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The Cross-Section of Volatility and Expected Returns
TL;DR: This paper examined the pricing of aggregate volatility risk in the cross-section of stock returns and found that stocks with high sensitivities to innovations in aggregate volatility have low average returns, and that stock with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low return.
Abstract: We examine the pricing of aggregate volatility risk in the cross-section of stock returns Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns In addition, we find that stocks with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low average returns This phenomenon cannot be explained by exposure to aggregate volatility risk Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility
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TL;DR: In this article, the authors used a newly developed dataset of daily, value-weighted market returns to construct and analyze the monthly realized volatility of the Athens Stock Exchange (A.S.E.) from 1985 to 2003.
Abstract: Using a newly developed dataset of daily, value-weighted market returns we construct and analyze the monthly realized volatility of the Athens Stock Exchange (A.S.E.) from 1985 to 2003. Our analysis focuses on the distributional and time series properties of the realized volatility series and on assessing the connection between realized volatility and returns through a multi-factor asset pricing model. In particular, we find strong evidence on the existence of a volatility feedback effect and a leverage effect, and on the existence of asymmetries between lagged returns and volatility. Furthermore, we examine the cross-sectional distribution of unconditional loadings on the realized risk factor(s) for different sets of characteristics-sorted common stock portfolios. We find that realized risk is a significantly priced factor in A.S.E. and its high explanatory power for the cross-section of portfolio average returns is independent of any return variation related to the market (CAPM) or size and book-to-market (Fama-French) factors. We discuss our findings in the context of the recent literature on realized volatility and feedback effects, as well as the literature on the pricing power of realized risk
5 citations
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TL;DR: In this paper, a strong link between institutional investors and long-run stock return and operating performance following seasoned equity offerings (SEOs) is found, and the authors conclude that post-SEO underperformance is not due to the SEO per se but rather is a manifestation of more general effects associated with changes in institutional interest in a firm's stock.
Abstract: We document a strong link between institutional investors and long-run stock return and operating performance following seasoned equity offerings (SEOs). Virtually all of the underperformance is confined to the top two quintiles of stocks with the largest increase in number of institutional investors prior to the post-issue underperformance. Moreover, non-SEO stocks with matching changes in institutional investors exhibit similar long-run underperformance to that of SEO stocks. Thus, we conclude that post-SEO underperformance is not due to the SEO per se but rather is a manifestation of more general effects associated with changes in institutional interest in a firm’s stock.
5 citations
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TL;DR: In this article, a cross-sectional model was proposed to forecast corporate earnings, which combines the accuracy of analysts' forecasts with the unbiasedness of a crosssectional model, and showed that using their estimates in the implied cost of capital calculation leads to a substantially stronger correlation with realized returns compared to earnings estimates from extant cross-section models.
Abstract: We propose a novel method to forecast corporate earnings, which combines the accuracy of analysts' forecasts with the unbiasedness of a cross-sectional model. We build on recent insights from the earnings forecasts literature to improve analysts' forecasts in two ways: reducing their sluggishness with respect to information in recent stock price movements and improving their long-term performance. Our model outperforms the most popular methods from the literature in terms of forecast accuracy, bias, and earnings response coefficient. Furthermore, using our estimates in the implied cost of capital calculation leads to a substantially stronger correlation with realized returns compared to earnings estimates from extant cross-sectional models.
5 citations
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TL;DR: The authors examined the information contained in option trading and short selling using a dynamic VAR model and showed that short selling and options trading are complements rather than substitutes, while options traders are relatively more informed.
Abstract: We examine the information contained in option trading and short selling using a dynamic VAR model. First, we address whether options and shorts are complements or substitutes. Contrary to existing event studies around option listing introductions, we show short selling and options trading are complements rather than substitutes. Second, we examine which group is relatively more informed. The results indicate that options traders are relatively more informed. Finally, we examine if options are redundant. Our results indicate that options markets are non-redundant.
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12 Nov 2013TL;DR: In this paper, le Tresor americain a injecte des liquidites dans les institutions financieres dans le cadre du Capital Purchase Program (CPP).
Abstract: La contraction de la liquidite et la paralysie des marches interbancaires durant la crise de 2007 ont conduit a la degradation des bilans des banques. En meme temps les prets bancaires et la production ont souffert de la baisse de demande. Le quasi-effondrement de Bear Steams et la faillite de Lehman Brothers peuvent etre tous les deux caracterises comme des chocs de liquidite qui ont eu un impact plus important sur les entreprises non financieres etant financierement fragiles. Entre 2008 et 2009 le Tresor americain a injecte des liquidites dans les institutions financieres dans le cadre du Capital Purchase Program (CPP). Les resultats montrent que le CPP a favorise les grandes banques dont la faillite potentie~e pouvait accroitre la ftagilite d'ensemble du secteur. Une telle repartition des fonds du CPP a ete efficace du point de vue du contribuable car la probabilite de non-remboursement des fonds de sauvetage a ete reduite au minimum. Cependant, les banques de petite taille qui avaient ete effectivement exposees au marche hypothecaire et aux prets non productifs se sont wes refuser l'aide financiere. Enfin, l'efficacite du CPP a ete analysee dans le chapitre 4 en termes de restauration d'offre de prets bancaires. L'augmentation du niveau de capitalisation est associee a des taux de croissance de prets plus eleves. Pendant la crise les banques-benefciaires du CPP ont montre les taux de croissance de prets plus eleves que les banques qui n'ont pas beneficie du CPP. En plus les banques-beneficiaires du CPP qui ont rachetes leurs actions aupres du Tresor americain ont octroye plus de prets que les banques-beneficiaires qui n'ont pas rembourse les fonds du CPP.
5 citations
References
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TL;DR: In this paper, the authors present some additional tests of the mean-variance formulation of the asset pricing model, which avoid some of the problems of earlier studies and provide additional insights into the nature of the structure of security returns.
Abstract: Considerable attention has recently been given to general equilibrium models of the pricing of capital assets Of these, perhaps the best known is the mean-variance formulation originally developed by Sharpe (1964) and Treynor (1961), and extended and clarified by Lintner (1965a; 1965b), Mossin (1966), Fama (1968a; 1968b), and Long (1972) In addition Treynor (1965), Sharpe (1966), and Jensen (1968; 1969) have developed portfolio evaluation models which are either based on this asset pricing model or bear a close relation to it In the development of the asset pricing model it is assumed that (1) all investors are single period risk-averse utility of terminal wealth maximizers and can choose among portfolios solely on the basis of mean and variance, (2) there are no taxes or transactions costs, (3) all investors have homogeneous views regarding the parameters of the joint probability distribution of all security returns, and (4) all investors can borrow and lend at a given riskless rate of interest The main result of the model is a statement of the relation between the expected risk premiums on individual assets and their "systematic risk" Our main purpose is to present some additional tests of this asset pricing model which avoid some of the problems of earlier studies and which, we believe, provide additional insights into the nature of the structure of security returns The evidence presented in Section II indicates the expected excess return on an asset is not strictly proportional to its B, and we believe that this evidence, coupled with that given in Section IV, is sufficiently strong to warrant rejection of the traditional form of the model given by (1) We then show in Section III how the cross-sectional tests are subject to measurement error bias, provide a solution to this problem through grouping procedures, and show how cross-sectional methods are relevant to testing the expanded two-factor form of the model We show in Section IV that the mean of the beta factor has had a positive trend over the period 1931-65 and was on the order of 10 to 13% per month in the two sample intervals we examined in the period 1948-65 This seems to have been significantly different from the average risk-free rate and indeed is roughly the same size as the average market return of 13 and 12% per month over the two sample intervals in this period This evidence seems to be sufficiently strong enough to warrant rejection of the traditional form of the model given by (1) In addition, the standard deviation of the beta factor over these two sample intervals was 20 and 22% per month, as compared with the standard deviation of the market factor of 36 and 38% per month Thus the beta factor seems to be an important determinant of security returns
2,899 citations
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TL;DR: In this paper, the generalized autoregressive conditionally heteroskedastic (GARCH) model of returns is modified to allow for volatility feedback effect, which amplifies large negative stock returns and dampens large positive returns, making stock returns negatively skewed and increasing the potential for large crashes.
Abstract: It is sometimes argued that an increase in stock market volatility raises required stock returns, and thus lowers stock prices. This paper modifies the generalized autoregressive conditionally heteroskedastic (GARCH) model of returns to allow for this volatility feedback effect. The resulting model is asymmetric, because volatility feedback amplifies large negative stock returns and dampens large positive returns, making stock returns negatively skewed and increasing the potential for large crashes. The model also implies that volatility feedback is more important when volatility is high. In U.S. monthly and daily data in the period 1926-88, the asymmetric model fits the data better than the standard GARCH model, accounting for almost half the skewness and excess kurtosis of standard monthly GARCH residuals. Estimated volatility discounts on the stock market range from 1% in normal times to 13% after the stock market crash of October 1987 and 25% in the early 1930's. However volatility feedback has little effect on the unconditional variance of stock returns.
1,793 citations
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TL;DR: In this article, the authors examined a class of continuous-time models that incorporate jumps in returns and volatility, in addition to diffusive stochastic volatility, and developed a likelihood-based estimation strategy and provided estimates of model parameters, spot volatility, jump times and jump sizes using both S&P 500 and Nasdaq 100 index returns.
Abstract: This paper examines a class of continuous-time models that incorporate jumps in returns and volatility, in addition to diffusive stochastic volatility. We develop a likelihood-based estimation strategy and provide estimates of model parameters, spot volatility, jump times and jump sizes using both S&P 500 and Nasdaq 100 index returns. Estimates of jumps times, jump sizes and volatility are particularly useful for disentangling the dynamic effects of these factors during periods of market stress, such as those in 1987, 1997 and 1998. Using both formal and informal diagnostics, we find strong evidence for jumps in volatility, even after accounting for jumps in returns. We use implied volatility curves computed from option prices to judge the economic differences between the models. Finally, we evaluate the impact of estimation risk on option prices and find that the uncertainty in estimating the parameters and the spot volatility has important, though very different, effects on option prices.
1,040 citations
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TL;DR: In this article, a new way to generalize the insights of static asset pricing theory to a multi-period setting is proposed, which uses a loglinear approximation to the budget constraint to substitute out consumption from a standard intertemporal asset pricing model.
Abstract: This paper proposes a new way to generalize the insights of static asset pricing theory to a multi-period setting. The paper uses a loglinear approximation to the budget constraint to substitute out consumption from a standard intertemporal asset pricing model. In a homoskedastic lognormal selling, the consumption-wealth ratio is shown to depend on the elasticity of intertemporal substitution in consumption, while asset risk premia are determined by the coefficient of relative risk aversion. Risk premia are related to the covariances of asset returns with the market return and with news about the discounted value of all future market returns.
805 citations
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TL;DR: This article investigated whether market-wide liquidity is a state variable important for asset pricing and found that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity.
Abstract: This study investigates whether market-wide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. Over a 34-year period, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5% annually, adjusted for exposures to the market return as well as size, value, and momentum factors.
789 citations