Risk Ambiguity And Anomalies In The Fixed Income Market
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Risk Ambiguity And Anomalies In The Fixed Income Market
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Author : Zhan Shi
language : en
Publisher:
Release Date : 2014
Risk Ambiguity And Anomalies In The Fixed Income Market written by Zhan Shi and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
This dissertation contains five essays on the implications of risks and ambiguity for asset pricing puzzles, especially in the fixed income market. The first essay studies the effects of time-varying Knightian uncertainty (ambiguity) on equilibrium asset prices; the second and third essays focus on the term premia in the nominal and real Treasury bond markets; The last two examine the performance of structural models of credit risk in explaining the levels and changes of corporate yield spreads.In the first essay, I consider a continuous-time Lucas exchange economy in which an ambiguity-averse agent applies a discount rate that is adjusted not only for the current magnitude of ambiguity but also for the risk associated with its future fluctuations. As such, both the ambiguity level and volatility help raise asset premia and accommodate richer dynamics of asset prices. With a novel measure for the ambiguity level, I show that the estimated model is able to explain a wide range of asset markets anomalies, including the equity premium puzzle, the risk-free rate puzzle, the credit spread puzzle, and the expectations puzzle. In particular, this paper establishes both theoretical and empirical linkages of ambiguity with the unspanned predictability in the Treasury market. Furthermore, the proposed ambiguity measure is found to exhibit significant predictive power for excess returns on equities and bonds as well as for corporate yield spreads, a finding that justifies uncertainty channels highlighted in the model.The remaining four essays are based on work that is coauthored with Professor Jingzhi Huang. In the second chapter, we provide new and robust evidence on the power of macro variables for forecasting bond risk premia by using a recently developed model selection method--the supervised adaptive group "leastabsolute shrinkage and selection operator" (lasso) approach. We identify a single macro factor that can not only subsume the macro factors documented in the existing literature but also can substantially raise their forecasting power for future bond excess returns. Specifically, we find that the new macro factor, a linear combination of four group factors (including employment, housing, and price indices), can explain the variation in excess returns on bonds with maturities ranging from 2 to 5 years up to 43%. The new factor is countercyclical and furthermore picks up unspanned predictability in bond excess returns. Namely, the new macro factor contains substantial information on expected excess returns (as well as expected future short rates) but has negligible impact on the cross section of bond yields.In the third essay, we document a number of new empirical findings about the dynamic behavior and economic determinants of risk premia on real bonds. Specifically, we find that the real bond risk premium changes over time and fluctuates between positive and negative values. We also find that the real term structure itself contains a component that drives risk premia but is undetectable from cross section of bond yields. In addition, we present evidence on the link between real bond premia and macroeconomic variables. More specifically, we find that macro factors associated with real estate and consumer income and expenditure can capture a large portion of forecastable variation in excess returns on real bonds. These empirical findings have important implications for both affine term structure models and consumption-based asset pricing models of real bonds.The fourth essay provides new insights into the equity-credit market integration puzzle. Empirical evidence has documented that while variables suggested by structural credit risk models can explain only a small portion of corporate bond spread changes (Collin-Dufresne, Goldstein, and Martin 2001), these models provide quite accurate predictions of hedge ratios for corporate bond returns (Schaefer and Strebulaev 2008). These two stylized facts together are often considered to have conflicting implications for the level of integration between equity and credit markets -- given the fundamental relationship between corporate bond spread changes and returns. we provide a rational explanation of this anomaly by demonstrating that the two aforementioned seemingly conflicting findings can be reconciled with each other within the standard structural modeling framework. In particular, we show empirically that sensitivities of spread changes to leverage ratio or equity predicted by the Merton (1974) model are not rejected in time-series tests -- namely, the Merton hedge ratios for spread changes are too consistent with data. That is, the equity-credit market integration puzzle can be explained from a traditional hedging perspective.In the last essay, we empirically examine the hedging performance of structural models using data on corporate bond transaction prices over the period July 2002--December 2012 from the Trade Reporting and Compliance Engine (TRACE) database. While there is a large literature on the pricing performance of structural credit risk models, there is little empirical evidence on the empirical performance of these models on hedging corporate bonds. We find that the Merton (1974) model is not as useful as univariate regression models for the purpose of hedging corporate bond returns with equity. Further, for investment-grade bonds, hedging with Treasury bonds with a hedge ratio of unity is more effective than the Merton delta hedging with equity. However, we find that the Merton model is more useful for the purpose of hedging corporate bond spread changes, especially for high-yield bonds. Lastly, we also investigate the pricing performance of the Merton model. We find that on average the model overestimates (underestimates) prices (yield spreads) of bonds in our sample. Specifically, the model overestimates prices of corporate bonds by 1.87% on average. To sum, the evidence based on more recent data on transaction prices indicates that the Merton model still underpredicts yield spreads, especially for short-maturity or investment-grade bonds.
Low Risk Anomalies In Global Fixed Income
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Author : Raul Leote de Carvalho
language : en
Publisher:
Release Date : 2015
Low Risk Anomalies In Global Fixed Income written by Raul Leote de Carvalho and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
In this paper we present the most compelling empirical evidence yet of a low-risk anomaly in fixed income markets. We show that portfolios invested in bonds with the lowest risk would have delivered the largest positive alpha and highest Sharpe ratios and portfolios invested in riskier bonds would have delivered the most negative alpha and lowest Sharpe ratios. Our results proved extremely robust and were confirmed for government bonds, quasi-government and foreign government bonds, securitized and collateralized bonds, corporate investment grade bonds, corporate high yield bonds, emerging market bonds and aggregates of some of these universes. We considered bonds denominated in USD, EUR, GBP and JPY separately and the results proved invariant to the currency. We confirmed the robustness of the results by using different measures of risk. The results were produced using data from the Bank of America Merrill Lynch database from January 1997 which includes 85,442 individual bonds in the 192 months analyzed.
Efficiency And Anomalies In Stock Markets
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Author : Wing-Keung Wong
language : en
Publisher: Mdpi AG
Release Date : 2022-02-17
Efficiency And Anomalies In Stock Markets written by Wing-Keung Wong and has been published by Mdpi AG this book supported file pdf, txt, epub, kindle and other format this book has been release on 2022-02-17 with Business & Economics categories.
The Efficient Market Hypothesis believes that it is impossible for an investor to outperform the market because all available information is already built into stock prices. However, some anomalies could persist in stock markets while some other anomalies could appear, disappear and re-appear again without any warning. A Special Issue on "Efficiency and Anomalies in Stock Markets" will be devoted to advancements in the theoretical development of market efficiency and anomaly in the Stock Market, as well as applications in Stock Market efficiency and anomalies.
Powering The Digital Economy Opportunities And Risks Of Artificial Intelligence In Finance
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Author : El Bachir Boukherouaa
language : en
Publisher: International Monetary Fund
Release Date : 2021-10-22
Powering The Digital Economy Opportunities And Risks Of Artificial Intelligence In Finance written by El Bachir Boukherouaa and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2021-10-22 with Business & Economics categories.
This paper discusses the impact of the rapid adoption of artificial intelligence (AI) and machine learning (ML) in the financial sector. It highlights the benefits these technologies bring in terms of financial deepening and efficiency, while raising concerns about its potential in widening the digital divide between advanced and developing economies. The paper advances the discussion on the impact of this technology by distilling and categorizing the unique risks that it could pose to the integrity and stability of the financial system, policy challenges, and potential regulatory approaches. The evolving nature of this technology and its application in finance means that the full extent of its strengths and weaknesses is yet to be fully understood. Given the risk of unexpected pitfalls, countries will need to strengthen prudential oversight.
The Current State Of Quantitative Equity Investing
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Author : Ying L. Becker
language : en
Publisher: CFA Institute Research Foundation
Release Date : 2018-05-10
The Current State Of Quantitative Equity Investing written by Ying L. Becker and has been published by CFA Institute Research Foundation this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018-05-10 with Business & Economics categories.
Quantitative equity management techniques are helping investors achieve more risk efficient and appropriate investment outcomes. Factor investing, vetted by decades of prior and current research, is growing quickly, particularly in in the form of smart-beta and ETF strategies. Dynamic factor-timing approaches, incorporating macroeconomic and investment conditions, are in the early stages but will likely thrive. A new generation of big data approaches are rendering quantitative equity analysis even more powerful and encompassing.
The Transformation Of Banking
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Author : Harvard University. Graduate School of Business Administration
language : en
Publisher:
Release Date : 1984
The Transformation Of Banking written by Harvard University. Graduate School of Business Administration and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1984 with Bank management categories.
C F A Study Guide
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Author : Institute of Chartered Financial Analysts
language : en
Publisher:
Release Date : 1992
C F A Study Guide written by Institute of Chartered Financial Analysts and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1992 with Investments categories.
Robustness
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Author : Lars Peter Hansen
language : en
Publisher: Princeton University Press
Release Date : 2016-06-28
Robustness written by Lars Peter Hansen and has been published by Princeton University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-06-28 with Business & Economics categories.
The standard theory of decision making under uncertainty advises the decision maker to form a statistical model linking outcomes to decisions and then to choose the optimal distribution of outcomes. This assumes that the decision maker trusts the model completely. But what should a decision maker do if the model cannot be trusted? Lars Hansen and Thomas Sargent, two leading macroeconomists, push the field forward as they set about answering this question. They adapt robust control techniques and apply them to economics. By using this theory to let decision makers acknowledge misspecification in economic modeling, the authors develop applications to a variety of problems in dynamic macroeconomics. Technical, rigorous, and self-contained, this book will be useful for macroeconomists who seek to improve the robustness of decision-making processes.
The Iebm Handbook Of Economics
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Author : William Lazonick
language : en
Publisher: International Thomson Business Press
Release Date : 2002
The Iebm Handbook Of Economics written by William Lazonick and has been published by International Thomson Business Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with Economics categories.
With contributions from leading international academics, this handbook covers systems of economic organization, systems of economic thought, business enterprise, industrial organization, economic institutions, and notable economists.
Endowment Asset Management
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Author : Shanta Acharya
language : en
Publisher: OUP Oxford
Release Date : 2007-04-19
Endowment Asset Management written by Shanta Acharya and has been published by OUP Oxford this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007-04-19 with Business & Economics categories.
There is a profound linkage between the quality of a university and its financial resources. The universities of Oxford and Cambridge rank among the world's finest educational institutions, and are able to draw on invested assets that are large by any standards. Endowment Asset Management explores how the colleges that comprise these two great universities make their investment decisions. Oxford and Cambridge are collegiate institutions, each consisting of a federal university and over 30 constituent colleges. While the colleges may have ostensibly similar missions, they are governed independently. Since they interpret their investment objectives differently, this gives rise to some remarkably dissimilar approaches to investment, which the authors explore in detail. The first study of its kind, Endowment Asset Management analyses the objectives, investment philosophy, asset management and governance of over 60 college and university endowment funds. Drawing on exhaustive research and detailed discussions with Oxford and Cambridge investment bursars, the authors investigate issues such as asset allocation and spending policy, which have a major influence on the institutions' financial health. This study reveals the colleges' individualism and diversity, and carefully analyses their strategies, which range from the traditional to cutting edge. The authors' findings are thought provoking for anyone concerned with the assets of foundations, endowments, charities, family offices, or trusts. All investors with a long-term investment horizon will find it extremely engaging.