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Author: William N. Goetzmann Publisher: Oxford University Press ISBN: 0195148142 Category : Business & Economics Languages : en Pages : 568
Book Description
This book aims to create a strong understanding of the empirical basis for the equity risk premium. Through the research and anaylsis of two scholars who are experts in this field, this volume presents the key issues that are paramount to investors, including whether or not to use historical data as a method of equity investing, and can the equity premium reflect changes in fundamental values and cash flows of the market.
Author: William N. Goetzmann Publisher: Oxford University Press ISBN: 0195148142 Category : Business & Economics Languages : en Pages : 568
Book Description
This book aims to create a strong understanding of the empirical basis for the equity risk premium. Through the research and anaylsis of two scholars who are experts in this field, this volume presents the key issues that are paramount to investors, including whether or not to use historical data as a method of equity investing, and can the equity premium reflect changes in fundamental values and cash flows of the market.
Author: Seunghan Lee Publisher: ISBN: Category : Cash flow Languages : en Pages : 99
Book Description
This dissertation studies the role of cash flow in explaining stock price variations and the determination of equity premium after correcting for the measurement error of cash flow growth. In Chapter 1, we incorporate price-total payout (dividends plus repurchases) ratio into the models of Binsbergen and Koijen (2010) and Campbell and Ammer (1993) to reassess the role of cash flow in stock price movement. We find that the existing results of a high persistence in expected returns and a strong dependence of stock price variation on discount rates are partly attributable to the use of price-dividend ratio with measurement error as a predictor of stock returns. The incorporation of price-total payout ratio enables the models i) to improve an in-sample goodness of fit for return and cash flow growth, ii) to produce a lower persistence of expected returns, which leads to a smaller shock to stock prices from the discount rate channel, iii) to show a higher contribution of cash flow channel to stock price movement in terms of variations in price-cash flow ratio and unexpected return. These results apply to medium and large cap portfolios as well as to aggregate market index. In Chapter 2, we explore the effects on stock market variation of other factors than stock repurchases that could account for the non-stationarity of price-dividend ratio by incorporating regime shifts in the mean of price-total payout ratio into the models of Binsbergen and Koijen (2010) and Campbell and Ammer (1993). Compared to the results of Chapter 1, we achieve i) an improvement in in-sample goodness of fit for return and cash flow growth, ii) a lower persistence and higher volatility of expected returns, iii) stronger role of cash flow channel in stock market variation, all of which show that not only stock repurchases but also other structural factors such as persistent decline in consumption volatility affecting the relationship between stock prices and cash flows should be taken into account when we attempt to investigate the sources of stock price variations. In Chapter 3, we incorporate price-total payout ratio and endogenously generated consumption volatility with regime shifts into the dynamic asset pricing model of Bansal, Kiku, Shaliastovich, and Yaron (2014) (hereafter, "BKSY model"), which stresses the role of a sizable positive risk premium from the macroeconomic volatility channel in explaining the equity premium by introducing the volatility risk into traditional consumption-based asset pricing model. Our extension of the BKSY model provides a different identification of the consumption volatility risk by including the effects of the economic agent's revision of expectation on the volatility states on each of three channels to determine the equity premium. From annual samples of 1930 to 2015, we find that our model shows a much smaller contribution of the consumption volatility risk to the total equity premium, most of which is now explained by the cash flow risk. This finding applies to cross-sectional portfolio returns as well as to aggregate market index return. Our model also indicates that the consumption volatility risk is not large enough to reverse a negative correlation between equity return and human capital return.
Author: Mehdi Karoui Publisher: ISBN: Category : Languages : en Pages :
Book Description
"This thesis consists of three essays that explore alternative approaches to extracting information from option data, and, along somewhat different lines, examine the channels through which liquidity is priced in equity options.The first essay proposes a novel approach to extracting option-implied equity premia, and empirically examines the information content of these risk premia for forecasting the stock market return. Our approach does not require specifying the functional form of the pricing kernel, and does not impose any restrictions on investors' preferences. We only assume the existence of put and call options which complete the market, and show that the implied equity premium can be inferred from expected excess returns on a portfolio of options. An empirical investigation of S&P 500 index options yields the following conclusions: (i) the implied equity premium predicts stock market returns; (ii) the implied equity premium consistently outperforms variables commonly used in the forecasting literature both in- and out-of-sample; (iii) the implied equity premium is positively related to future returns and negatively related to current returns, as theoretically expected.The second essay studies the effect of illiquidity on equity option returns. Illiquidity is well-known to be a significant determinant of stock and bond returns. We are the first to report on illiquidity premia in equity option markets using a large cross-section of firms. An increase in option illiquidity decreases the current option price and predicts higher expected delta-hedged option returns. This effect is statistically and economically significant, and it is consistent with existing evidence that market makers in the equity options market hold net long positions. The illiquidity premium is robust across puts and calls, across maturities and moneyness, as well as across different empirical approaches. It is also robust when controlling for various firm-specific variables including a standard measure of illiquidity of the underlying stock. For long term options, we find evidence of a liquidity risk factor. In the third essay, we demonstrate that in multifactor asset pricing models, prices of risk for factors that are nonlinear functions of the market return can be readily obtained using data on index returns and index options. We apply this general result to the measurement of the conditional price of coskewness and cokurtosis risk. The price of coskewness risk corresponds to the spread between the physical and the risk-neutral second moments, and the price of cokurtosis risk corresponds to the spread between the physical and the risk-neutral third moments. Estimates of these prices of risk have the expected sign, and they lead to reasonable risk premia. An out-of-sample analysis of factor models with coskewness and cokurtosis risk indicates that the new estimates of the price of risk improve the models. performance. The models also robustly outperform competitors such as the CAPM and the Fama-French model." --
Author: Stephen D. Hassett Publisher: John Wiley & Sons ISBN: 1118118618 Category : Business & Economics Languages : en Pages : 210
Book Description
A radical, definitive explanation of the link between loss aversion theory, the equity risk premium and stock price, and how to profit from it The Risk Premium Factor presents and proves a radical new theory that explains the stock market, offering a quantitative explanation for all the booms, busts, bubbles, and multiple expansions and contractions of the market we have experienced over the past half-century. Written by Stephen D. Hassett, a corporate development executive, author and specialist in value management, mergers and acquisitions, new venture strategy, development, and execution for high technology, SaaS, web, and mobile businesses, the book convincingly demonstrates that the equity risk premium is proportional to long-term Treasury yields, establishing a connection to loss aversion theory. Explains stock prices from 1960 through the present including the 2008/09 "market meltdown" Shows how the S&P 500 has consistently reverted to values predicted by the model Solves the equity premium puzzle by showing that it is consistent with findings on loss aversion Demonstrates that three factors drive valuation and stock price: earnings, long term growth, and interest rates Understanding the stock market is simple. By grasping the simplicity, business leaders, corporate decision makers, private equity, venture capital, professional, and individual investors will fully understand the system under which they operate, and find themselves empowered to make better decisions managing their businesses and investment portfolios.
Author: Jaroslav Horvath Publisher: ISBN: Category : Languages : en Pages : 132
Book Description
This dissertation analyzes business cycles and international asset pricing under disaster risk. In the first chapter, I use annual consumption and financial data for 31 countries over 140 years and I document that developing countries exhibit a more volatile consumption and a significantly larger equity premium. By employing a Bayesian Markov Chain Monte Carlo approach, I estimate an empirical model of macroeconomic disasters - low-probability events with disastrous consequences such as the Great Depression - in developing and high-income countries. I find that developing countries have a higher overall probability of entering a disaster and that they are also much more likely to enter an individual disaster such as a sovereign debt crisis. Disasters in high-income countries are shown to be shorter, on average, but more severe and uncertain. Group heterogeneity in disaster parameters allows me to generate a substantial equity premium for both groups of countries. Disaster contagion plays a vital role in explaining the equity premium puzzle for high-income countries. The model-simulated correlations of equity premium within each group of countries are qualitatively in line with data. The second chapter provides evidence that the U.S. stock market returns not only exhibit large negative skewness, but that they also provide poor payoffs during deep consumption recessions. Using out-of-the-money S&P 500 index options, I obtain a hedged risk premium and show that the hedged risk premium captures the equity risk premium during normal times. I isolate the disaster risk premium as the difference between the total equity risk premium and the hedged risk premium. In addition, I illustrate that the risk premium due to disasters explains about eighty percent of the total equity risk premium. In the cross-section of stock returns, I find that stocks that are more negatively related to the disaster risk premium yield considerably higher subsequent returns. However, this finding is not robust to adjusting for Fama-French price factors. I also find a little predictive power of the disaster risk premium with respect to the aggregate stock market returns due to the lack of autocorrelation in the disaster risk premium. The third chapter recognizes the importance of a large informal economy for business cycles in emerging countries. I show that a two-sector real business cycle model of a small open economy with a poorly measured informal sector, Cobb-Douglas utility function, and country spread fluctuations accounts for the low volatility of hours worked and large relative volatility of consumption to output in emerging countries. Due to the non-separability between consumption and labor supply, the model cannot explain the countercyclical real interest rates and trade balance that prevail in developing countries. The results suggest that GHH preferences are necessary to generate countercyclical real interest rates and trade balance in a neoclassical setting with working capital constraint and exogenous movements in real interest rates.
Author: William N. Goetzmann
Author: William N. Goetzmann
Author: Seunghan Lee
Author: Jun Sato
Author: Hyo-won Ahn
Author: Mohamed Mehdi Rahoui
Author: Mehdi Karoui
Author: Stephen D. Hassett
Author: Amit Goyal
Author: Jiang Luo
Author: Jaroslav Horvath