Past managerial guidance and returns to variance trading around earnings announcements

I investigate the relationship between past managerial guidance and realized variance risk premiums (VRPs) – i.e., the difference between implied and realized variance – in equity options around earnings announcements. I find that implied variances are lower before earnings announcements but VRPs are higher when firms provide guidance. I also find higher option-implied jump risk when firms issue surprising guidance. Further tests suggest a portion of the higher VRPs are due to changes in perceived higher-order risks, but traders also underreact to the precision of information in short-term guidance. These results are attenuated for firms with a better information environment.     

Variance risk in commodity markets

We analyze the variance risk of commodity markets. We construct synthetic variance swaps and find significantly negative realized variance swap payoffs in most markets. We find evidence of commonalities among the realized payoffs of commodity variance swaps. We also document comovements between the realized payoffs of commodity, equity and bond variance swaps. Similar results hold for expected variance swap payoffs. Furthermore, we show that both realized and expected commodity variance swap payoffs are distinct from the realized and expected commodity futures returns, indicating that variance risk is unspanned by commodity futures.     

Credit variance risk premiums

This paper studies variance risk premiums in the credit market using a novel data set of swaptions quotes on the CDX North America Investment Grade and High-Yield indices. The returns of credit variance swaps are negative and economically large, irrespective of the credit rating class. They are robust to transaction costs and cannot be explained by established risk factors and structural model variables. We also dissect the overall variance risk premium into receiver and payer variance risk premiums. We show that credit variance risk premiums are mainly driven by the payer corridor, which is associated with worsening macroeconomic conditions.     

The impact of junior debt issuance on senior unsecured debt’s risk premiums

Numerous studies have examined the impact of security issuance upon the value of pre-existing debt and equity but the focus has largely been on changes in equity value. We examine changes in senior unsecured debt risk premiums that accompany new junior debt issues. Additionally, we test several hypotheses regarding the potential impacts of junior debt issues. Extant theory suggests senior debt value may be threatened under certain conditions by the issuance of junior debt. Our results indicate that when junior debt replaces bank debt, senior default risk premiums experience abnormal declines. The result is broadly consistent with the elevation of the senior unsecured debt by way of the elimination of a separate and more senior class of debt claimants. In contrast, we also find that larger junior bond issues are associated with abnormal increases in senior risk premiums, broadly consistent with issue size being correlated with negative information about firm cash flows. We find strong evidence of interaction effects. For example, replacement of bank debt results in greater changes in default risk premiums the larger the issue size. We also find lower credit ratings magnify other effects. For example, if the junior debt issued matures before the outstanding senior unsecured bond, senior risk premiums experience abnormal increases for lower rated debt.     

The predictability of returns on equity REITs and their co-movement with other assets

Recent evidence suggests that the variation in the expected excess returns is predictable and arises from changes in business conditions. Using a multifactor latent variable model with time-varying risk premiums, we decompose excess returns into expected and unexpected excess returns to examine what determines movements in expected excess returns for equity REITs are more predictable than all other assets examined, due in part to cap rates which contain useful information about the general risk condition in the economy. We also find that the conditional risk premiums (expected excess returns) on EREITs move very closely with those of small cap stocks and much less with those of bonds.     

“好”的不确定性、“坏”的不确定性与股票市场定价——基于中国股市高频数据分析

不确定性并不是都是“坏”的,“好”的不确定性也同样存在。本文采用Barndorff-Nielsen et al.(2010)提出的已实现半方差作为股票市场“好”的不确定性和“坏”的不确定性的代理指标,并在此基础上构建了相对符号变差(RSV),分析RSV对中国股市定价的影响。基于2007-2017年中国A股5分钟高频数据的实证研究发现:(1)与理论解释相一致,RSV与股票收益之间呈现负相关关系。无论是基于单变量分组、双变量分组还是公司层面的截面回归,这种影响在经济上和统计上都显著。(2)RSV是独立于已实现偏度的一个重要定价因子,且RSV对股票的定价能力强于已实现偏度的定价能力。(3)RSV对中国股市的影响是状态依存的,相对于经济景气程度高的状态,在经济景气程度低的状态下RSV定价影响更大。(4)基于RSV构建的投资组合的表现明显优于市场超额收益率组合、SMB组合和HML组合的表现。     

A dynamic equilibrium model for U-shaped pricing kernels

This paper proposes a dynamic equilibrium model that can provide a unified explanation for the stylized facts observed in stock index markets such as the fat tails of the risk-neutral return distribution relative to the physical distribution, negative expected returns on deep OTM call options and negative realized variance risk premiums. In particular, we focus on the U-shaped pricing kernel against the stock index return, which is closely related to the negative call returns. We assume that the stock index return follows a time-changed Lévy process and that a representative investor has power utility over the aggregate consumption that forms a linear regression of the stock index return and its stochastic activity rate. This model offers a macroeconomic interpretation of the stylized facts from the perspective of the sensitivity of the activity rate and stock index return on aggregate consumption as well as the investor’s risk aversion.     

The skewness risk premium in equilibrium and stock return predictability

In this study, we investigate the skewness risk premium in the financial market under a general equilibrium setting. Extending the long-run risks (LRR) model proposed by Bansal and Yaron (J Financ 59:1481–1509, 2004) by introducing a stochastic jump intensity for jumps in the LRR factor and the variance of consumption growth rate, we provide an explicit representation for the skewness risk premium, as well as the volatility risk premium, in equilibrium. On the basis of the representation for the skewness risk premium, we propose a possible reason for the empirical facts of time-varying and negative risk-neutral skewness. Moreover, we also provide an equity risk premium representation of a linear factor pricing model with the variance and skewness risk premiums. The empirical results imply that the skewness risk premium, as well as the variance risk premium, has superior predictive power for future aggregate stock market index returns, which are consistent with the theoretical implication derived by our model. Compared with the variance risk premium, the results show that the skewness risk premium plays an independent and essential role for predicting the market index returns.     

Bank risk and real estate: An asset pricing perspective

While a number of papers have investigated the time-series behavior ofex post bank stock returns and real estate returns, no study has comprehensively studied the relationship betweenex ante risk premiums on both assetsand the time-varying nature of such premiums in relationship to economic and real estate market conditions. In this study, we investigate how the changing nature of bank risk taking, especially in the real estate market, has affected theex ante pricing of risk in the market for bank stocks. We find that the time variation in bank risk premiums are partly determined by interest rate and real estate market conditions. We also discover that the real estate factor has been important for banks in the 1980s.     

Can unpredictable risk exposure be priced?

We study the link between beta predictability and the price of risk. An investor who desires exposure to a certain risk factor needs to predict what next period’s beta will be. We use a simple model to show that an ambiguity averse agent’s demand is lower when betas are hard to predict, leading to a reduction in risk premiums. We test the implications for downside betas and VIX betas. We find that they have economically and statistically small prices of risk once we account for the fact that an investor cannot observe ex-post realized betas when determining asset demand.     

Incomplete Consumption Risk Sharing and Currency Risk Premiums

This article studies the impact of imperfect consumption risksharing across countries on the formation of time-varying riskpremiums in the foreign exchange market and on their cross-sectionaldifferences. These issues are addressed within the frameworkof the Constantinides and Duffie (1996) model applied to a multicountryworld. The article shows that the cross-country variance ofconsumption growth rates is counter-cyclical and that this featureof consumption data is mildly helpful for currency pricing.In particular, unlike the standard CCAPM, the new model is ableto generate currency risk premiums at lower values of risk aversionand provide certain explanatory power for cross-sectional differencesin currency returns.     

The many facets of privately negotiated stock repurchases

We investigate the causes and consequences of 737 privately negotiated share repurchases in the years 1984–2001. In contrast to the negative announcement returns and positive repurchase premiums reported by past research, we find positive announcement returns and premiums that are not significantly different from zero. Only when we investigate the 60 greenmail events separately do we find results similar to past research. However, for this subsample, we find long-horizon excess returns that are comparable to the average 18% repurchase premium, challenging the widely accepted opinion that managers overpay in greenmail repurchases. Moreover, we find that our understanding of the event improves when we split the non-greenmail repurchases according to the price paid. Repurchases at a premium can be modeled as signals, while other repurchases are mere wealth transfers between the corporation and the selling stockholders, the extent of which is determined by the relative bargaining power of the seller and the repurchasing firm.     

Testing asset pricing models with changing expectations and an unobservable market portfolio

When the assumption of constant risk premiums is relaxed, financial valuation models may be tested, and risk measures estimated without specifying a market index or state variables. This is accomplished by examining the behavior of conditional expected returns. The approach is developed using a single risk premium asset pricing model as an example and then extended to models with multiple risk premiums. The methodology is illustrated using daily return data on the common stocks of the Dow Jones 30. The tests indicate that these returns are consistent with a single, time-varying risk premium.     

Labor Market and Financial Shocks: A Time-Varying Analysis

We estimate a time-varying VAR model to analyze the effects of a financial shock on the U.S. labor market. We find that a tightening of financial conditions is highly detrimental to the labor market. We show that while negative financial shocks have been responsible for increases in unemployment, our model does not find significant contributions of financial shocks during periods of expansion. The source of this asymmetry is the time-varying standard deviation of the identified shock, which is higher in times of financial distress; on the other hand, we find that the transmission mechanism does not significantly change over time.     

Conventional and downside CAPM: The case of London stock exchange

Many studies on asset pricing have highlighted the importance of downside risk, in line with the actual losses of investors. In addition, the capital asset pricing model (CAPM), although presented as a universal theory, may provide significantly different rates of return in bull and bear markets. Using the CAPM under different conditions could be regarded as an alternative measurement and valuation approach to downside risk. This paper investigates conventional and downside approaches to risk taking into account different measures of downside beta coefficients. A further contribution of this research is the development of an alternative approach to testing the CAPM relationship. For this purpose, conditional relationships of the CAPM are proposed in which risk premiums are set separately in bull and bear periods. Using equity data and portfolios from the United Kingdom, we obtained positive and statistically significant downside risk premiums. We observed a slight advantage of downside measures over conventional beta measures. Conditional models provide evidence of a positive risk premium in rising markets and a negative risk premium in falling markets. The robustness analysis in subperiods indicates that these findings are largely unchanged for downside beta coefficients, which is not fulfilled by the model in a variance approach.     

On expectations,term premiums and the volatility of long-term interest rates

Shiller has shown that the variance of the holding-period yield on long-term bonds may frequently exceed a bound implied by the rational expectations model of the term structure. This paper extends Shiller's variance inequality to allow for the possible presence of time-varying term premiums. The paper then explores the question of whether term premiums, or perhaps transactions costs, are likely to reverse prior findings of excess volatility.     

Risk,uncertainty, and asset prices

We identify the relative importance of changes in the conditional variance of fundamentals (which we call “uncertainty”) and changes in risk aversion in the determination of the term structure, equity prices, and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in price–dividend ratios and the equity risk premium is primarily driven by risk aversion, uncertainty plays a large role in the term structure and is the driver of countercyclical volatility of asset returns.     

Are classical option pricing models consistent with observed option second-order moments? Evidence from high-frequency data

As a means of validating an option pricing model, we compare the ex-post intra-day realized variance of options with the realized variance of the associated underlying asset that would be implied using assumptions as in the Black and Scholes (BS) model, the Heston, and the Bates model. Based on data for the S&P 500 index, we find that the BS model is strongly directionally biased due to the presence of stochastic volatility. The Heston model reduces the mismatch in realized variance between the two markets, but deviations are still significant. With the exception of short-dated options, we achieve best approximations after controlling for the presence of jumps in the underlying dynamics. Finally, we provide evidence that, although heavily biased, the realized variance based on the BS model contains relevant predictive information that can be exploited when option high-frequency data is not available.     

The Relevance of Target Accounting Quality to the Long-Term Success of Cross-Border Mergers

Abstract:  We investigate a sample of cross-border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long-term success of the acquisitions, measured by the post-merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long-term success. Employing a procedure recommended by Lyon et al. (1999) , we find that US acquirers in cross-border mergers experience significantly negative long-term abnormal returns post-merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post-acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country-specific features. The results reveal that post-merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built-in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross-border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.