also to new opportunities. In order to improve their capital structure, Greek manufacturing LSEs need to achieve higher asset utilization and profit margins through economies of scale attained mainly by higher exports. Moreover, governmental measures aiming to support LSEs' efforts should focus their impact on alleviating taxation, reducing bureaucratic burdens, minimizing market imperfections and subsidizing applications of new technology.     

Uncertainty and Consumption in Keynes's Theory of Effective Demand

Keynesian uncertainty normally exercises influence over effective demand via private investment. This paper expands the scope of influence of uncertainty to comprise private consumption as well. When private spending is explicitly made subject to uncertainty the individual consumer is forced to take active steps to make the future predictable. Contracted, sticky money prices are key tools in the consumer's efforts to keep uncertainty at a minimum and match earnings with consumption costs. However, even if prices are successfully contracted there is still need for preparedness against contingencies. Consumers therefore regulate their propensity to consume with reference to their confidence in the future: the propensity to consume is high when confidence is strong and low when confidence is weak. Because of its effect on the propensity to consume, consumer confidence exercises a significant influence on macroeconomic activity in general.     

Can the Consumption Capital Asset Pricing Model Account for Traders' Expected Currency Returns?

This study uses survey data on traders' exchange rate forecasts to test whether their expected excess returns are related to the covariance between the exchange rate and consumption; as predicted by the consumption capital asset pricing model (CCAPM). The covariance is measured through the novel use of rolling windows of the realized covariance (both forward and backward looking) and testing is conducted with the cointegrated VAR. The model is able to account for expected returns with more plausible degrees of risk aversion, but only when using sufficiently long, backward‐looking measures of the covariance. This suggests that market participants assess risk, in part, based upon the pro‐cyclicality of returns, and infer it from experience in the recent past. There is also evidence that inclusion of the real exchange rate improves the plausibility of the estimates and the model fit.     

Uncertainty in the public debt market and stochastic long-run growth

In a continuous time model, a representative household has to allocate its investment and consumption in an optimal manner under conditions of uncertainty. In the present study it is hypothesized that there are two types of assets: a risk-free and a risky asset. The risk-free asset is assumed to be the physical capital, while at the same time uncertainty is allowed to result from the exogenous random variations in the public debt market, rendering in this way government bonds to act as the risky asset. In the endogenous growth framework with productive public investment, the expected long-run growth rate, the dynamic path of consumption as well as the optimal allocation of investment between a risky and a riskless asset, are analytically derived. This kind of treatment allows us to create a locus for the long-run growth over the various levels of uncertainty. The outcome of the analysis is that a rise in uncertainty impacts negatively upon the long-run growth rate. In order to empirically assess the relationship between growth and uncertainty, we lay our emphasis on the US economy for the period 1957:1 to 2008:4. Within the framework of a bivariate BEKK–GARCH(1,1)-M model a significant negative relationship between uncertainty and economic growth has been established.     

Informational efficiency: ranking markets

Summary. The paper studies informational properties of three types of imperfectly competitive markets: a one-signal speculative market (OSS market) in which agents have only private information about the fundamental value (v) of the risky asset traded, a two-signal speculative market (TSS market) in which agents have private information about both v and the asset supply, and a market in which agents are endowed with both information about v and shares of the risky asset traded. In this last market (JA market), agents have joint activities: they trade for both speculative and hedging purposes. It is shown that (i) the JA market and the OSS market are the most and the least efficient, respectively, and (ii) the levels of informational efficiency in the three markets are inversely correlated with the intensities with which traders use their private information about the fundamental value of the asset. Received May 28, 1999; revised version: May 28, 1999     

Efficient ‘myopic’ asset pricing in general equilibrium: A potential pitfall in excess volatility tests

Excess volatility tests for financial market efficiency maintain the hypothesis of risk neutrality. This permits the specification of the benchmark efficient market price as the present discounted value of expected future dividends. By departing from the risk neutrality assumption in a stripped-down version of Lucas's general equilibrium asset pricing model, I show that asset prices determined in a competitive asset market and efficient by construction can nevertheless violate the variance bounds established under the assumption of risk neutrality. This can occur even without the problems of non-stationarity (including bubbles) and finite samples. Standard excess volatility tests are joint tests of market efficiency and risk neutrality. Failure of an asset price to pass the test may be due to the absence of risk neutrality rather than to market inefficiency.     

Implications of Shifting Retail Market Shares for Loan Monitoring in a Dominant‐Bank Model

This study utilizes a dominant‐bank model to investigate whether an increase in retail loan and deposit‐market concentration increases the incentives for both dominant and fringe banks to monitor their loans and thereby improve the quality of their loan portfolios. It shows that the effects on banks' incentives to engage in monitoring aimed at eliminating loan default losses in response to increased concentration of retail market shares of loans and deposits depend critically on whether the banks' asset and liability choices are interdependent. When the asset and liability decisions of both dominant and fringe banks are independent, a shift in market shares in favor of the dominant bank generates a straightforward increase in the incentives of all banks to monitor their loans. Under portfolio interdependence, the effects on monitoring outcomes at dominant banks and at banks within the competitive fringe depend on more complicated configurations of parameters. This fact helps explain mixed empirical evidence on the relationships between bank competition and measures of bank risk and soundness.     

Rational functions: an alternative approach to asset pricing

This paper shows that asset prices are linear polynomials of various underlying explanatory factors and asset returns being ratios of these polynomials, are rational functions that do not add linearly when averaging. Hence, average returns should be modeled based on stock prices. However, continuous returns may be treated as approximately linear across time and modeled directly. Our new Rational Function (RF) models, empirically outperform the traditional asset pricing models like the Capital Asset Pricing Model (CAPM) and the Fama–French three and five-factor models for both average and continuous returns. Moreover, the RF theory also provides a model to estimate the asset volumes. The average change in asset volumes together with average returns provide the estimates for average change in market values of assets. Thus, the RF model approach can be used to select assets that provide either highest returns for profit maximization or highest change in market values for wealth maximization for given levels of risk.     

Double Bubbles in Assets Markets With Multiple Generations

We construct an asset market in a finite horizon overlapping-generations environment. Subjects are tested for comprehension of their fundamental value exchange environment and then reminded during each of 25 periods of the environment's declining new value. We observe price bubbles forming when new generations enter the market with additional liquidity and bursting as old generations exit the market and withdrawing cash. The entry and exit of traders in the market creates an M shaped double bubble price path over the life of the traded asset. This finding is significant in documenting that bubbles can reoccur within one extended trading horizon and, consistent with previous cross-subject comparisons, shows how fluctuations in market liquidity influence price paths. We also find that trading experience leads to price expectations that incorporate fundamental value.     

过度自信、有限参与和资产价格泡沫

当存在模型不确定性且有限市场参与内生时,过度自信的投资者和理性投资者参与股票市场的程度有着不同的行为模式。本文给出的模型分析了两种投资者在不同情况下对股票市场的参与情况,借此解释有限市场参与、超额进入和资产定价之间的关系。模型在流动性溢价、投资者结构和风险溢价的关系等方面具有明显的实证含义。模型表明,理性投资者有更大的投资区域,但是非理性投资者在其投资区域内更为激进。进而,在不同情形下,模型给出了资产均衡价格与投资者结构之间对应关系。