Showing 1 - 10 of 4,456
This paper highlights two new effects of credit default swap markets (CDS) in a general equilibrium setting. First, when firms' cash flows are correlated, CDSs impact the cost of capital{credit spreads{and investment for all firms, even those that are not CDS reference entities. Second, when...
Persistent link: https://www.econbiz.de/10012992726
The article presents a historical review of the literature related to the empirical problem of excessive risk premium. The risk premium (the difference between the return on equities and risk-free rate) observed in financial markets cannot be reconciled with theoretical models of financial...
Persistent link: https://www.econbiz.de/10011539760
The present paper considers a class of general equilibrium economics when the primitive uncertainty model features uncertainty about continuous-time volatility. This requires a set of mutually singular priors, which do not share the same null sets. For this setting we introduce an appropriate...
Persistent link: https://www.econbiz.de/10010212527
In this paper we analyze in what way the demand generated by dynamic hedging strategies affects the equilibrium prices of the underlying asset. We derive an explicit expression for the transformation of market volatility under the impact of hedging. It turns out that market volatility increases...
Persistent link: https://www.econbiz.de/10005841370
Asset prices have been found to respond to unpredicted changes in macroeconomic variables in a number of studies. This paper focuses on the relationship between economic factors and the stock market for a small open economy, namely Canada. Exchange risk is observed to have a significant impact...
Persistent link: https://www.econbiz.de/10010616908
This study develops a multi-factor framework where not only market risk is considered but also potential changes in the investment opportunity set. Although previous studies find no clear evidence about a positive and significant relation between return and risk, favourable evidence can be...
Persistent link: https://www.econbiz.de/10010944726
Does the presence of arbitrageurs decrease equilibrium asset price volatility? I study an economy with arbitrageurs, informed investors, and noise traders. Arbitrageurs face a trade-off between arbitrage and inference: they would like to buy assets in response to temporary price declines (the...
Persistent link: https://www.econbiz.de/10010283435
We explore the cross-sectional pricing of volatility risk by decomposing equity market volatility into short- and long-run components. Our finding that prices of risk are negative and significant for both volatility components implies that investors pay for insurance against increases in...
Persistent link: https://www.econbiz.de/10010283455
We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model...
Persistent link: https://www.econbiz.de/10010283537
We study a new class of three-factor affine option pricing models with interdependent volatilitydynamics and a stochastic skewness component unrelated to volatility shocks. Theseproperties are useful in order (i) to model a term structure of implied volatility skews moreconsistent with the data...
Persistent link: https://www.econbiz.de/10009522187