Journal ArticleDOI
Uncertainty, Time-Varying Fear, and Asset Prices
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In this paper, the authors construct an equilibrium model that captures salient properties of index option prices, equity returns, variance, and the risk-free rate, and show empirically consistent fundamentals and reasonable model uncertainty explain option prices and the variance premium.Abstract:
I construct an equilibrium model that captures salient properties of index option prices, equity returns, variance, and the risk-free rate. A representative investor makes consumption and portfolio choice decisions that are robust to his uncertainty about the true economic model. He pays a large premium for index options because they hedge important model misspecification concerns, particularly concerning jump shocks to cash flow growth and volatility. A calibration shows that empirically consistent fundamentals and reasonable model uncertainty explain option prices and the variance premium. Time variation in uncertainty generates variance premium fluctuations, helping explain their power to predict stock returns.read more
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Journal ArticleDOI
Risk, Uncertainty and Monetary Policy
TL;DR: This article decompose the VIX into two components, a proxy for risk aversion and expected stock market volatility (uncertainty), and find that a lax monetary policy decreases both risk aversion, with the former effect being stronger.
Journal ArticleDOI
Risk, Uncertainty and Monetary Policy
TL;DR: This paper decompose the VIX into two components, a proxy for risk aversion and expected stock market volatility (uncertainty), and find that a lax monetary policy decreases both risk aversion, with the former effect being stronger.
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Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most
TL;DR: This article examined the relation between firm-level transparency, stock market liquidity, and valuation across a variety of international settings and found that increased liquidity is associated with lower implied cost of capital and with higher valuation.
Journal ArticleDOI
Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most
TL;DR: This paper examined the relation between firm-level transparency, stock market liquidity, and valuation across countries, focusing on whether the relation varies with a firm's characteristics and economic environment, concluding that increased liquidity is associated with lower implied cost of capital and with higher valuation.
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The VIX, the variance premium and stock market volatility
Marie Hoerova,Geert Bekaert +1 more
TL;DR: This article decompose the squared VIX index, derived from US SP options prices, into the conditional variance of stock returns and the equity variance premium, and then examine the predictive power of the VIX and its two components for stock market returns, economic activity and financial instability.
References
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Book
Risk, Uncertainty and Profit
TL;DR: In Risk, Uncertainty and Profit, Frank Knight explored the riddle of profitability in a competitive market profit should not be possible under competitive conditions, as the entry of new entrepreneurs would drive prices down and nullify margins, however evidence abounds of competitive yet profitable markets as mentioned in this paper.
Journal ArticleDOI
Risk, Ambiguity, and the Savage Axioms
TL;DR: The notion of "degrees of belief" was introduced by Knight as mentioned in this paper, who argued that people tend to behave "as though" they assigned numerical probabilities to events, or degrees of belief to the events impinging on their actions.
Journal ArticleDOI
THE EQUITY PREMIUM A Puzzle
Rajnish Mehra,Edward C. Prescott +1 more
TL;DR: This paper showed that an equilibrium model which is not an Arrow-Debreu economy will be the one that simultaneously rationalizes both historically observed large average equity return and the small average risk-free return.
Journal ArticleDOI
Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
Larry G. Epstein,Stanley E. Zin +1 more
TL;DR: In this paper, a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries is developed, which allows risk attitudes to be disentangled from the degree of inter-temporal substitutability, leading to a model of asset returns in which appropriate versions of both the atemporal CAPM and the inter-time consumption-CAPM are nested as special cases.
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By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
TL;DR: In this paper, a consumption-based model is proposed to explain a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-term horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.
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