Speculation, in the spirit of Harrison and Kreps [1978], is introduced into a standard real business cycle model. Investors (speculators) hold heterogeneous beliefs about firm growth. Firm ownership, and thus, the firm’s discount factor varies with waves of optimism and leverage. These waves ripple into firm investments in hours. The firm’s discount factor links the equity premium and labor volatility puzzles. We obtain an upper bound to the amplification that can be generated by speculation for any model of beliefs – a factor of 1.5. A calibration based on diagnostic beliefs amplifies hours volatility by a factor of 1.15 and produces a bubble component of 20 percent
{"title":"Speculation-Driven Business Cycles","authors":"Saki Bigio, Eduardo Zilberman","doi":"10.2139/ssrn.3507450","DOIUrl":"https://doi.org/10.2139/ssrn.3507450","url":null,"abstract":"Speculation, in the spirit of Harrison and Kreps [1978], is introduced into a standard real business cycle model. Investors (speculators) hold heterogeneous beliefs about firm growth. Firm ownership, and thus, the firm’s discount factor varies with waves of optimism and leverage. These waves ripple into firm investments in hours. The firm’s discount factor links the equity premium and labor volatility puzzles. We obtain an upper bound to the amplification that can be generated by speculation for any model of beliefs – a factor of 1.5. A calibration based on diagnostic beliefs amplifies hours volatility by a factor of 1.15 and produces a bubble component of 20 percent","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128507912","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Climate change becomes a common threat to the world and has been studied by scholars in various fields. In the field of finance, many papers discuss the financial market efficiency toward climate change in order to better manage related risk. Our work focuses on the topic of climate change risk in the stock market. We use the long-term trends of the newly released climate index, Actuaries Climate Index (ACI), as proxies for climate change risk. As a genre of production risk, ACI trends have an adverse impact on agricultural production and corporate profitability of agriculture-related companies. We find significant forecasting power of climate change risk on corporate profits. This motivates us to further test the existence of forecasting power on stock returns. We construct a long-short stock trading strategy that adjusts climate change risk to conduct the test. With a one-year holding period, our non-overlapping strategy earns positive returns with zero cost at the beginning over a 26-year test period. The outperformance strongly suggests the predicting ability of the ACI. Thus, the stock market is believed to be inefficient toward climate change risk. We get similar results and conclusions for different versions and extensions of the non-overlapping strategy. However, by subsample tests, we find that the forecasting power on stock returns degenerates quickly in a short period in 2017. This strange "overturn" remains unclear due to limitations of data and brings the importance of follow-up studies.
{"title":"Climate Change Risk and Agriculture-Related Stocks","authors":"Rui-jun Jiang, Chengguo Weng","doi":"10.2139/ssrn.3506311","DOIUrl":"https://doi.org/10.2139/ssrn.3506311","url":null,"abstract":"Climate change becomes a common threat to the world and has been studied by scholars in various fields. In the field of finance, many papers discuss the financial market efficiency toward climate change in order to better manage related risk. Our work focuses on the topic of climate change risk in the stock market. We use the long-term trends of the newly released climate index, Actuaries Climate Index (ACI), as proxies for climate change risk. As a genre of production risk, ACI trends have an adverse impact on agricultural production and corporate profitability of agriculture-related companies. We find significant forecasting power of climate change risk on corporate profits. This motivates us to further test the existence of forecasting power on stock returns. We construct a long-short stock trading strategy that adjusts climate change risk to conduct the test. With a one-year holding period, our non-overlapping strategy earns positive returns with zero cost at the beginning over a 26-year test period. The outperformance strongly suggests the predicting ability of the ACI. Thus, the stock market is believed to be inefficient toward climate change risk. We get similar results and conclusions for different versions and extensions of the non-overlapping strategy. However, by subsample tests, we find that the forecasting power on stock returns degenerates quickly in a short period in 2017. This strange \"overturn\" remains unclear due to limitations of data and brings the importance of follow-up studies.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-12-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117252074","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Most corporate news occurs in the after-hours market, a very illiquid trading environment. We examine the relationship between liquidity and price discovery around after-hours earnings announcements. Prices reflect earnings surprises through changes in quotes rather than through trades. Following announcements, ask (bid) prices adjust quickly to positive (negative) surprises while bid (ask) prices are slower to adjust. Returns computed from trade prices underestimate the speed and magnitude of price reactions following announcements relative to midquote returns. These findings emphasize the importance of using quotes and not trade prices when studying price discovery in the after-hours market. This is especially crucial when there are confounding events, which we illustrate using analyst recommendation revisions.
{"title":"How Is Earnings News Transmitted to Stock Prices?","authors":"Vincent Grégoire, Charles Martineau","doi":"10.2139/ssrn.3060094","DOIUrl":"https://doi.org/10.2139/ssrn.3060094","url":null,"abstract":"Most corporate news occurs in the after-hours market, a very illiquid trading environment. We examine the relationship between liquidity and price discovery around after-hours earnings announcements. Prices reflect earnings surprises through changes in quotes rather than through trades. Following announcements, ask (bid) prices adjust quickly to positive (negative) surprises while bid (ask) prices are slower to adjust. Returns computed from trade prices underestimate the speed and magnitude of price reactions following announcements relative to midquote returns. These findings emphasize the importance of using quotes and not trade prices when studying price discovery in the after-hours market. This is especially crucial when there are confounding events, which we illustrate using analyst recommendation revisions.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-12-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134074459","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines how the Chinese stock market acts differently towards state‐controlled and market‐oriented media coverage. Using a setting of post‐earnings announcement drift, we find that information from state‐controlled media enters the stock price in a timelier manner, while the message from market‐oriented media needs more time to get a response from investors. The effect is also influenced by whether the type of news coverage is good or bad. Our findings suggest that the capital market underreacts when good news is reported by the market‐oriented media.
{"title":"Media Heterogeneity and Post‐Earnings Announcement Drift: Evidence from China","authors":"Ye Guo, Mengqi Huang","doi":"10.1111/acfi.12570","DOIUrl":"https://doi.org/10.1111/acfi.12570","url":null,"abstract":"This paper examines how the Chinese stock market acts differently towards state‐controlled and market‐oriented media coverage. Using a setting of post‐earnings announcement drift, we find that information from state‐controlled media enters the stock price in a timelier manner, while the message from market‐oriented media needs more time to get a response from investors. The effect is also influenced by whether the type of news coverage is good or bad. Our findings suggest that the capital market underreacts when good news is reported by the market‐oriented media.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116974109","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
There is a substantial body of theoretical and empirical research on asset price comovement and determinants. The empirical analysis in this paper differs in that it incorporates a channel for cross country comovement in asset prices, as well in a set of proposed asset price determinants, across a sample of 9 OECD countries. A Bayesian dynamic factor model is utilised to isolate common, or ‘world’, and country specific shocks in stock, bond, currency, and house markets and in variables representing monetary policy, fiscal policy, productivity, demand, relative commodity prices and macroeconomic sentiment. The results are used to gauge the degree of financial and economic integration. Individual asset returns are then regressed on factors extracted from the driving variables to examine the relative importance of the common and country shocks. Stock and bond markets in particular are found to be driven largely by shocks which are common across all countries and asset markets, though a country level cycle in returns is also evident. Together the world factors in the driving variables are found to be a relatively large source of shocks for all asset markets, with shocks to fiscal policy variables, productivity and sentiment appearing to underpin international linkages in asset return volatility. The country-specific component in relative commodity price growth is a large driving force for individual returns.
{"title":"Investigating the Drivers of International Comovement in Real Financial Asset Returns","authors":"Kate McKinnon","doi":"10.2139/ssrn.3493981","DOIUrl":"https://doi.org/10.2139/ssrn.3493981","url":null,"abstract":"There is a substantial body of theoretical and empirical research on asset price comovement and determinants. The empirical analysis in this paper differs in that it incorporates a channel for cross country comovement in asset prices, as well in a set of proposed asset price determinants, across a sample of 9 OECD countries. A Bayesian dynamic factor model is utilised to isolate common, or ‘world’, and country specific shocks in stock, bond, currency, and house markets and in variables representing monetary policy, fiscal policy, productivity, demand, relative commodity prices and macroeconomic sentiment. The results are used to gauge the degree of financial and economic integration. Individual asset returns are then regressed on factors extracted from the driving variables to examine the relative importance of the common and country shocks. Stock and bond markets in particular are found to be driven largely by shocks which are common across all countries and asset markets, though a country level cycle in returns is also evident. Together the world factors in the driving variables are found to be a relatively large source of shocks for all asset markets, with shocks to fiscal policy variables, productivity and sentiment appearing to underpin international linkages in asset return volatility. The country-specific component in relative commodity price growth is a large driving force for individual returns.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-11-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123938365","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Under very general conditions, we construct a micro-macro model for closed economy with a large number of heterogeneous agents. By introducing both financial capital (i.e. valued capital---- equities of firms) and physical capital (i.e. capital goods), our framework gives a logically consistent, complete factor income distribution theory with micro-foundation. The model shows factor incomes obey different distribution rules at the micro and macro levels, while marginal distribution theory and no-arbitrage princi-ple are unified into a common framework. Our efforts solve the main problems of Cambridge capital controversy, and reasonably explain the equity premium puzzle. Strong empirical evidences support our results.
{"title":"A Contribution to Theory of Factor Income Distribution, Cambridge Capital Controversy and Equity Premium Puzzle","authors":"Xiaofeng Liu","doi":"10.2139/ssrn.3494696","DOIUrl":"https://doi.org/10.2139/ssrn.3494696","url":null,"abstract":"Under very general conditions, we construct a micro-macro model for closed economy with a large number of heterogeneous agents. By introducing both financial capital (i.e. valued capital---- equities of firms) and physical capital (i.e. capital goods), our framework gives a logically consistent, complete factor income distribution theory with micro-foundation. The model shows factor incomes obey different distribution rules at the micro and macro levels, while marginal distribution theory and no-arbitrage princi-ple are unified into a common framework. Our efforts solve the main problems of Cambridge capital controversy, and reasonably explain the equity premium puzzle. Strong empirical evidences support our results.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134179682","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Heterogeneous-agents asset pricing theories imply that stockholders' consumption has the first-order effect on equity premium. Motivated by these theories, we evaluate the performance of the conditional CCAPM in explaining time-variation in market returns and cross-sectional variation in portfolio returns. At the market level, we show that the conditional stockholders' consumption risk has strong predictive power for market returns with 39% in-sample and 19% out-of-sample R-squared for the three-year horizon, outperforming a broad set of alternative predictors. At the portfolio-level, stockholders' consumption risk explains 40% of the cross-sectional average returns. Stockholders' consumption risk also partially explains the value, size, profitability, investment, and long-term reversal premia. We provide an explanation for why stockholders' consumption risk reverses the findings in the literature using aggregate consumption risk: stockholders' consumption risk varies in the opposite direction to aggregate consumption risk, but in the same direction with the equity premium and value premium. This article also demonstrates that time-variation in both the price and amount of risk should be considered in testing the CCAPM.
{"title":"Countercyclical Stockholders' Consumption Risk and Tests of Conditional CCAPM","authors":"Redouane Elkamhi, Chanik Jo","doi":"10.2139/ssrn.3349844","DOIUrl":"https://doi.org/10.2139/ssrn.3349844","url":null,"abstract":"Heterogeneous-agents asset pricing theories imply that stockholders' consumption has the first-order effect on equity premium. Motivated by these theories, we evaluate the performance of the conditional CCAPM in explaining time-variation in market returns and cross-sectional variation in portfolio returns. At the market level, we show that the conditional stockholders' consumption risk has strong predictive power for market returns with 39% in-sample and 19% out-of-sample R-squared for the three-year horizon, outperforming a broad set of alternative predictors. At the portfolio-level, stockholders' consumption risk explains 40% of the cross-sectional average returns. Stockholders' consumption risk also partially explains the value, size, profitability, investment, and long-term reversal premia. We provide an explanation for why stockholders' consumption risk reverses the findings in the literature using aggregate consumption risk: stockholders' consumption risk varies in the opposite direction to aggregate consumption risk, but in the same direction with the equity premium and value premium. This article also demonstrates that time-variation in both the price and amount of risk should be considered in testing the CCAPM.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132935064","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We build a dynamic model that highlights two separate effects of product market competition on factor betas. Within an industry, competition increases dynamically with the underlying demand and is responsible for an inverse U-shaped relation between systematic risk and profitability. Conditional on profitability, industries with lower adjustment costs are more competitive and less risky. Our empirical approach exploits changes in oil prices to capture the dynamic effect in the oil sector and uses a measure of trade flows between economic sectors to capture the cross-industry effect. Our methodology improves on previous studies that use one-dimensional proxies such as industry concentration to measure competition.
{"title":"Dynamic Competition and Expected Returns","authors":"I. Babenko, Oliver Boguth, Yuri Tserlukevich","doi":"10.2139/ssrn.3490319","DOIUrl":"https://doi.org/10.2139/ssrn.3490319","url":null,"abstract":"We build a dynamic model that highlights two separate effects of product market competition on factor betas. Within an industry, competition increases dynamically with the underlying demand and is responsible for an inverse U-shaped relation between systematic risk and profitability. Conditional on profitability, industries with lower adjustment costs are more competitive and less risky. Our empirical approach exploits changes in oil prices to capture the dynamic effect in the oil sector and uses a measure of trade flows between economic sectors to capture the cross-industry effect. Our methodology improves on previous studies that use one-dimensional proxies such as industry concentration to measure competition.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-11-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116659036","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper proposes a new integrated conditional moment test for model adequacy related to the tests studied in Bierens (1982) and Bierens and Ploberger (1997). The new test allows for a numerical calculation of its asymptotic distribution when the parameter estimator is asymptotically linear. We find that the power of the test in misspecified linear models is better or similar to some of the most commonly used alternatives in the literature. The metric properties of the proposed test are used to study the impact of three types of aggregation on the specification error - aggregation of observations across time, cross-sectional aggregation of variables, or aggregation of different models for the same variable. We show that neglected non-linearity in linear models is asymptotically negligible with a power-type rate of decay in the case of independent observations when data are aggregated across time. We provide an illustration from the field of finance with the capital asset pricing model (CAPM). The frequency of rejection of the linear specification of the CAPM can decline more than three times when the model is estimated with monthly rather than daily returns.
与Bierens(1982)和Bierens and plobberger(1997)研究的检验相关，本文提出了一种新的模型充分性综合条件矩检验。当参数估计量为渐近线性时，新的检验允许对其渐近分布进行数值计算。我们发现，在错误指定的线性模型中，测试的能力比文献中一些最常用的替代方法更好或相似。所提出的测试的度量属性用于研究三种类型的聚集对规范误差的影响-跨时间的观测聚集，变量的横截面聚集或同一变量的不同模型聚集。我们表明，当数据随时间聚合时，在独立观测的情况下，线性模型中被忽略的非线性与功率型衰减率渐近可忽略。我们用资本资产定价模型(CAPM)从金融领域提供了一个例证。当模型以月收益而不是日收益估计时，CAPM线性规格的拒绝频率可以下降三倍以上。
{"title":"Testing Model Adequacy – A Metric Approach","authors":"Stoyan V. Stoyanov","doi":"10.2139/ssrn.3486642","DOIUrl":"https://doi.org/10.2139/ssrn.3486642","url":null,"abstract":"The paper proposes a new integrated conditional moment test for model adequacy related to the tests studied in Bierens (1982) and Bierens and Ploberger (1997). The new test allows for a numerical calculation of its asymptotic distribution when the parameter estimator is asymptotically linear. We find that the power of the test in misspecified linear models is better or similar to some of the most commonly used alternatives in the literature. The metric properties of the proposed test are used to study the impact of three types of aggregation on the specification error - aggregation of observations across time, cross-sectional aggregation of variables, or aggregation of different models for the same variable. We show that neglected non-linearity in linear models is asymptotically negligible with a power-type rate of decay in the case of independent observations when data are aggregated across time. We provide an illustration from the field of finance with the capital asset pricing model (CAPM). The frequency of rejection of the linear specification of the CAPM can decline more than three times when the model is estimated with monthly rather than daily returns.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128960934","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Dominik Rösch, A. Subrahmanyam, Mathijs A. Van Dijk
Abstract Short-term traders could affect the informativeness of stock prices about long-run fundamentals. Less (more) short-termism may thus induce managers to rely more (less) on stock prices in real investment decisions. Supporting this notion, we show that the investment-to-price sensitivity is inversely related to two short-termism proxies (controlling for firm size): institutional churn and liquidity. We confirm this finding using decimalization and an increase in mutual fund disclosure frequency as exogenous shocks to short-termism. Furthermore, short-termism is associated with an increased likelihood of voluntary capital expenditure forecasts by managers, suggesting a greater tendency to solicit market feedback when short-termism is high.
{"title":"Investor short-termism and real investment","authors":"Dominik Rösch, A. Subrahmanyam, Mathijs A. Van Dijk","doi":"10.2139/ssrn.3494118","DOIUrl":"https://doi.org/10.2139/ssrn.3494118","url":null,"abstract":"Abstract Short-term traders could affect the informativeness of stock prices about long-run fundamentals. Less (more) short-termism may thus induce managers to rely more (less) on stock prices in real investment decisions. Supporting this notion, we show that the investment-to-price sensitivity is inversely related to two short-termism proxies (controlling for firm size): institutional churn and liquidity. We confirm this finding using decimalization and an increase in mutual fund disclosure frequency as exogenous shocks to short-termism. Furthermore, short-termism is associated with an increased likelihood of voluntary capital expenditure forecasts by managers, suggesting a greater tendency to solicit market feedback when short-termism is high.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124333974","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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