Two-dimensional risk-neutral valuation relationships for the pricing of options

The Black–Scholes model is based on a one-parameter pricing kernel with constant elasticity. Theoretical and empirical results suggest declining elasticity and, hence, a pricing kernel with at least two parameters. We price European-style options on assets whose probability distributions have two unknown parameters. We assume a pricing kernel which also has two unknown parameters. When certain conditions are met, a two-dimensional risk-neutral valuation relationship exists for the pricing of these options: i.e. the relationship between the price of the option and the prices of the underlying asset and one other option on the asset is the same as it would be under risk neutrality. In this class of models, the price of the underlying asset and that of one other option take the place of the unknown parameters.      

基于上证50ETF期权的“定价核之谜”研究

基于上证50E T F和上证50E TF期权数据,本文经验研究了中国市场是否存在“定价核之谜”,并对“定价核之谜”与市场走势之间的关系进行了探讨。实证结果显示,中国市场存在“定价核之谜”,且“定价核之谜”与下期市场收益率呈显著负向关系、与下期市场振幅呈显著正向关系。本文首次给出了“定价核之谜”在中国金融市场存在的经验证据,并且证实了“定价核之谜”对下期市场走势具有一定的预测作用。     

On pricing kernels and finite-state variable Heath Jarrow Morton models

Once a pricing kernel is established, bond prices and all other interest rate claims can be computed. Alternatively, the pricing kernel can be deduced from observed prices of bonds and selected interest rate claims. Examples of the former approach include the celebrated Cox, Ingersoll, and Ross (1985b) model and the more recent model of Constantinides (1992). Examples of the latter include the Black, Derman, and Toy (1990) model and the Heath, Jarrow, and Morton paradigm (1992) (hereafter HJM). In general, these latter models are not Markov. Fortunately, when suitable restrictions are imposed on the class of volatility structures of forward rates, then finite-state variable HJM models do emerge. This article provides a linkage between the finite-state variable HJM models, which use observables to induce a pricing kernel, and the alternative approach, which proceeds directly to price after a complete specification of a pricing kernel. Given such linkages, we are able to explicitly reveal the relationship between state-variable models, such as Cox, Ingersoll, and Ross, and the finite-state variable HJM models. In particular, our analysis identifies the unique map between the set of investor forecasts about future levels of the drift of the pricing kernel and the manner by which these forecasts are revised, to the shape of the term structure and its volatility. For an economy with square root innovations, the exact mapping is made transparent.     

Analyst cash flow forecasts and pricing of accruals

This paper investigates how analyst cash flow forecasts affect investors' valuation of accounting accruals. We find that the strength of the accrual anomaly documented in Sloan (1996) is weaker for firms with analyst cash flow forecasts, after controlling for idiosyncratic risk, transaction costs and firm characteristics associated with the issuance of cash flow forecasts. We further show that this reduction in mispricing of accounting accruals is at least partially attributed to the improved ability of investors to price earnings manipulations imbedded in accruals. We investigate several non-mutually exclusive alternative explanations for this improvement in investors' ability and demonstrate that the increased investor attention and the improved accuracy of analyst earnings forecasts both contribute to the mitigation of the accrual anomaly.     

Why mutual funds “underperform”

I propose a parsimonious model that reproduces the negative risk-adjusted performance of actively managed equity mutual funds. In the model, a fund manager can generate state-dependent active returns at a disutility. Negative expected performance and mutual fund investing simultaneously arise in equilibrium because the active return the fund manager generates covaries positively with a component of the pricing kernel that the performance measure omits, consistent with recent empirical evidence. Using data on U.S. funds, I also document new empirical evidence consistent with the model's cross-sectional implications.     

On user costs of risky monetary assets

Summary. We extend the monetary-asset user-cost risk adjustment of Barnett, Liu and Jensen (1997) and their risk-adjusted Divisia monetary aggregates to the case of multiple non-monetary assets and intertemporal non-separability. Our model can generate potentially larger and more accurate CCAPM user-cost risk adjustments than those found in Barnett, Liu and Jensen (1997). We show that the risk adjustment to a monetary assets user cost can be measured easily by its beta. We show that any risky non-monetary asset can be used as the benchmark asset, if its rate of return is adjusted in accordance with our formula. These extensions could be especially useful, when own rates of return are subject to exchange rate risk, as in Barnett (2003).We thank participants at the 11^th Global Finance Annual Conference, Yuqing Huang, and an anonymous referee for helpful comments and suggestions.     

Forward-neutral valuation relationships for options on zero coupon bonds

This paper extends the literature on Risk-Neutral Valuation Relationships (RNVRs) to derive valuation formulae for options on zero coupon bonds when interest rates are stochastic. We develop Forward-Neutral Valuation Relationships (FNVRs) for the transformed-bounded random walk class. Our transformed-bounded random walk family of forward bond price processes implies that (i) the prices of the zero coupon bonds are bounded below at zero and above at one, and (ii) negative continuously compounded interest rates are ruled out. FNVRs are frameworks for option pricing, where the forward prices of the options are martingales independent of the market prices of risk. We illustrate the generality and flexibility of our approach with models that yield several new closed-form solutions for call and put options on discount bonds.     

Asset pricing under information with stochastic volatility

Based on a general specification of the asset specific pricing kernel, we develop a pricing model using an information process with stochastic volatility. We derive analytical asset and option pricing formulas. The asset prices in this rational expectations model exhibit crash-like, strong downward movements. The resulting option pricing formula is consistent with the strong negative skewness and high levels of kurtosis observed in empirical studies. Furthermore, we determine credit spreads in a simple structural model.      

Why Do Analysts use a Zero Forecast for Other Comprehensive Income?

Accounting theory and accounting researchers stress the importance of clean surplus accounting and comprehensive income to corporate valuation. However, casual observation suggests that sell-side equity analysts routinely ignore other comprehensive income (OCI) in their forecasts and instead focus on forecasting earnings (before OCI). Using a sample of analyst reports, I first confirm that analysts normally omit forecasts of OCI or comprehensive income from their reports, consistent with analysts forecasting OCI as zero. I then predict and find that a zero forecast for OCI generally produces lower forecasting errors than alternative time-series models, such as a random walk or AR(1) model, suggesting a rational reason why analysts take this approach. Finally, I predict and find that although analysts’ point forecasts of future OCI are usually zero, their implied cost of equity estimates are consistent with analysts forecasting a positive variance for OCI.     

Oman's monetary policy transmission process under the fixed peg: some empirical puzzles

This paper highlights that an open economy, like Oman, could often enjoy partial monetary policy independence despite operating with a fixed peg, which may appear as a clear violation of the ‘macroeconomic trilemma'. While explaining the country-specific factors that create the scope for partial monetary policy independence, the paper underscores that for meaningful use of this partial monetary policy independence to attain domestic goals of inflation and output, the transmission mechanism of monetary policy must work effectively. Empirical analyses presented in this paper for Oman, however, suggest the presence of not only the ‘interest rate puzzle’ but also the ‘IS puzzle’ and the ‘Phillips curve puzzle’, which together signal the presence of significant transmission weaknesses. The paper, thus, concludes that costs stemming from loss of any monetary policy independence because of the fixed peg may not be very significant for Oman, and hence, any alternative exchange rate regime cannot be viewed as appropriate just on the grounds that an alternative regime could deliver greater monetary policy independence.     

Out-of-sample density forecasts with affine jump diffusion models

We conduct out-of-sample density forecast evaluations of the affine jump diffusion models for the S&P 500 stock index and its options’ contracts. We also examine the time-series consistency between the model-implied spot volatilities using options & returns and only returns. In particular, we focus on the role of the time-varying jump risk premia. Particle filters are used to estimate the model-implied spot volatilities. We also propose the beta transformation approach for recursive parameter updating. Our empirical analysis shows that the inconsistencies between options & returns and only returns are resolved by the introduction of the time-varying jump risk premia. For density forecasts, the time-varying jump risk premia models dominate the other models in terms of likelihood criteria. We also find that for medium-term horizons, the beta transformation can weaken the systematic effect of misspecified AJD models using options & returns.     

欧洲股票市场的规模和动因:基于不同β系数的资本资产定价模型实证研究

我们选用在13个欧洲股市上市的证券,形成规模和动因组合.我们不仅发现规模溢价的证据,还发现8个样本市场存在重大动因收益率.这些收益率可能不构成异常现象,因为它们与不同β值的资本资产定价模型一致.我们还发现,系统风险与经济周期有关.此外,研究结果显示,虽然规模和动因收益率显著,但是难以在中、短期利用它们,因为在我们的样本...     

The dynamic effects of monetary policy: A structural factor model approach

A structural factor model for 112 US monthly macroeconomic series is used to study the effects of monetary policy. Monetary policy shocks are identified using a standard recursive scheme, in which the impact effects on both industrial production and prices are zero. The main findings are the following. First, the maximal effect on bilateral real exchange rates is observed on impact, so that the “delayed overshooting” puzzle disappears. Second, after a contractionary shock prices fall at all horizons, so that the price puzzle is not there. Finally, monetary policy has a sizable effect on both real and nominal variables.     

The Value Relevance of Management Forecasts and Their Impact on Analysts' Forecasts: Empirical Evidence From Japan

A major financial disclosure feature in Japan is that stock exchanges require firms to provide next year's earnings forecasts. This study investigates the value relevance of Japanese management earnings forecasts and their impact on analysts' earnings forecasts. First, the value relevance of management forecasts is investigated using a valuation framework provided by Ohlson (2001 ), in which firm value is expressed as a function of book value, current earnings and next year's expected earnings. The analysis yields that of the three accounting variables examined, management forecasts have the highest correlation and incremental explanatory power with stock price.
Next, the impact of management forecasts on analysts' forecasts is examined. The results show that more than 90% of changes in analysts' forecasts are explained by management forecasts alone. Further analysis reveals that the heavy dependence of financial analysts on management forecasts in formulating their own forecasts may partially be attributed to the relatively high accuracy of management forecasts. At the same time, financial analysts also somewhat modify management forecasts when certain financial factors indicate that the credibility of management forecasts is in doubt.
Overall, this study presents empirical evidence that Japanese management forecasts provide useful information for the market and have a significant influence on analysts' forecasts.