A NEW APPROACH TO ASSET INTEGRATION: METHODOLOGY AND MYSTERY

Abstract. This paper develops a new methodology to test financial market integration. Our technique is based on an intertemporal asset‐pricing model, and relies on estimating and comparing expected discount rates across asset markets. Expected discount rates are allowed to vary freely over time, constrained only by the fact that they are equal across assets. Assets are allowed to have very general risk characteristics, and are constrained only by a linear factor model of covariances with the discount rate over short time periods. We provide a variety of domestic and international empirical illustrations of our technique, and find surprisingly little evidence of integration.     

Asset price fluctuations without aggregate shocks

We analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous, infinitely-lived agents, and self-enforcing intertemporal trades. Individual incomes fluctuate and are correlated; preferences, dividends and aggregate income are fixed. Almost all economies in this class have a unique stationary Markovian equilibrium with fluctuations in asset prices. As the set of unrationed households changes over time and states, excess demand functions shift, asset returns fluctuate, and some households are shut out of asset markets. Examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default.     

Portfolio choice with internal habit formation: a life-cycle model with uninsurable labor income risk

Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: a low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.     

ON THE ROLE OF THE GROWTH OPTIMAL PORTFOLIO IN FINANCE

The paper discusses various roles that the growth optimal portfolio (GOP) plays in finance. For the case of a continuous market we show how the GOP can be interpreted as a fundamental building block in financial market modeling, portfolio optimisation, contingent claim pricing and risk measurement. On the basis of a portfolio selection theorem, optimal portfolios are derived. These allocate funds into the GOP and the savings account. A risk aversion coefficient is introduced, controlling the amount invested in the savings account, which allows to characterize portfolio strategies that maximise expected utilities. Natural conditions are formulated under which the GOP appears as the market portfolio. A derivation of the intertemporal capital asset pricing model is given without relying on Markovianity, equilibrium arguments or utility functions. Fair contingent claim pricing, with the GOP as numeraire portfolio, is shown to generalise risk neutral and actuarial pricing. Finally, the GOP is described in various ways as the best performing portfolio.     

PORTFOLIO BEHAVIOUR AND ASSET PRICING IN A CHARACTERISTICS FRAMEWORK

We have applied the characteristics model to the problem of portfolio behaviour and asset pricing. By defining assets in terms of characteristics, we generated individual demands for assets which depended on the prices of assets, the technological relationship between assets and asset characteristics, and the individual's preferences for different characteristics. In general, the characteristics model cannot be readily aggregated across individuals. However, when we assumed that the assets-characteristics technology had a simple form which was common to all individuals, market-clearing conditions could be used to derive an asset pricing model. Finally, we showed that the characteristics model provides a unified approach to the problem of preference-based portfolio behaviour and asset pricing. A number of existing models can be interpreted as characteristics models: the state-preference model, the parameter-preference model, the capital asset pricing model and the inter-temporal capital asset pricing model.     

Fuzzy Value-at-risk: Accounting for Market Liquidity

In this paper we present a value-at-risk measure which accounts for market liquidity. We show that taking into account market liquidity implies a decoupling of valuation of long and short positions. We present a pricing model, named fuzzy measure model, that yields different values for positions of different sign and that can be usefully exploited to account for liquidity risk. This methodology is well-suited to price options when the distribution of the underlying asset is not known precisely, as in the case of implied options in corporate claims or real options. As an example, we apply our pricing technique to an option based model of value-at-risk, in line with the Merton and Perold approach, and we recover different value-at-risk figures for long and short positions.
(J.E.L.: C00, D81, G12).     

A portfolio approach to climate investments: CAPM and endogenous risk

Is there a role for investments in climate change mitigation despite low expected return? We use a model of intertemporal expected utility maximisation to analyse this question. Similar to the capital asset pricing model (CAPM) the rate of return depends on the correlation of risk between the return on investments in climate change mitigation and the market portfolio, but in contrast to the classical CAPM we admit the fact that economic and environmental systems are jointly determined, implying that environmental risk is endogenous. Therefore, investments in climate change mitigation may reduce risk via self-protection and self-insurance. If risk reduction is accounted for in cost–benefit evaluations, climate investments may be justified despite low expected return. These aspects of climate investments are not, however, communicated via standard cost–benefit analyses of climate policy. Optimal climate policy may therefore be more ambitious than previously considered.     

宏观经济状态对资产定价因子的影响

为刻画资产定价因子随宏观经济状态时变性,本文通过经济增长和通货膨胀两个指标定义经济状态,建立宏观经济状态下的条件资产定价模型。研究发现在中国资本市场上此模型能够显著改进CAPM模型的效力,其定价效力甚至优于多因子模型。进一步研究表明,宏观经济通过两个维度影响资产价格：第一,多数资产在衰退时期对市场风险更敏感,其代表市场因子的贝塔系数大于复苏与过热阶段;第二,小市值公司的贝塔系数均值及波动性大于大公司,在经济衰退时承担更高的风险收益。     

On Intertemporal Subsidy-Free Prices and Economic Depreciation: Constrained Market Pricing Revisited

The constrained market pricing approach to regulating monopolies maintains that prices should be subsidy-free, lying between the often expansive bounds of stand alone and incremental costs. For a simple two-good/two-period model of a monopolist subject to a zero profit constraint, it is shown that subsidy-free prices are those which rise to the amortized opportunity cost of the currently optimal asset configuration required to meet both current and future demand, providing—in some circumstances—justification for accelerated depreciation. Such intertemporal subsidy-free prices recognize that the stand alone cost of existing assets to current consumers depends on the value of those assets to future consumers. Hence, if a feasible resale price for the fixed costs of capacity exists within or between periods, then intertemporal stand alone costs and intertemporal incremental costs are driven to equality.     

Optimal climate change mitigation under long-term growth uncertainty: Stochastic integrated assessment and analytic findings

Economic growth over the coming centuries is one of the major determinants of today׳s optimal greenhouse gas mitigation policy. At the same time, long-run economic growth is highly uncertain. This paper is the first to evaluate optimal mitigation policy under long-term growth uncertainty in a stochastic integrated assessment model of climate change. The sign and magnitude of the impact depend on preference characteristics and on how damages scale with production. We explain the different mechanisms driving optimal mitigation under certain growth, under uncertain technological progress in the discounted expected utility model, and under uncertain technological progress in a more comprehensive asset pricing model based on Epstein–Zin–Weil preferences. In the latter framework, the dominating uncertainty impact has the opposite sign of a deterministic growth impact; the sign switch results from an endogenous pessimism weighting. All of our numeric scenarios use a DICE based assessment model and find a higher optimal carbon tax than the deterministic DICE base case calibration.     

Systematic skewness in asset pricing: an empirical examination of the Taiwan stock market

This paper is an empirical study of asset pricing with the systematic skewness in the pricing model. We adopt the Fama-French three-factor model, which incorporates the firm-size and book-to-market ratio in asset pricing as the base case, and then includes the skewness factor used by Harvey and Siddique in the pricing model. The evidence shows that systematic skewness is significant and might be important in asset pricing when portfolios are formed by industry, firm-size, book-to-market, or momentum strategies. When portfolios are constructed by momentum or coskewness strategies, lower momentum, or lower coskewness portfolios exhibit higher skewness and higher kurtosis. When portfolios are grouped by excess returns, it is seen that the average excess return is positively correlated with size and coskewness. Thus the systematic skewness is closely related to firm size. And the relationship between systematic skewness and excess return is obscured by the reverse firm-size effect.     

An examination of the economic significance of stock return predictability in UK stock returns

We explore the out-of-sample performance of domestic UK asset allocation strategies that use forecasts of expected returns from a linear predictive regression and those that are implied by asset pricing models such as the capital asset pricing model (CAPM) or arbitrage pricing theory (APT). Our findings suggest that using forecasts of expected returns from the predictive regression generate significant benefits in out-of-sample performance. We find the performance of the strategies using expected return forecasts implied by the CAPM or APT is lower than the predictive regression strategy. However, with binding investment constraints, the performance of the APT matches that of the predictive regression.     

No-arbitrage, state prices and trade in thin financial markets

We examine how non-competitiveness in financial markets affects the choice of asset portfolios and the determination of equilibrium prices. In our model, potential arbitrage is conducted by a few highly specialized institutional investors who recognize and estimate the impact of their trades on financial prices. We apply a model of economic equilibrium, based on Weretka (, 2007a), in which price effects are determined endogenously as part of the equilibrium concept. For the case in which markets allow for perfect insurance, we argue that the principle of no-arbitrage asset pricing is consistent with non-competitive behavior of the arbitragers and extend the fundamental theorem of asset pricing to the non-competitive setting.     

Sentiment asset pricing model with consumption

We present an asset pricing model by incorporating investor sentiment. The sentiment equilibrium price could be decomposed to the rational term and the sentiment term, and the investor sentiment has a systematic and significant impact on the risky asset price. In the model, the sentiment term has a wealth-weighted average structure and the investor's wealth proportion could amplify the sentiment shock on the asset price. The model could offer a partial explanation of some financial anomalies in the stock market: the phenomenon of savings transfer to the stock market, pricing bubble and high volatility.     

Cumulant instrument estimators for hedge fund return models with errors in variables

We revisit the factors incorporated in asset pricing models following the recent developments in financial markets – i.e., the rise of shadow banking and the change in the transmission channel of monetary policy. We propose two versions of the Fung and Hsieh (2004) hedge fund return model, especially an augmented market model which accounts for the new dynamics of financial markets and the procyclicality of hedge fund returns. We run these models with an innovative Hausman procedure, tackling the measurement errors embedded in the models factor loadings. Our empirical method also allows for confronting the drawbacks of the instruments used to estimate hedge fund asset pricing models.     

行为资产定价理论综述

如何刻画投资者行为是资产定价理论 50年来发展的主要脉络。在消费资本资产定价模型基础上 ,通过修正投资者的效用函数而发展起来的行为资产定价理论 ,对投资者行为的认识达到了新的高度。本文构造了行为资产定价的一般均衡研究框架 ,指出了此框架与行为金融理论的区别 ,并在此框架下 ,综述了当前流行的行为资产定价模型。文章最后分析了行为资产定价理论的下一步发展方向。     

Uniform testing and portfolio strategies for single and multifactor asset pricing models in the Pacific Basin markets

We test and implement portfolio strategies for three major asset pricing models, under uniform diagnostic measures using the PACAP data set containing all current listing and de-listing of firms for the local stock exchange in several Pacific Basin countries. Compared to the often used MSCI database that include only a subset of the (large) firms in the local markets, the more complete coverage of our database allows for more robust testing of current multifactor asset pricing models since the possible effects of additional factors such as size and book to market may not show up correctly using less comprehensive data sets. Our data set also provides a natural packet of nonUS data for addressing the issue of whether the results of recent asset pricing research are sample specific. Our overall results provide multi-country (sample nonspecific) support for the additional asset pricing risk factors of the Fama-French three-factor model but not for the momentum factor of the Carhart model. We additionally find that the size risk factor is more prominent than value risk factor in the Pacific Basin markets. Finally, we find strong evidence that portfolio strategies implemented to capture value and size effects are profitable in the Pacific Basin stock markets.     

Asset pricing in an Islamic economy

ABSTRACT

We define an Islamic economy as one with borrowing restrictions, no leverage, and no risk-free asset. We derive a consumption-based asset pricing model for this economy under standard preferences. We demonstrate that news to consumption growth is the main driver of Islamic financial markets, but the degree of borrowing constraints also affects the pricing of Islamic assets. Using Saudi Arabian data, simulations show that our model does a good job in matching the observed equity premium as well as the volatility of the market return. Our model implies that the price-dividend ratio predicts dividend growth, and as a result that prices are driven mainly by cash-flow news rather than by discount rate news. Empirical tests show that our model is consistent with the data.     

中国居民消费、习惯偏好与资产收益研究

习惯模型是行为资产定价理论的重要组成部分,该模型将经济主体的习惯因素纳入到资产定价之中,由此推进了消费资本资产定价理论的发展。习惯模型已经在欧美等国家和地区得到了广泛研究,而在资本市场蓬勃发展的中国则处于被人遗忘的尴尬境地。本文利用外在习惯偏好模型对我国居民消费、习惯偏好与资产收益进行分析。GMM结果是混合性的,模型可以较好地拟合数据,GMM结果无法否定外在习惯偏好模型,因而无法否定习惯因素在消费与资产收益分析中的重要性。     

Existence and efficiency of equilibrium in infinite economies with finite aggregate wealth

Summary. We prove the existence and efficiency of equilibrium in economies with infinitely many consumers in which there are finitely many agents who own a positive portion of the aggregate endowment. We prove existence for commodity spaces which are employed in the general equilibrium asset pricing models and use incomplete and intransitive preferences. We discuss the importance of existence of finitely many agents who own a positive portion of the aggregate endowment in obtaining efficient equilibrium. For general equilibrium asset pricing applications we require forward properness only at individually rational Pareto optimal allocations. We provide an Arrow-Debreu model for these economies. We also give an application of our approach and results by employing Stochastic Differential Utility as the utility of each consumer in an infinite horizon model.