The Optimal Log-Utility Asset Management under Incomplete Information

In this paper, we propose a theory for deriving the optimal portfolio that assures the log-utility investors of maximizing their expected utility. Restricting investors' information at defined levels, we propose the sample path-wise optimal portfolio (SPOP), which is consistent with the back-test framework used in actualinvestment. It is proven that, at any finite terminal time, this SPOP is asymptotically optimal among all the portfolios which are predictable under investors' incompleteinformation. The optimality is guaranteed by the continuous Bayesian updating formula. Finally, we discuss an algorithm for searching the SPOP, based on asset prices at discrete time intervals.     

Information Uncertainty and Expected Returns

This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of “value ambiguity,” or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for IU, we show that (1) on average, high-IU firms earn lower future returns (the “mean” effect), and (2) price and earnings momentum effects are much stronger among high-IU firms (the “interaction” effect). These findings are consistent with analytical models in which high IU exacerbates investor overconfidence and limits rational arbitrage.This revised version was published online in August 2005 with a corrected cover date.     

Discussion of “Information Uncertainty and Expected Returns”

Jiang, Lee, and Zhang (Review of Accounting Studies, 2005, this issue) show that stock returns are smaller for young firms, volatile stocks, high volume stocks, and stocks with long equity durations. In addition to having lower returns, momentum effects are particularly strong in these stocks. The focus of this discussion is on the informal behavioral model that is used to explain these results and how well the variables used in the study proxy for information uncertainty, the model’s focus.This revised version was published online in August 2005 with a corrected cover date.     

Incomplete Information, Heterogeneity, and Asset Pricing

We consider a pure exchange economy where the drift of aggregateconsumption is unobservable. Agents with heterogeneous beliefsand preferences act competitively on financial and goods markets.We discuss how equilibrium market prices of risk differ acrossagents, and in particular we discuss the properties of the marketprice of risk under the physical (objective) probability measure.We propose a number of specifications of risk aversions andbeliefs where the market price of risk is much higher, and theriskless rate of return lower, than in the equivalent full informationeconomy (homogeneous and heterogeneous preferences) and thuscan provide an(other) answer to the equity premium and risk-freerate puzzles. We also derive a representation of the equilibriumvolatility and numerically assess the role of heterogeneityin beliefs. We show that a high level of stock volatility canbe obtained with a low level of aggregate consumption volatilitywhen beliefs are heterogeneous. Finally, we discuss how incompleteinformation may explain the apparent predictability in stockreturns and show that in-sample predictability cannot be exploitedby the agents, as it is in fact a result of their learning processes.     

Strategic Auditing: An Incomplete Information Model

This paper presents a stylized model of the strategy game between the auditor and the client. The client is assumed to have either good or bad inherent risk in her reporting system. She chooses a reporting effort level to maintain the accounting records and data management depending on her type of inherent risk. The auditor chooses a high or low level of audit procedures. A high level of auditing procedures will reveal the client's type and effort from which the auditor can decide either to qualify the financial statements or to issue a clean report. The client and the auditor are assumed to move simultaneously. Pure strategy equilibria are derived for all the undominated strategies between the auditor and the client in the region of the model that is more similar to the Fellingham and Newman (1985) model. Unlike their model in which a high auditing level is never a pure strategy in equilibrium, we obtain pure strategy equilibria for high auditing levels.     

Using Multiple Imputation in the Analysis of Incomplete Observations in Finance

Incomplete observations are a common feature of financial applicationsthat use survey response, annual report, and proprietary bankingand security issue and pricing data. Finance researchers usea variety of procedures, including deleting offending observationsand imputing ad hoc values, that potentially fail to deliverefficient and unbiased parameter estimates. This article examinesthe application of a statistical framework, multiple imputationmethods, that minimizes incomplete data problems if the missingnesssatisfies certain criteria. When applied to two financial datasetsinvolving severe data incompleteness, the imputation methodsoutperform the ad hoc approaches commonly used in the financeliterature.     

不完全信息下的供应链风险评估方法研究

本文使用多属性决策方法进行供应链风险评估,在风险属性权重信息不完全的情况下,建立非线性规划模型求得各风险属性的权重值,并通过求与理想解之间的加权欧氏距离来评估风险值的大小,解决了评估专家由于知识、经验和偏好不完全相同而意见难以统一的困难,最后用一个例子说明了该方法的有效性和实用性。     

Portfolio Optimization in Discontinuous Markets under Incomplete Information

We consider the problem of maximization of expected utility from terminal wealth for log and power utility functions in a market model that leads to purely discontinuous processes. We study this problem as a stochastic control problem both under complete as well as incomplete information. Our contribution consists in showing that the optimal strategy can be obtained by solving a system of equations that in some cases is linear and that a certainty equivalence property holds not only for log-utility but also for a power utility function. For the case of a power utility under incomplete information we also present an independent direct approach based on a Zakai-type equation.      

Relationship Lending and Liquidation Under Imperfect Information

Journal of Financial Services Research - Using a model of a competitive credit market, we study a firm’s choice between financing a production project using a transaction loan and a...     

Information Quality and the Expected Rate of Return: A Structural Equation Modelling Approach

Asia-Pacific Financial Markets - We use structural equation modelling for a robust test of the role information quality plays in explaining the cost of equity capital (CoE). SEM allows us to...     

Earnings and Expected Returns

The aggregate dividend payout ratio forecasts excess returns on both stocks and corporate bonds in postwar U.S. data. High dividends forecast high returns. High earnings forecast low returns. The correlation of earnings with business conditions gives them predictive power for returns; they contain information about future returns that is not captured by other variables. Dividends and earnings contribute substantial explanatory power at short horizons. For forecasting long-horizon returns, however, only (scaled) stock prices matter. Forecasts of low long-horizon stock returns in the mid-1990s are caused not by earnings or dividends, but by high stock prices.     

A Note on Utility Maximization with Unbounded Random Endowment

This paper addresses the applicability of the convex duality method for utility maximization, in the presence of random endowment. When the underlying price process is a locally bounded semimartingale, we show that the fundamental duality relation holds true, for a wide class of utility functions and unbounded random endowments. We show this duality by exploiting Rockafellar’s theorem on integral functionals, to a random utility function.     

How to Discount Cashflows with Time-Varying Expected Returns

While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time‐varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk‐free rates, predictable risk premiums, and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analytic term structure of discount rates, with different discount rates applied to expected cashflows at different horizons. Using constant discount rates can produce large misvaluations, which, in portfolio data, are mostly driven at short horizons by market risk premiums and at long horizons by time variation in risk‐free rates and factor loadings.     

Information Acquisition Under Uncertainty in Credit Markets

This article studies information acquisition through investmentin improved risk assessment technology in competitive creditmarkets. A technology has two attributes: its ability to screenin productive borrowers, and its ability to screen out unproductiveborrowers. The two attributes have fundamentally different effectson acquisition incentives and the structure of equilibrium informationalexternalities between lenders. The article also studies howuncertainty associated with the quality of superior technologyaffects information acquisition incentives. Uncertainty influencesinformation acquisition even with risk-neutral banks. Increaseduncertainty may raise or dampen incentives, depending on whetheruncertainty is, respectively, about screening out or screeningin quality.     

Optimal Design of Intergovernmental Grants Under Asymmetric Information

This paper develops a theoretical explanation why it may be optimal for higher-level governments to pay categorical block grants or closed-ended matching grants to local governments. We consider a federation with two types of local governments which differ in the cost of providing public goods. The federal government redistributes between jurisdictions, but cannot observe the type of a jurisdiction. In this asymmetric information setting, it is shown that the second-best optimum can be implemented with the help of categorical block grants and closed-ended matching grants, but not with unconditional block grants or open-ended matching grants. JEL Code: H77, D82     

预期通货膨胀与企业资产结构

本文以2003年至2015年的上市公司为研究样本,研究企业的资产结构调整过程是否会考虑预期通货膨胀的变化。结果表明,预期通货膨胀上升时期,企业金融资产水平降低,经营资产水平增加;针对预期通货膨胀主动调整资产结构的企业未来经营业绩会更好;宏观经济政策不确定性会抑制预期高通货膨胀对企业资产结构的影响。进一步研究发现,融资约束和产品市场竞争状况都会对预期通货膨胀与企业资产结构的关系产生影响。本文为企业更好地应对预期通货膨胀、降低政策变化风险和提高资产配置效率提供理论指导。     

Expected earnings growth and portfolio performance

We form portfolios based on forecasted growth rates in earnings and apply stochastic dominance tests. Low expected-growth rate portfolios dominate high expected-growth rate portfolios. This suggests that the superior return performance of value stocks is not due to omitted risk factors but is a consequence of investors making systematic errors in forming earnings expectations. Fama and French (1992) extend and refine the results of previous studies that report relationships between stock returns and firm characteristics (e.g., Banz (1981), firm size; Rosenberg et al. (1985), book value to market value; Basu (1983) and Jaffe et al. (1989), earnings-to-price ratio; and Keim (1985), dividend yield).     

银行利润最大化、效率与ROA

本文依据利润最大化概念分解ROA影响因素,然后再结合效率理论提出eROA(效率ROA)模型,对2003～2010年中国商业银行效率进行分析。结果表明:加入WTO后在去政策性负担和投资拉动型经济增长模式影响下,四大商业银行eROA大幅提高;银行业效率呈现双增长趋同现象;长期发展中,效率与经营稳健性强相关。这一结果也证明了经济增长与金融发展之间的联系。后危机时期国民经济结构调整、经济增长速度放缓和金融体制改革深化将对四大商业银行盈利能力产生较大影响,而对股份制商业银行则影响较弱。     

Incomplete Markets and Hyperbolic Discounting

A growing number of empirical researchers are finding evidence of hyperbolic discounting in their investigations on the nature of preferences for distributing consumption over time. This article contributes to the literature by exposing a large class of models in which hyperbolic and exponential discounting are observationally equivalent. The results of the modeling approach simultaneously resolve serious concerns raised by other models in the literature that have been used to explain the empirical findings and answer other questions raised by the phenomenon that are unexplained by earlier contributions. By analyzing an intertemporal general equilibrium model with incomplete insurance markets, this article demonstrates that for sufficiently short time horizons, values implied by a hyperbolic discount function fall within incomplete market valuation bounds.