Credit risk in general equilibrium

This paper contributes to the literature on default in general equilibrium. Borrowing and lending takes place via a clearing house (bank) that monitors agents and enforces contracts. Our model develops a concept of bankruptcy equilibrium that is a direct generalization of the standard general equilibrium model with financial markets. Borrowers may default in equilibrium and returns on loans are determined endogenously. Restricted to a special form of mean variance preferences, we derive a version of the capital asset pricing model with bankruptcy. In this case, we can characterize equilibrium prices and allocations and discuss implications for credit risk modeling.     

Investor sentiment,information and asset pricing model

We present an asset pricing model with investor sentiment and information, which shows that the investor sentiment has a systematic and significant impact on the asset price. The equilibrium price's rational term drives the asset price to the rational, and the sentiment term leads to the asset price deviating from it. In our model, the proportion of sentiment investors and the information quality could amplify the sentiment shock on the asset price. Finally, the information is fully incorporated into prices when sentiment investors learn from prices. The model could offer a partial explanation of some financial anomalies: price bubbles, high volatility, asset prices' momentum effect and reversal effect.     

Two-period trading sentiment asset pricing model with information

We present a dynamic asset pricing model with investor sentiment and information, which shows that the investor sentiment plays a systematic and important role in the asset prices and the information is gradually incorporated into prices. The model has an analytical solution to the sentiment equilibrium price. We find that sentiment trading quantity not only increases the market liquidity, but also causes the asset prices' overreaction if the intensity of sentiment demand is more than a constant value. Therefore, the continuing overreactions result in a short-term momentum and a long-term reversal. The model could offer a partial explanation to some financial anomalies such as price bubbles, high volatility, asset prices' overreaction and so on.     

International asset prices and portfolio choices under Bayesian learning

We calculate equilibrium asset prices and portfolio choices from a two-country OLG international asset pricing model under the assumption that investors are on a Bayesian learning path. Investors from both countries receive identical information flows, but domestic investors start off with less precise priors concerning foreign fundamentals. Learning is shown to produce first-order effects on the properties of asset prices, in the form of increased equity returns, volatility clustering, and time-varying correlations across national stock markets. Moreover, on a learning path, estimation risk generates portfolio biases similar to those observed empirically, i.e. a strong preference towards domestic securities and excessive turnover in foreign securities. These findings are robust to changes in prior beliefs, the calibration of initial information asymmetries, and the parameterization of the model. We use real GDP data for the US and Europe to calibrate the model and show that in the event of a financial liberalization during the 1970s, high excess returns, time-varying volatility, substantial home bias, and excess turnover should have been observed.     

Beauty contest,bounded rationality,and sentiment pricing dynamics

We present a dynamic asset pricing model that incorporates investor sentiment, bounded rationality and higher-order expectations to study how these factors affect asset pricing equilibrium. In the model, we utilize a two-period trading market and investors make decisions based on the heterogeneous expectations principle and the “sparsity-based bounded rational” sentiment. We find that bounded rationality results in mispricing and reduces it in next period. Investor sentiment produces more significant effects than private signals, optimistic investor sentiment increases hedging demand, thus causing prices to soar. Higher-order investors are more rational and attentive to the strategies of other participants rather than private signals. This model also derives the dampening effect of higher-order expectations to price volatility and the heterogeneity expectation depicts inconsistent investor behavior in financial markets. In the model, investors' expectations about future price is distorted by their sentiment and bounded rationality, so they obtain a biased mean from the signal extraction.     

“Overreaction” of Asset Prices in General Equilibrium

We attempt to explain the overreaction of asset prices to movements in short-term interest rates, dividends, and asset supplies. The key element of our explanation is a margin constraint that traders face which limits their leverage to a fraction of the value of their assets. Traders may lever themselves, furthermore, either directly by borrowing short term or indirectly by engaging in futures and options trading, so that the scenario is relevant to contemporary financial markets. When some shock pushes asset prices to a low enough level at which the margin constraint binds, traders are forced to liquidate assets. This drives asset prices below what they would be with frictionless markets. Also, a shock which simply increases the likelihood that the margin constraint will bind can have a very similar effect on asset prices. We construct a general equilibrium model with margin constrained traders and derive some qualitative properties of asset prices. We present an analytical solution for a deterministic version of the model and a simple numerical computation of the stochastic version.Journal of Economic LiteratureClassification Numbers: G1, E0.     

Equilibrium asset pricing with systemic risk

We provide an equilibrium multi-asset pricing model with micro- founded systemic risk and heterogeneous investors. Systemic risk arises due to excessive leverage and risk taking induced by free-riding externalities. Global risk-sensitive financial regulations are introduced with a view of tackling systemic risk, with Value-at-Risk a key component. The model suggests that risk-sensitive regulation can lower systemic risk in equilibrium, at the expense of poor risk-sharing, an increase in risk premia, higher and asymmetric asset volatility, lower liquidity, more comovement in prices, and the chance that markets may not clear. We thank Michel Habib, José Scheinkman, Hyun Shin and two anonymous referees for their helpful comments. Jean-Pierre Zigrand is a lecturer in Finance at the LSE, and is the corresponding author. The authors would like to acknowledge financial support under the EPSRC Grant GR/S83975/01 at the Financial Markets Group, London School of Economics.     

基于投资者异质性信念的证券定价模型——对我国股票市场价格的实证检验

投资者异质性信念的相互作用影响着证券价格,证券市场上的各种证券需求与供给关系,往往表现为投资者各种不同信念的对抗和交融。本文以悲观信念（看多）和乐观信念（看空）之间的相互作用为例,研究了异质性信念对资产均衡定价的影响,并以我国股票市场的机构投资者信念为对象进行了实证检验,得出我国股票市场投资者信念与证券价格相互作用的结论。本文的建议是在投资过程中,准确分析市场中投资者的异质性信念结构,尤其是资金雄厚的机构投资者的信念结构至关重要。     

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.     

Macroeconomic Effects of Asset‐Price Shocks in a Globalized Financial Market

In this paper, I study a model in which shocks to asset prices affect the real sector of the economy through a credit channel. As financial markets become internationally integrated, the economy becomes less vulnerable to domestic asset‐price shocks, but more vulnerable to foreign asset‐price shocks. To the extent that monetary policy stabilization is feasible and desirable, the globalization of financial markets shifts the focus of monetary policy from domestic asset prices to worldwide asset prices.     

Stochastic and structural fiscal policy in a monetary stationary economy

In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unanticipated (structural) fiscal policy on the stock market depends qualitatively on the ‘business cycle’ of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are incapable of achieving a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.     

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.     

Individual labour income,stock prices and whom it may concern

In this paper, a panel model which describes the relationship between individual labour income and stock prices in Germany is estimated. The specification allows the individuals to cluster concerning the model parameters that describe first the individual labour income dynamics and second the relationship between the individual labour income and financial markets. Methodically, a Bayesian model-based non-Gaussian panel data approach, proposed by Juarez and Steel (2010a), is used. A group of individuals with a high cluster assignment probability is found. The characteristics of this group, whose individuals share the same autoregressive dynamics and a common, relatively high dependence on financial markets, are investigated further. It can be shown that this group has a statistically significantly different partition of the major occupational groups. This leads to implications for various branches of the literature, such as the pricing of human capital contracts, the hedging of individual income risk, portfolio optimization or asset pricing.     

Observable restrictions of general equilibrium models with financial markets

This paper examines whether general equilibrium models of exchange economies with incomplete financial markets impose restrictions on prices of commodities and assets given the stochastic processes of dividends and aggregate endowments. We show that the assumption of time-separable expected utility implies restriction on the cross-section of asset prices as well as on spot commodity prices. However, a relaxation of the assumption of time separability will generally destroy these restriction.     

Real exchange rates,asset prices and terms of trade: A theoretical analysis

This paper develops a continuous-time two-country dynamic equilibrium model, in which the real exchange rates, asset prices, and terms of trade are jointly determined in the presence of nontradable goods. The model determines the relation between the financial markets and real goods markets in the world economy and their responses to various shocks under the home bias assumption. A positive domestic supply shock induces a positive return on the domestic asset markets and a deterioration of terms of trade that improves the foreign output and boosts the foreign asset markets. Demand shocks act in the opposite way. This model also analyses the impact of change in the relative price of nontradable to tradable goods on the terms of trade and asset markets. A higher productivity growth in tradable goods than in nontradable goods leads to a higher relative price of nontradable to tradable goods, which appreciates the real exchange rate, deteriorates the terms of trade, and depresses the domestic and foreign asset markets. A lower relative price of nontradable goods depreciates the real exchange rate, improves the terms of trade, and lifts both the domestic and foreign asset markets.     

Feedback effects between credit ratings and financial markets

Credit rating agencies often make sharp adjustments in their pronouncements during times of stress in financial markets. These adjustments typically happen with a delay relative to shocks in market prices. Since prices convey information about what market participants are doing and thinking, it is likely that rating agencies take into account market prices when issuing their pronouncements.In order to understand the relationship between credit ratings and financial prices, we develop a model of debt roll-over in which rating agencies incorporate information publicly available in financial markets. We find that (1) rating agencies respond to market prices, i.e. nonfundamental price volatility can shift financing conditions from a low risk spread and high credit rating equilibrium to an equilibrium with high spread and low rating, and (2) rating agencies can anchor expectations about the equilibrium in financial markets, thus serving as an antidote to nonfundamental price volatility.     

连续进化金融模型与全局渐进化稳定策略

本文运用达尔文生物进化论思想研究连续交易金融市场选择的动态变化及一般均衡规律。本文发现并证明了:金融资产“赢利”的充要条件是该资产相对股息大于相对股价;投资比例等于股息分发比例的简单混合策略是全局渐近进化稳定策略;在均衡条件下,对应的金融资产价格等于该资产股息占总股息的比例的数学期望;市场变异或金融创新是有效市场形成的动力;全局渐近进化稳定策略业绩可能在某些时候不是最好的,但只要其初始财富大于零,最终将控制市场上的所有财富,而简单混合策略,可能在某个时候业绩优良,然而,在市场存在全局渐近进化稳定策略的条件下,只要其初始财富份额小于1,最终控制的财富趋向于零,从而被市场所淘汰。     

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.     

Welfare-improving financial innovation with a single good

Summary. We show that at any equilibrium of almost every single-good incomplete markets economy, it is possible to find an asset which when introduced makes every agent better-off. Diamond (1967) has shown, however, that such economies are constrained suboptimal, so it is of course impossible to find a new asset which makes all agents worse-off. This contrasts with the case of multiple consumption goods, for which Cass and Citanna (1995) and Elul (1995) demonstrate that equilibrium utilities may be arbitrarily perturbed via financial innovation. Proving our result requires us to exploit not changes in equilibrium prices, but rather the gains to trading the new asset. In particular, we find an asset which when introduced does not change the existing asset prices even though it is traded by every agent – by a revealed preference argument it must therefore make everyone better-off. Received: May 28, 1997; revised version: July 1, 1997     

Dynamic asset pricing model with heterogeneous sentiments

The systematic and important role of investor sentiment has been supported by some recent empirical and theoretical literatures. In this paper, we present a dynamic asset pricing model with heterogeneous sentiments and we find that the equilibrium stock price is the wealth-share-weighted average of the stock prices that would prevail in an economy with one sentiment investor only. Moreover, heterogeneous sentiments induce fluctuations in the wealth distribution, which increases stock return volatility and induces mean reversion in stock returns. The model offers a partial explanation for the financial anomaly of mean reversion.