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Author: Ruojun Wu Publisher: ISBN: Category : Bayesian statistical decision theory Languages : en Pages : 137
Book Description
This dissertation studies the effect of parameter uncertainty on the return predictability and volatility of the stock market. The first two chapters focus on the decomposition of market volatility, and the third chapter studies the return predictability. When facing imperfect information, the investors tend to form a learning scheme that encompasses both historical data and prior beliefs. In the variance decomposition framework, the introducing of learning directly impacts the way that return forecasts are revised and consequently the relative component of market volatility based on these forecasts, namely the price movements from revision on future discount rates and those from future cash flows. According to the empirical study in Chapter 1, the former is not necessarily the major driving force of market volatility, which provides an alternative view on what moves stock prices. Learning is modeled and estimated by Bayesian method. Chapter 2 follows the topic in Chapter 1 and studies the role of persistent state variables in return decomposition in order to provide more robust inference on variance decomposition. In Chapter 3 we propose to utilize theoretical constraints to help predict market returns when in sample data is very noisy and creates model uncertainty for the investors. The constraints are also incorporated by Bayesian method. We show in the out-of-sample forecast experiment that models with theoretical constraints produce better forecasts.
Author: Ruojun Wu Publisher: ISBN: Category : Bayesian statistical decision theory Languages : en Pages : 137
Book Description
This dissertation studies the effect of parameter uncertainty on the return predictability and volatility of the stock market. The first two chapters focus on the decomposition of market volatility, and the third chapter studies the return predictability. When facing imperfect information, the investors tend to form a learning scheme that encompasses both historical data and prior beliefs. In the variance decomposition framework, the introducing of learning directly impacts the way that return forecasts are revised and consequently the relative component of market volatility based on these forecasts, namely the price movements from revision on future discount rates and those from future cash flows. According to the empirical study in Chapter 1, the former is not necessarily the major driving force of market volatility, which provides an alternative view on what moves stock prices. Learning is modeled and estimated by Bayesian method. Chapter 2 follows the topic in Chapter 1 and studies the role of persistent state variables in return decomposition in order to provide more robust inference on variance decomposition. In Chapter 3 we propose to utilize theoretical constraints to help predict market returns when in sample data is very noisy and creates model uncertainty for the investors. The constraints are also incorporated by Bayesian method. We show in the out-of-sample forecast experiment that models with theoretical constraints produce better forecasts.
Author: Chengbo Fu Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
This dissertation consists of three essays on stock market volatility. In the first essay, we show that investors will have the information in the idiosyncratic volatility spread when using two different models to estimate idiosyncratic volatility. In a theoretical framework, we show that idiosyncratic volatility spread is related to the change in beta and the new betas from the extra factors between two different factor models. Empirically, we find that idiosyncratic volatility spread predicts the cross section of stock returns. The negative spread-return relation is independent from the relation between idiosyncratic volatility and stock returns. The result is driven by the change in beta component and the new beta component of the spread. The spread-relation is also robust when investors estimate the spread using a conditional model or EGARCH method. In the second essay, the variance of stock returns is decomposed based on a conditional Fama-French three-factor model instead of its unconditional counterpart. Using time-varying alpha and betas in this model, it is evident that four additional risk terms must be considered. They include the variance of alpha, the variance of the interaction between the time-varying component of beta and factors, and two covariance terms. These additional risk terms are components that are included in the idiosyncratic risk estimate using an unconditional model. By investigating the relation between the risk terms and stock returns, we find that only the variance of the time-varying alpha is negatively associated with stock returns. Further tests show that stock returns are not affected by the variance of time-varying beta. These results are consistent with the findings in the literature identifying return predictability from time-varying alpha rather than betas. In the third essay, we employ a two-step estimation method to separate the upside and downside idiosyncratic volatility and examine its relation with future stock returns. We find that idiosyncratic volatility is negatively related to stock returns when the market is up and when it is down. The upside idiosyncratic volatility is not related to stock returns. Our results also suggest that the relation between downside idiosyncratic volatility and future stock returns is negative and significant. It is the downside idiosyncratic volatility that drives the inverse relation between total idiosyncratic volatility and stock returns. The results are consistent with the literature that investor overreact to bad news and underreact to good news.
Author: Stefan A. Jacewitz Publisher: ISBN: Category : Languages : en Pages :
Book Description
This dissertation collects two papers regarding the econometric and economic theory and testing of the predictability of asset returns. It is widely accepted that stock returns are not only predictable but highly so. This belief is due to an abundance of existing empirical literature finding often overwhelming evidence in favor of predictability. The common regressors used to test predictability (e.g., the dividend-price ratio for stock returns) are very persistent and their innovations are highly correlated with returns. Persistence when combined with a correlation between innovations in the regressor and asset returns can cause substantial over-rejection of a true null hypothesis. This result is both well documented and well known. On the other hand, stochastic volatility is both broadly accepted as a part of return time series and largely ignored by the existing econometric literature on the predictability of returns. The severe effect that stochastic volatility can have on standard tests are demonstrated here. These deleterious effects render standard tests invalid. However, this problem can be easily corrected using a simple change of chronometer. When a return time series is read in the usual way, at regular intervals of time (e.g., daily observations), then the distribution of returns is highly non-normal and displays marked time heterogeneity. If the return time series is, instead, read according to a clock based on regular intervals of volatility, then returns will be independent and identically normally distributed. This powerful result is utilized in a unique way in each chapter of this dissertation. This time-deformation technique is combined with the Cauchy t-test and the newly introduced martingale estimation technique. This dissertation finds no evidence of predictability in stock returns. Moreover, using martingale estimation, the cause of the Forward Premium Anomaly may be more easily discerned.
Author: Gregory William Eaton Publisher: ISBN: Category : Languages : en Pages : 304
Book Description
I examine the effects of stock liquidity on asset values and whether aggregate stock liquidity and other forecasting instruments predict stock market returns. In the first chapter, I use tick-size reductions in equity markets as sources of exogenous variation in liquidity to examine the causal effect of transaction costs on firm value. In contrast to the prevailing view, I find that increased liquidity has a marginal or, in some cases, negative impact on firm value. The second chapter evaluates the predictive content of aggregate liquidity for economic activity and stock returns. We decompose illiquidity into a component capturing aggregate volatility and a volatility-adjusted component and find strong evidence that the component of illiquidity uncorrelated with volatility forecasts stock market returns. The third chapter provides new evidence on the stock return forecasting performance of alternative corporate payout yields. We find that the net payout yield forecasts stock returns and generally outperforms the commonly used dividend yield. Additionally, we show that the choice of cash flow used to construct the payout yield is economically significant. An agent relying on the incorrect payout measure as a forecasting instrument is willing to pay an economically significant amount to switch to the optimal policy.
Author: Shunlin Liang Publisher: ISBN: Category : Industrial management Languages : en Pages :
Book Description
This dissertation consists of two essays on disaster risk and equity return predictability. The first essay proposes new measures of firm-level and market level disaster risk from deviation of put-call symmetry, which is free from being contaminated by the asymmetry between option traders and equity investors. Compared with other known measures of disaster risk, the market-level disaster risk measure robustly predicts aggregate market returns, with out-of-sample (R^2=6.86%) for the next twelve months. The cross-sectional analysis shows that firm-level disaster risk also explains variations in expected stock returns. Stocks with high firm-level disaster risk earn an annual four-factor subsequent alpha 8.0% higher than stocks with low firm-level disaster risk. I explore potential mechanisms giving rise to these asset pricing facts. The second essay finds that the investor’s learning of higher moments can account for the time-variation, size, and volatility of equity premium. I estimate the investor’s belief on skewness and kurtosis of consumption and dividend growth, and assume investor’s Bayesian learning about a skew student’s t-distribution with unknown fixed parameters. The predictive regressions show that more negative skewness and higher kurtosis predict higher subsequent market excess returns, which implies the investor’s learning generates the time variation of equity premium although the true distribution is static. The calibrated asset pricing model shows that the investor’s learning also explains the size and volatility of the equity premium observed in the data when the investor has a preference for early resolution of uncertainty.
Author: Chan R. Mang Publisher: ISBN: Category : Languages : en Pages : 149
Book Description
My thesis examines return predictability in government bond markets and currency markets. In Chapter 1, I take the term structure model in Cochrane and Piazzesi (2008) and construct currency market prices. The implied currency market prices are then counterfactually volatile and predictable, at least with respect to commonly used predictor variables. Getting the model closer to currency market data means reducing bond risk compensation but doing so nearly eliminates predictability in bond markets. One way to generate sensible time-variation in bond and currency risk-premia allows the volatility of returns to be time-varying. In Chapter 2, I test if alternative forecast rules perform better than the return-forecasting factor of Cochrane and Piazzesi (2008). I compare forecasts assuming all historical data is available to recursively made ones that are revised with the arrival of news. Differences in the two forecast rules systematically move with realized bond risk-premia and forecast mean yield curve levels and short-term interest rates one year ahead not just for the U.S., but also for government bond markets of other industrialized economies. I show that lower long-term rates relative to short-rates in 2004-2005 is consistent with an expected a decline of interest rates by market participants. In Chapter 3, I show that the cross-sectional average spread in the return-forecasting factor of Cochrane and Piazzesi (2005, 2008) can forecast currency risk-premia. However, the return-forecasting factor spread consistent with real-time data does not forecast currency risk-premia. I also find that both currency risk-premia and exchange rate changes have a predictable component that is detected by the information gap, what I call the hidden FX market factor, between forecasts that take as given the full sample of data and those consistent with real-time availability. Controlling for large and transitory exchange rate changes using this information gap make interest rate differentials between the average foreign country and the U.S. positively correlated with dollar appreciation rates, delivering the right sign predicted by uncovered interest parity.
Author: Ruojun Wu
Author: Ruojun Wu
Author: Yuzhao Zhang
Author: Shu Yan
Author: Amit Goyal
Author: Chengbo Fu
Author: Stefan A. Jacewitz
Author: Gregory William Eaton
Author: Bradley Steele Paye
Author: Shunlin Liang
Author: Chan R. Mang