Dividend growth, stock valuation, and long-run risk

In this paper, we integrate the long-run concept of risk into the stock valuation process. We use the intertemporal consumption capital asset pricing model to demonstrate that a stock’s long-run dividend growth is negatively related to its current dividend-price ratio and positively related to its long-run covariance between dividends and consumption. Then, we show that the equilibrium price of a stock is determined by its current dividend, long-run dividend growth, and long-run risk. In all, our work suggests that risk cumulated over many periods represents an important parameter in assessing the theoretical value of a firm.     

Tail risk and investors’ concerns: Evidence from Brazil

I estimate tail risk for Brazil from January 2001 to July 2020 and investigate the origins of tail risk variation. The tail risk measure peaks at stock market crashes, financial crises, political shocks and disaster events such as the coronavirus pandemic. Moreover, I find that tail risk is countercyclical, has strong predictive power for market returns and negatively predicts real economic activity. In order to identify the investors’ concerns associated with tail risk, I extract daily news from the largest financial newspaper in Brazil. The co-movement between news and tail risk indicates that tail risk variation is mainly driven by disaster concerns, followed by economic and government uncertainty. While economic uncertainty explains the countercyclical property of tail risk, investors only require compensation for bearing tail risk implied by disaster concerns. Similarly, tail risk negatively impacts real outcomes because of the disaster concerns that it identifies. These findings support recent models explaining asset pricing puzzles with time-varying disaster risk.     

Corporate tax,financial leverage,and portfolio risk

We examine the theoretical implications of corporate income tax for a risky portfolio in a aggregate-endowment economy. In this model, corporate income tax affects the portfolio risk associated with the rebalancing motive during market clearance. An asset is defined as a portfolio of stocks and bonds whose portfolio weights are similar to financial leverage. Corporate tax can decrease after-tax consumption from dividends (increase leverage) and increase the tax shield that increases dividends (decrease leverage). Changes in dividends are responsible for the correlation between expected dividend growth and consumption growth and, thus, affect stock pricing and returns. Overall, the model is characterized by tax-induced portfolio risk associated with financial leverage.     

The temporal dimension of risk

If returns are stationary, then the risk of an asset in any time frequency can be estimated from the risk of the asset in any other time frequency through a simple linear rescaling. This implies that short-term risk carries reliable information about long-term risk, and both data frequencies and investment horizons are irrelevant when evaluating an asset’s risk. However, most series of stock returns are nonstationary, which if ignored may lead investors to make significant mistakes. Using recent data from fourteen European securities markets, I show that investors that mistakenly assume stationarity are bound to underestimate the total and systematic risk (and overestimate the risk-adjusted returns) of European stocks. The underestimation of total risk ranges between .25% and 2.18% a month, and averages almost 1% a month.     

Re-examining risk premiums in the Fama–French model: The role of investor sentiment

This paper reconstructs the Fama–French three-factor (F–F) model as a panel smooth transition regression (PSTR) framework to investigate the differentiated effects of investor sentiment proxies-the volatility index (VIX), credit default swap (CDS), and TED spread-on the three risk premiums. Sample period spans from 2003: 1Q to 2013: 4Q. Sample objects are 58 semiconductor companies listed on Taiwan Security Exchange Corporation. The empirical results report that stock returns display a nonlinear path, and the three risk premiums are time-varying, depending on different proxies of investor sentiment in different regimes. Market premiums fall as investors in stock markets show extreme optimism or extreme pessimism. Except in rare situations, the size premium is significant and decreases with the increase in the VIX. Returns in holding growth stocks dominate holding value stocks when the investors show extreme pessimism or optimism. However, in normal sentiment of investment, value stocks earn more returns than growth stocks.     

Dynamic interaction of risk–return trade-offs between oil market and China’s stock market: An analysis from the risk preferences perspective

The risk–return trade-off refers to the compensation required by investors for bearing risks, which can be viewed as the risk preference of investors in a market. The current study investigates the dynamic interdependence of risk–return trade-offs between China’s stock market and the crude oil market from the perspective of risk preference of investors, which is designed to explore the transmission process of investors’ risk preference in both markets. Specifically, this study applies the time-varying parameter GARCH-M model, namely TVP-GARCH-M model, to characterize the time-dependent risk–return trade-offs (investors’ risk preferences) in the crude oil and China’s stock markets, then examines their relationship through Granger causality tests. Results show that a variation in risk preferences of the oil market investors can dramatically cause a variation in risk preferences of the Chinese stock market investors, while the risk preference of investors in the Chinese stock market does not lead to that in the crude oil market, which is in accordance with expectations. The dynamic effect of investors’ risk appetite in the crude oil market is further examined by the TVP-VAR model. The findings of this work suggest that there generally exists a positive impact of investors’ risk preference in the oil market and that the effect is time-varying to a greater degree during the short and medium term. Moreover, responses of the Chinese stock market investors’ risk preference were more significant during the 2008 financial crisis. Additionally, the empirical results remain robust when applying alternative crude oil prices and China’s stock prices.     

Variance swaps,non-normality and macroeconomic and financial risks

This paper studies the determinants of the variance risk premium and discusses the hedging possibilities offered by variance swaps. We start by showing that the variance risk premium responds to changes in higher order moments of the distribution of market returns. But the uncertainty that determines the variance risk premium – the fear by investors to deviations from normality in returns – is also strongly related to a variety of macroeconomic and financial risks associated with default, employment growth, consumption growth, stock market and market illiquidity risks. We conclude that the variance risk premium reflects the market willingness to pay for hedging against these financial and macroeconomic sources of risk. An out-of-sample asset allocation exercise shows that the inclusion of the variance swap reduces the modified value-at-risk with respect to a portfolio holding exclusively the equity market portfolio.     

Homeownership and mixed-asset portfolio allocations

Homeownership represents both a consumption and an investment decision for individuals. Considering the investment benefits of the home, we estimate the total returns and risk associated with the investment in single-family homes. Then, using a mean–variance utility function, we consider the impact of homeownership and mortgage loan financing on the optimal asset allocation decisions of individuals and contrast this with advice that does not include the home as part of the portfolio. While optimal portfolio weights are dependant upon both the degree of risk aversion of the individual investor and the relative importance of the home in the overall net worth picture, we show that, in general, the higher the home-to-net worth ratio, the higher the optimal portfolio allocation to stock. For most investors, including the home in the optimization decision leads to higher allocations to risky stock than suggested by traditional advice that ignores the home.     

Individual stock crowded trades,individual stock investor sentiment and excess returns

Recent behavioral asset pricing models and the popular press suggest that investors may follow similar strategies resulting in crowded equity positions to push prices further away from fundamentals. This paper develops a new approach to measure individual stock crowded trades, and further investigates the joint effects of individual stock crowded trades and individual stock investor sentiment on excess returns. Specifically, our results show that the combined effect of individual stock crowded trades and individual stock investor sentiment on excess returns is positive and significant, which reveals the importance of “anomaly factors” in asset pricing. Furthermore, our results suggest that increasing individual stock buyer-initiated crowded trades will increase excess returns simultaneously; however, increasing individual stock seller-initiated crowded trades will decrease excess returns simultaneously. Collectively, our results highlight the importance of individual stock crowded trades and individual stock investor sentiment on the formation of stock prices.     

Optimal growth under model uncertainty

The optimal growth of a wealth process toward a goal is studied under ambiguous markets with first- and second-order moment uncertainties relating to stock returns. Optimal strategies and value functions are solved explicitly. A verification theorem is proved to show that the results solve the original stochastic control problem. Quantitative analyses of the investment strategies indicate that a rational individual with ambiguity aversion reduces market participation when return and volatility are uncorrelated, while there is an exception for synchronous return and volatility. The welfare of shorting a discounted reward is computed, which demonstrates that in an ambiguous pricing economy, investors can generate a positive premium via appropriate asset allocations.     

公司风险视角下上市国企管理层股权激励研究

在允许国有控股上市公司实施股权激励的背景下,考察了其不同种类风险与经营者股权激励强度的关系。先界定了风险的类型,再通过构建基于风险的两种股权激励模型,并进一步推导得出：若国有上市企业的管理层不能（可以）买卖公司以外的市场证券组合时,其最优股权激励强度与公司特别性风险成反向变化关系,而与公司整体性风险的相关关系不确定（无关）,这为正在实践中摸索的国有上市企业管理层股权激励合同的设计提供了进一步的理论建议。     

Information asymmetry,sentiment interactions,and asset price

We develop an asset pricing model with sentiment interactions between institutional and individual investors under the condition of information asymmetry. Our model considers private information and investor sentiment, two imperfections in securities markets, and integrates them into a theoretical model to investigate the role of the interaction between information asymmetry and investor sentiment in asset pricing. We show that the joint effect of private information and investor sentiment deviate the price of risky assets and efficiently explains anomalies in the stock market. Investor sentiment changes the effect of information on the equilibrium price relative to a world where all investors are completely rational. Private information changes the effect of investor sentiment on the equilibrium price in comparison with a scenario with symmetric market information. In addition, the individual investors’ learning and the disclosure of information both allow private information to be better integrated into the price and simultaneously changes the effect of investor sentiment on the equilibrium price.     

股票价格低于每股净资产的影响因素分析——来自中国A股上市公司的经验证据

破净指股票价格跌破每股净资产,是股票价格与每股净资产关系的一种极端表现。本文以1 059家A股上市公司为样本,采用修正的Ohlson模型,分组对股价破净的影响因素进行研究。结果发现:对于业绩为正的非ST企业而言,公司规模大、上市时间早、机构投资者持股比例低的国有企业容易破净;ST企业的股票价格虽下跌,但其重组捷径和壳资源改变了投资者的预期,使ST企业不破净或较少破净。     

Valuation of options on the maximum of two prices with default risk under GARCH models

In this paper, we work under GARCH models to value options on the maximum or the minimum of two prices. In addition, we consider not only two underlying asset prices but also geometric average ones. Further, default risk is also incorporated in a reduced-form model. In the proposed framework, closed-form pricing formulae of options on the maximum with or without default risk are derived and then used to perform numerical examples.     

Predicting the portfolio risk of high-dimensional international stock indices with dynamic spatial dependence

The spatial dependence of assets, which relates to similarities in economic, political, or cultural systems and other aspects, has been confirmed through empirical research; however, spatial dependence has rarely been applied to financial risk measurement. To fill this gap in the literature, a dynamic spatial GARCH-copula (sGC) model is proposed in this paper to evaluate the portfolio risk of international stock indices. In this model, a spatial GARCH is used as the marginal distribution and vine copula is adopted as the joint distribution of indices. Then, the proposed model is applied empirically to assess portfolio risk. Results show that, first, the proposed risk prediction model with spatial dependence outperforms a model neglecting spatial effects per the Kupiec test, Z test and Christoffersen test. Risk prediction during periods of economic stability is also more accurate than during times of crisis. Second, risk measures for models with spatial dependence are higher than those without such dependence but lower than for vine copula models. Third, models including either spatial dependence or vine copulas alone exhibit relatively poor performance. Fourth, the model involving extreme value theory (EVT) generates the greatest value at risk to pass the Kupiec test, Z test and Christoffersen test; however, this model is not suitable for characterizing international indices with EVT based on negative values of the shape parameters of estimates. Findings offer important implications for personal investors, institutional investors, and national regulatory authorities.     

Monetary Policy and the Stock Market: Theory and Empirical Evidence

This paper gives a comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy. This is an area of research that has interested monetary and financial economists for a long time. Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigated whether equity is a good hedge against inflation. Empirical studies show that money can be helpful in predicting future stock returns. Empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run. The short-run negative relation between stock returns and inflation can easily be explained by theoretical models. If the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns, while if it conducts a procyclical policy we could observe a positive relation. According to both theoretical and empirical studies investors receive an inflation risk premium for holding equity.     

Aggregate volatility expectations and threshold CAPM

We propose a volatility-based capital asset pricing model (V-CAPM) in which asset betas change discretely with respect to changes in investors’ expectations regarding near-term aggregate volatility. Using a novel measure to proxy uncertainty about expected changes in aggregate volatility, i.e. monthly range of the VIX index (RVIX), we find that portfolio betas change significantly when uncertainty about aggregate volatility expectations is beyond a certain threshold level. Due to changes in their market betas, small and value stocks are perceived as riskier than their big and growth counterparts in bad times, when uncertainty about aggregate volatility expectations is high. The proposed model yields a positive and significant market risk premium during periods when investors do not expect significant uncertainty in near-term aggregate volatility. Our findings support a volatility-based time-varying risk explanation.     

Asymmetric positive feedback trading and stock pricing in China

Defining asymmetry of feedback trading (AFC) as the difference between buying-winners and selling-losers intensities, the paper investigates if AFC impacts stock pricing. We show that buying stocks with low AFC and selling stocks with high AFC makes significant positive returns after controlling traditional pricing factors. The return mainly comes from the long leg and cannot be simply attributed to either mispricing, liquidity, or risk premium. Further study shows that the negative impact of AFC on future stock return is reinforced with an increase in past returns, maximum daily return, relative valuation level, asset growth rate, or operating profit rate. As AFC represents retail trading intensity, the results imply that the inactiveness of retail investors may make price relative underreaction to good news and thus lead to positive expected stock return.     

Heterogenous beliefs with sentiments and asset pricing

We present a dynamic equilibrium model with two irrational investors: an extrapolator and a contrarian, whose beliefs regarding the growth rate of dividend stream are biased by their sentiments. The key contribution is to connect two disagreements with the degree of irrationality of investors and to provide novel insights into the predictability of stock return. We show that the higher level of sentiment disagreement is, the more stock price is overvalued. However, the future stock price will decline because the extrapolator’s sentiment will cool down over time. Therefore, the sentiment disagreement negatively predicts future return. At the meanwhile, our model not only shows that the survey expectations about cashflows increase the variations in asset price and dampen the corresponding volatility, but also helps to explain the mixed results about the relationship between the investors’ belief dispersions and stock return predictability.     

Investigating the effectiveness of convertible bonds in reducing agency costs: A Monte-Carlo approach

Simulation and option pricing techniques are used to value the marginal effect of asset risk on stock value. I find the optimal mix of stock, debt and convertible bonds that reduces this marginal effect to zero. At this optimal point the agency costs of debt are minimized. The incentive to add risky projects that arises from ordinary debt is offset by the incentive to ignore risky projects that arises from convertible debt.