Model Misspecification and Underdiversification

In this paper, we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification. We develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio, but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks. We find that when the overall ambiguity about the joint distribution of returns is high, then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean‐variance portfolio.     

Price Convexity and Skewness

This paper develops a model in which investors who are prohibited from short selling agree to disagree on the precision of a publicly observed signal. The model implies that the equilibrium price is a convex function of the public signal. The model predicts that (1) the stock price reacts more to good news than to bad news; (2) the skewness of stock returns is positively correlated with contemporaneous returns, but negatively correlated with lagged returns; (3) short sale constraints increase rather than decrease skewness; and (4) disagreement about information precision increases skewness. Empirical tests conducted find supportive evidence for all these predictions.     

Skewness and Stock Option Prices

Abstract

In the classical Black-Scholes model, the logarithm of the stock price has a normal distribution, which excludes skewness. In this paper we consider models that allow for skewness. We propose an option-pricing formula that contains a linear adjustment to the Black-Scholes formula. This approximation is derived in the shifted Poisson model, which is a complete market model in which the exact option price has some undesirable features. The same formula is obtained in some incomplete market models in which it is assumed that the price of an option is defined by the Esscher method. For a European call option, the adjustment for skewness can be positive or negative, depending on the strike price.     

Utility and the Skewness of Return in Gambling

This paper demonstrates that the intuitively appealing argument based on the postulated trade-off between expected return, variance and skewness of return of a risk-averse gambler does not provide an explanation of observed betting behaviour. It is shown how the expected utility of a representative gambler faced with a single-prized outcome event can be expressed in terms of the mean and variance of return, the mean and skewness of return or, generally, of the mean and any other single moment of return: and the standard practice of taking a Taylor series expansion/approximation of the expected utility involving moments of return is usually incorrect. Previous analyses have suggested that a punter will accept a lower mean return for higher skewness and this work seems to have involved invalid expansions of the utility function. The upshot is that with certain utility functions which have been used in a number of studies, any analysis based on expansion and estimation of the derivatives of the utility function may be valid only for data based on odds-on favourites and not for longshots.     

On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation

Recent studies in the empirical finance literature have reportedevidence of two types of asymmetries in the joint distributionof stock returns. The first is skewness in the distributionof individual stock returns. The second is an asymmetry in thedependence between stocks: stock returns appear to be more highlycorrelated during market downturns than during market upturns.In this article we examine the economic and statistical significanceof these asymmetries for asset allocation decisions in an out-of-samplesetting. We consider the problem of a constant relative riskaversion (CRRA) investor allocating wealth between the risk-freeasset, a small-cap portfolio, and a large-cap portfolio. Weuse models that can capture time-varying moments up to the fourthorder, and we use copula theory to construct models of the time-varyingdependence structure that allow for different dependence duringbear markets than bull markets. The importance of these twoasymmetries for asset allocation is assessed by comparing theperformance of a portfolio based on a normal distribution modelwith a portfolio based on a more flexible distribution model.For investors with no short-sales constraints, we find thatknowledge of higher moments and asymmetric dependence leadsto gains that are economically significant and statisticallysignificant in some cases. For short sales-constrained investorsthe gains are limited.     

Ex Ante Skewness and Expected Stock Returns

We use option prices to estimate ex ante higher moments of the underlying individual securities’ risk‐neutral returns distribution. We find that individual securities’ risk‐neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross‐section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co‐moments, individual securities’ skewness matters.     

What's in Your 403(b)? Academic Retirement Plans and the Costs of Underdiversification

Sponsors of defined contribution retirement plans typically limit the investment choices of plan participants to a small number of investment managers and a limited number of investment vehicles. Such restrictions may limit excessive risk-taking by participants but also may preclude opportunities for efficient diversification. Many college and university 403 (b) plans have restricted investment choices to the retirement annuities offered by TIAA-CREF, the current manager of over half of all 403(b) contributions. Using 10 years of historical data, we study the efficiency of this TIAA-CREF opportunity set relative to a larger set that includes several standard index funds. Extrapolations must be interpreted -with caution. Assuming optimal rebalancing, depending on loss aversion and diversification constraints, the historical sample of returns implies that over a 20-year remaining work life, an employee -with an expanded menu that includes standard index funds could gain over 40% in terminal wealth compared to one who is restricted to TIAA-CREF retirement annuities. Even when a naive diversification strategy of equally weighting (1/n) all available funds is used, the expandedmenu outperforms the restricted portfolio by more than 25% over20years. These differences generally are significant at conventional levels based on parametric and nonparametric testing and do not appear to result from idiosyncratic market performance durinz the sample period.     

Conglomerate Investment,Skewness, and the CEO Long‐Shot Bias

Do behavioral biases of executives matter for corporate investment decisions? Using segment‐level capital allocation in multisegment firms (“conglomerates”) as a laboratory, we show that capital expenditure is increasing in the expected skewness of segment returns. Conglomerates invest more in high‐skewness segments than matched stand‐alone firms, and trade at a discount, which indicates overinvestment that is detrimental to shareholder wealth. Using geographical variation in gambling norms, we find that the skewness‐investment relation is particularly pronounced when CEOs are likely to find long shots attractive. Our findings suggest that CEOs allocate capital with a long‐shot bias.     

Skewness and Kurtosis Implied by Option Prices: A Correction

Corrado and Su (1996) provide skewness and kurtosis adjustment terms for the Black‐Scholes model, using a Gram‐Charlier expansion of the normal density function. In this note we provide a correction to the expression for the skewness coefficient and illustrate the effect on call option prices of the error found.     

Skewness of Returns, Capital Adequacy, and Mortgage Lending

We calibrate a simulation model of credit value-at-risk for mortgage lending to UK experience. Simulations to capture the skewness of returns that might arise in the context of a financial crisis suggest that the IRB calculations of the new Basel Accord can substantially understate prudential capital adequacy. The same model shows that raising capital requirements has only a small impact on bank funding costs. We conclude that Pillar 2 supervisory review should increase capital requirements above IRB levels for secured bank assets—those whose returns can potentially fall furthest, relative to other, normally “riskier” assets, in extreme outcomes. JEL classification: G21, G28, R31. Presented at the December 2003 conference at the University of Tor Vegata, Rome. We are grateful for comments from William Lang, Mario Onarato, Larry Wall, and from an anonymous referee. All errors and omissions are our own responsibility. “The lady doth protest too much, methinks. The Queen's response to the players in Hamlet, Act 3, scene 2.     

Liquidity,Skewness and Stock Returns: Evidence from Chinese Stock Market

In this paper, a capital asset pricing model (CAPM) incorporating liquidity and skewness factors is proposed and tested by using the Chinese stock market data. The empirical results indicate that, under various market conditions, the liquidity-adjusted three-moment CAPM provides a better fit to the realized returns of various stock portfolios. Overall, this research reveals that illiquidity cost, liquidity risk and as well as skewness have important impacts on asset pricing in the Chinese stock market.     

Skewness and leptokurtosis in GARCH-typed VaR estimation of petroleum and metal asset returns

This paper utilizes the most flexible skewed generalized t (SGT) distribution for describing petroleum and metal volatilities that are characterized by leptokurtosis and skewness in order to provide better approximations of the reality. The empirical results indicate that the forecasted Value-at-Risk (VaR) obtained using the SGT distribution provides the most accurate out-of-sample forecasts for both the petroleum and metal markets. With regard to the unconditional and conditional coverage tests, the SGT distribution produces the most appropriate VaR estimates in terms of the total number of rejections; this is followed by the nonparametric distribution, generalized error distribution (GED), and finally the normal distribution. Similarly, in the dynamic quantile test, the VaR estimates generated by the SGT and nonparametric distributions perform better than that generated by other distributions. Finally, in the superior predictive test, the SGT distribution has significantly lower capital requirements than the nonparametric distribution for most commodities.     

Equilibrium Forward Curves for Commodities

We develop an equilibrium model of the term structure of forward prices for storable commodities. As a consequence of a nonnegativity constraint on inventory, the spot commodity has an embedded timing option that is absent in forward contracts. This option's value changes over time due to both endogenous inventory and exogenous transitory shocks to supply and demand. Our model makes predictions about volatilities of forward prices at different horizons and shows how conditional violations of the 'Samuelson effect' occur. We extend the model to incorporate a permanent second factor and calibrate the model to crude oil futures data.     

信息不对称与上市公司股权再融资偏好

大量理论和实证研究表明：上市公司应该避免采用股权再融资方式筹集资金，以减少对公司价值产生的负面影响。但是国内外仍有不少上市公司采用股权再融资，我国还呈现强烈的股权再融资偏好，这说明上市公司采用股权再融资存在一定理论依据。运用信息经济学理论，从信息不对称角度对此现象进行解释，结论为信息不对称产生的“逆向选择”和“道德风险”给上市公司采用股权再融资方式找到充分的理由。我国不合理的制度背景，产生更加严重的信息不对称，造成我国上市公司强烈的股权再融资偏好。     

Ownership Structure and Dividend Preference

Most Chinese listed companies have been transformed from state-owned enterprises; the resulting institutional transformation is characterized by the emergence of highly concentrated ownership and state-owned shares, which may exert an influence on corporate finance. We examine the relationship between ownership structure and cash dividend preference and then reexamine the same relationship with different levels of growth opportunities. The results reveal a positive relationship between cash dividend preference and state ownership, but the same relationship exists only in firms facing lower levels of investment opportunity. However, the ratio of employee shares and tradable shares correlates significantly and negatively with cash dividend preference.     

Affluent mature consumers: Preference and patronisation for financial services

Mature consumers have long been recognised as an important segment of market that no marketers of financial-service providers could ignore. The segment itself, however, is not homogeneous. Our study further segments the market basing on income and contrasts the differences between upscale mature consumers and lower scale ones in terms of their preference and patronisation for financial services. The study based on two large-scale studies designed to generate information that would fill gaps in our existing knowledge about upscale older consumers. Implications are discussed for marketers of financial services to fine-tune their differentiation strategies.     

关系型融资模式的均衡分析和均衡的突破

距离型融资模式是未来融资方式的一个合理选择,但在我国该模式并无法如预期简单实现,因为关系型融资模式是一个均衡,而模式的转换是一个均衡的突破.我国的企业偏好债务融资而非股本融资,银行有维持和发展银企关系的激励,国家则通过金融支持来保护和控制银行,三方都没有积极性偏离均衡.均衡的突破关键在于政银关系.政府退出"金融支持"具有必要性、合理性和可行性.另外,缩小"破产罚金",WTO的冲击,也有助于该均衡的瓦解.     

Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets

In models where both investors and securities are subject to differential taxation, there may be no set of prices that rule out infinite gains to trade, or “tax arbitrage.” This paper characterizes the joint restrictions on financial-asset returns and investors' tax schedules that preclude tax arbitrage in the absence of short-sale constraints. The authors show that, if there exists any configuration of marginal tax rates on investors' tax schedules that rule out infinite gains to trade, then “no-tax-arbitrage” prices will exist. They also show that the existence of “no-tax-arbitrage” prices ensures the existence of equilibrium prices.     

近代西方金融均衡理论:进展与评述

在全球经济失衡,国内经济增长减速、物价上涨的大背帚下,经济的内外均衡问题已成为政策制定者的重要难题。本文旨在系统地梳理货币均衡、利率均衡以及内外均衡等西方金融均衡理论,以便更有效地研究制定解决内外均衡问题的经济政策。