Approximating Large Diversified Portfolios

This paper considers a financial market with asset price dynamics modeled by a system of lognormal stochastic differential equations. A one‐dimensional stochastic differential equation for the approximate evolution of a large diversified portfolio formed by these assets is derived. This identifies the asymptotic dynamics of the portfolio as being a lognormal diffusion. Consequentially an efficient way for computing probabilities, derivative prices, and other quantities for the portfolio are obtained. Additionally, the asymptotic strong and weak orders of convergence with respect to the number of assets in the portfolio are determined.     

Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices

This paper shows that the quantitative predictions of an equilibrium asset-pricing model with financial frictions are consistent with key features of the Sudden Stop phenomenon. Foreign traders incur costs in trading assets with domestic agents, and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings. When this constraint does not bind, standard productivity shocks cause typical real-business-cycle effects. When it binds, the same shocks cause strikingly different effects depending on the leverage ratio and asset market liquidity. With high leverage and a liquid market, the shocks force “fire sales” of assets and Fisher's debt-deflation mechanism amplifies the responses of asset prices, consumption and the current account. Precautionary saving makes these Sudden Stops infrequent in the long run.     

A binomial model of Geithner's toxic asset plan

This paper formally models the Public-Private Investment Partnership (PPIP), a plan for U.S. government sponsored purchases of distressed assets. This paper solves both the problem of the asset manager buying toxic assets and the banks selling toxic assets. It solves for the fair market value of toxic assets implied by subsidized toxic asset sales, and it estimates the size of the government's subsidy. Moreover, this paper finds the circumstances under which banks and asset managers will meet at mutually acceptable prices. In general, healthier banks will be more willing sellers of toxic assets than zombies.     

A closer look at co-movements among stock returns

Correlation among financial assets is widely recognized; however, the mechanics of the relationship are not well understood. This paper investigates the microstructure of the co-movement of stock returns. The goal is to improve our understanding of correlation among stock returns by examining the conditions under which asset returns co-move on an intra-day basis. The methodology combines a traditional lead–lag model with a modified or pseudo-error correction model. Empirical evidence is presented to suggest the speed of adjustment between paired asset intra-day returns is a function of asymmetric information. Specifically, the wider an asset's spread, the faster the asset will converge to the intra-day returns of other similar assets. This result is consistent with partial adjustment model presented by Chan (Chan, K. (1993). Imperfect information and cross-autocorrelation among stock prices. The Journal of Finance:1211–1230.) which suggests market makers gain from monitoring other market makers in periods of uncertainty.     

Dealer spread and portfolio selection under price risks: evidence from the gold service industry

The bid and ask quotes as well as portfolio selection decisions of gold dealers who face a gold price risk are investigated within a continuous-time framework. The research integrates into a systematic analysis the decision of asset allocation in financial economics as well as the decision of a bid–ask spread in a market microstructure. The holding rate of gold is correlated to the intensity and jump size of the Poisson process, which is a hedging demand for gold assets against the risk of extreme events. According to empirical analysis from the gold service industries, the gold spread return is related to the expected return, volatility and jump risks of gold prices.     

An empirical analysis and extension of internalization theory in emerging markets: The role of firm-specific assets and asset dispersion in the multinationality-performance relationship

This study examines the relationship between firm multinationality and financial performance with a focus on firm-specific assets and dispersion of these assets for MNCs from emerging markets. Drawing upon internalization theory, the authors reveal that while the financial performance of manufacturing MNCs depends on technological assets, service MNCs are more dependent on marketing assets to succeed in international markets. Study findings further emphasize the critical role of the industry context in emerging markets as the authors demonstrate that international asset dispersion weakens the effects of internationalization on financial performance more for MNCs in manufacturing industries than for MNCs in services.     

The demand for safe assets in emerging economies and global imbalances: New empirical evidence

Recent economic theory has singled out mismatches between the supply and the demand of safe financial assets in emerging countries as drivers of international capital flows and, ultimately, global current account imbalances. This paper assesses empirically the contribution of such “search for safe assets” to the size and composition of emerging economies’ international asset portfolios. Excess demand for safe assets in financially less‐developed countries would imply that these countries hold disproportionately high shares of their total portfolios in foreign assets. Moreover, financially less‐developed countries would hold disproportionately high shares of their foreign portfolios in financially developed countries, which are the major producers of ostensibly safe assets. This paper finds little empirical support for these predictions. Financially less‐developed countries allocate a larger proportion of their total holdings to domestic assets. Even when focusing on their foreign portfolios, there is no evidence of a general bias towards the assets of financially developed countries. Overall, asset mismatches do not appear to explain the asset allocation of financially less‐developed countries.     

Size matters for OTC market makers: General results and dimensionality reduction techniques

In most over‐the‐counter (OTC) markets, a small number of market makers provide liquidity to other market participants. More precisely, for a list of assets, they set prices at which they agree to buy and sell. Market makers face therefore an interesting optimization problem: they need to choose bid and ask prices for making money while mitigating the risk associated with holding inventory in a volatile market. Many market‐making models have been proposed in the academic literature, most of them dealing with single‐asset market making whereas market makers are usually in charge of a long list of assets. The rare models tackling multiasset market making suffer however from the curse of dimensionality when it comes to the numerical approximation of the optimal quotes. The goal of this paper is to propose a dimensionality reduction technique to address multiasset market making by using a factor model. Moreover, we generalize existing market‐making models by the addition of an important feature: the existence of different transaction sizes and the possibility for the market makers in OTC markets to answer different prices to requests with different sizes.     

Mexican peso crisis and its spillover effects to emerging market debt

This paper examines the spillover effects of the Mexican financial crisis to emerging financial markets. As of November 1994, the financial markets were not anticipating a change in exchange rate regime in Mexico. Coincident with the peso devaluation on 20, December 1994, Mexican Brady bond prices declined significantly and continued to experience significant decline during the subsequent three months. Emerging market assets reacted differently to the Mexican crisis. Latin America as a region was more exposed to the Mexican crisis than emerging markets from other regions. The ratio of liquid monetary assets to international reserves and the ratio of current account to GDP were the most influential variables in explaining variation in CARs across countries. Trade competition with third markets was the most significant transmission channel during the Mexican crisis.     

MARKET SELECTION OF FINANCIAL TRADING STRATEGIES: GLOBAL STABILITY

In this paper we analyze the long-run dynamics of the market selection process among simple trading strategies in an incomplete asset market with endogenous prices. We identify a unique surviving financial trading strategy. Investors following this strategy asymptotically gather total market wealth. This result generalizes findings by Blume and Easlcy (1992) to any complete or incomplete asset market.     

互联网消费金融资产证券化的发展反思与监管建议

自从2005年《信贷资产证券化试点管理办法》实施以来,在政策红利、经济发展、消费刺激以及技术深化的时代背景下,对互联网消费金融进行资产证券化日益成为金融市场发展的热点。互联网消费金融机构通过资产证券化,可以全面实现期限转换、信用转换、流动性转换以及风险转换等金融核心功能;但互联网消费金融资产证券化的过度创新发展,同时也带来了诸多法律风险,包括基础资产的真实性风险、破产隔离和真实出售的风险、信息披露不透明的风险以及杠杆率水平过高的违规风险。对此,本文通过分析目前我国互联网消费金融资产证券化的监管现状与不足,以给出互联网消费金融资产证券化健康发展的监管建议。     

Robust Hedging of Barrier Options

This article considers the pricing and hedging of barrier options in a market in which call options are liquidly traded and can be used as hedging instruments. This use of call options means that market preferences and beliefs about the future behavior of the underlying assets are in some sense incorporated into the hedge and do not need to be specified exogenously. Thus we are able to find prices for exotic derivatives which are independent of any model for the underlying asset. For example we do not need to assume that the underlying assets follow an exponential Brownian motion.
We find model-independent upper and lower bounds on the prices of knock-in and knock-out puts and calls. If the market prices the barrier options outside these limits then we give simple strategies for generating profits at zero risk. Examples illustrate that the bounds we give can be fairly tight.     

Equilibrium Pricing in the Presence of Cumulative Dividends Following a Diffusion

The paper presents some security market pricing results in the setting of a security market equilibrium in continuous time. The theme of the paper is financial valuation theory when the primitive assets pay out real dividends represented by processes of unbounded variation. In continuous time, when the models are also continuous, this is the most general representation of real dividends, and it can be of practical interest to analyze such models.
Taking as the starting point an extension to continuous time of the Lucas consumption-based model, we derive the equilibrium short-term interest rate, present a new derivation of the consumption-based capital asset pricing model, demonstrate how equilibrium forward and futures prices can be derived, including several examples, and finally we derive the equilibrium price of a European call option in a situation where the underlying asset pays dividends according to an Itô process of unbounded variation. In the latter case we demonstrate how this pricing formula simplifies to known results in special cases, among them the famous Black–Scholes formula and the Merton formula for a special dividend rate process.     

Productivity, terms of trade and the ‘home market effect’

This paper analyzes the international transmission and welfare implications of productivity gains and changes in market size when macroeconomic adjustment occurs both along the intensive margin of trade (changes in the relative price of existing varieties of tradable goods) and the extensive margin (creation and destruction of varieties). We draw a distinction between productivity gains that enhance manufacturing efficiency and gains that lower the cost of firms' entry and of product differentiation. Countries with lower manufacturing costs have higher GDP but supply their products at lower international prices. Instead, countries with lower entry costs supply a larger array of goods at improved terms of trade. Output growth driven by demographic expansions, as well as government spending, is associated with an improvement in international relative prices and firms' entry. While trade liberalization may result in a smaller array of goods available to consumers, efficiency gains from deeper economic integration benefit consumers via lower goods prices. The international transmission mechanism and the welfare spillovers vary under different asset market structures, depending on trade costs, the elasticity of labor supply, and consumers' taste for varieties.     

Dollar illiquidity and central bank swap arrangements during the global financial crisis

While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness.     

大股东资产注入的产业链整合效应研究

以股权分置改革后已完成大股东资产注入的上市公司为样本,通过统计大股东资产注入前后上市公司与大股东之间关联交易的变化以及资产注入前后上市公司经营业绩的变化来检验大股东资产注入的产业链整合效应,研究发现: 大股东注入的资产大多与上市公司产业相关,相比资产注入前一年,资产注入后一年上市公司与大股东之间的关联交易量以及非公允关联交易量均显著下降,并且上市公司各项经营业绩指标也均比资产注入前一年有所上升,表明大股东资产注入降低了上市公司与大股东之间的关联交易,改善了上市公司经营业绩,具有积极的产业链整合效应。     

Mean‐variance efficiency of the market portfolio and futures trading

We derived an intertemporal capital asset pricing model in which the mean‐variance efficiency of the market portfolio is neither a necessary nor a sufficient condition. We obtained this result by modeling a frictionless, continuously open financial market in which nonredundant futures contracts are available for trade, in addition to cash assets. Introducing such contracts modifies the way investors optimally allocate their wealth. Their portfolios then comprise the riskless asset, a perturbed mean‐variance‐efficient portfolio of cash assets, and a perturbed mean‐variance‐efficient portfolio of futures contracts. Furthermore, a (3 + K) mutual fund separation is obtained, with K being the number of economic state variables, in lieu of the usual (2 + K) fund separation. Mean‐variance efficiency of the market portfolio is a necessary condition only when cash assets are the sole traded assets. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:329–346, 2001     

Does investor recognition matter for asset pricing?

In a world of market imperfections, what matters for asset prices differs from theory predictions based on perfect markets and information. In this paper, using a market setting where information costs are more pronounced, I show that the level of investor recognition/awareness matters for asset prices as predicted by Merton (1987). Using a novel dataset, I study the price effects of inclusions to and exclusions from a benchmark equity index in the context of emerging market assets. While testing for a number of existing hypotheses, I am able to document evidence for the ‘investor recognition’ hypothesis, using event study methodology. Furthermore, by making use of analysts' recommendations data, I show that there is a significant increase in coverage for the included stocks. This is also significantly related to the observed price change.     

ANALYTIC APPROXIMATIONS FOR MULTI‐ASSET OPTION PRICING

We derive general analytic approximations for pricing European basket and rainbow options on N assets. The key idea is to express the option’s price as a sum of prices of various compound exchange options, each with different pairs of subordinate multi‐ or single‐asset options. The underlying asset prices are assumed to follow lognormal processes, although our results can be extended to certain other price processes for the underlying. For some multi‐asset options a strong condition holds, whereby each compound exchange option is equivalent to a standard single‐asset option under a modified measure, and in such cases an almost exact analytic price exists. More generally, approximate analytic prices for multi‐asset options are derived using a weak lognormality condition, where the approximation stems from making constant volatility assumptions on the price processes that drive the prices of the subordinate basket options. The analytic formulae for multi‐asset option prices, and their Greeks, are defined in a recursive framework. For instance, the option delta is defined in terms of the delta relative to subordinate multi‐asset options, and the deltas of these subordinate options with respect to the underlying assets. Simulations test the accuracy of our approximations, given some assumed values for the asset volatilities and correlations. Finally, a calibration algorithm is proposed and illustrated.     

The global financial crisis: Some suggestions for reform of the global financial architecture in the light of Islamic finance

The article argues that the primary cause of the current subprime mortgage crisis in the United States is the absence of adequate market discipline in the financial system. This tends to promote excessive lending, high leverage, speculation, and an unsustainable rise in asset prices. Unwinding later on gives rise to a vicious cycle of selling that feeds on itself and leads to a steep decline in asset prices followed by financial crisis and economic slowdown. The solution lies in introducing risk sharing along with the availability of credit for primarily the purchase of real goods and services that Islamic finance aims at introducing. This can help inject greater discipline into the system and, thereby, substantially reduce financial instability. Since the introduction of greater discipline into the financial system may deprive the subprime borrowers of credit, the article also discusses the need for finding ways of satisfying their genuine credit needs. © 2011 Wiley Periodicals, Inc.