http://hdl.handle.net/2451/25934 2026-04-07T18:54:33Z 2026-04-07T18:54:33Z Lynch, Anthony W. http://hdl.handle.net/2451/27371 2008-06-01T06:03:26Z 1999-03-01T00:00:00Z

Title: Portfolio Choice and Equity Characteristics: Characterizing the Hedging Demands Induced by Return Predictability Authors: Lynch, Anthony W. Abstract: This paper examines portfolio allocation across equity portfolios formed on the basis of characteristics like size and book-to- market. In particular, the paper assesses the impact of return predictability on portfolio choice for a multi-period investor with a coefficient of relative risk aversion of 4. Compared to the investor’s allocation in her last period, return predictability with dividend yield causes the investor early in life to tilt her risky-asset portfolio away from high book-to-market stocks and away from small stocks. These results are explained using Merton’s (1973) characterization of portfolio allocation by a multiperiod investor in a continuous time setting. Abnormal returns relative to the investor’s optimal early-life portfolio are also calculated. These abnormal returns are found to exhibit the same cross-sectional patterns as abnormal returns calculated relative to the market portfolio: higher for small than large firms, and higher for high than low book-to-market firms. Thus, hedging demand may be a partial explanation for the high expected returns documented empirically for small firms and high book-to-market firms. However, even with this hedging demand, the investor wants to short-sell the low book-to market portfolio to hold the high book-to-market portfolio. The utility costs of using a value-weighted equity index or of ignoring predictability are also calculated. An investor using a value-weighted equity index would give up a much larger fraction of her wealth to have access to book-to-market portfolios than size portfolios. Finally, while an investor would give up a much larger fraction of her wealth to have access to dividend yield information than term spread information, term spread does have incremental benefits over and above just using dividend yield alone.

1999-03-01T00:00:00Z Boudoukh, Jacob Richardson, Matthew Smith, Tom Whitelaw, Robert http://hdl.handle.net/2451/27370 2008-06-01T06:02:23Z 1999-11-01T00:00:00Z

Title: Regime Shifts and Bond Returns Authors: Boudoukh, Jacob; Richardson, Matthew; Smith, Tom; Whitelaw, Robert Abstract: This paper investigates the implications of a 2-regime model of the business cycle for term premiums and volatilities in the bond market. The model, which is estimated via maximum likelihood using GDP, consumption and production data, has two key features -- mean growth rates that vary across regimes and time-varying transition probabilities between regimes. The implied dynamics of term premiums and volatilities are complex and interesting. Business cycle turning points are characterized by high volatility and strongly time-varying term premiums. These implications are then investigated using data on bond returns. Nonparametric estimation results are broadly consistent with the model. Using the slope of the term structure as a conditioning variable, we can identify periods with negative term premiums and volatile returns.

1999-11-01T00:00:00Z Shapiro, Alexander http://hdl.handle.net/2451/27369 2008-06-01T06:02:55Z 1999-09-01T00:00:00Z

Title: The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence Authors: Shapiro, Alexander Abstract: This paper analyzes equilibrium in a dynamic pure-exchange economy under a generalization of Merton's (1987) investor recognition hypothesis (IRH). Because of information costs, a class of investors is assumed to possess incomplete information, which suffices to implement only a particular trading strategy. The IRH is mapped into corresponding portfolio restrictions that bind a subset of agents. The model is formulated in continuous time, and detailed characterization of equilibrium quantities is provided. The model implies that, all else equal, a risk premium on a less visible stock need not be higher than that on a more visible stock with a lower volatility -- contrary to results derived in a static mean-variance setting. An empirical analysis suggests that a consumption-based capital asset pricing model (CCAPM) augmented by the IRH is a more realistic model than the traditional CCAPM for explaining the cross-sectional variation in unconditional expected equity returns.

1999-09-01T00:00:00Z Fisher, Adlai http://hdl.handle.net/2451/27368 2008-06-01T06:03:02Z 1999-09-01T00:00:00Z

Title: Multivariate Stock Returns Around Extreme Events: A Reassessment of Economic Fundamentals and the 1987 Market Crash Authors: Fisher, Adlai Abstract: This paper reassesses the role of economic fundamentals in the 1987 stock market crash using a two factor common-component model of returns. The model decomposes returns into idiosyncratic components, a common white noise component, and a common source of Poisson jumps. Among three two-year sample periods for Major Market Index stocks, only a 1987-88 sample results in an estimated jump component with low frequency and large size. Using Bayes' rule, we infer ex post jump probabilities for each sample day. In contrast to an analogous univariate model for an index return, the multivariate model captures information in the cross-section of returns. Leading financial news on the most likely jump days from the multivariate model is compared with news on a control group of high index return days. Days with high jump probabilities under the multivariate model contain systematically more news related to the dollar, trade deficits, and financing of the U. S. budget deficit. This suggest that the common jump component proxies for economic fundaments related to this cluster of news events, and that the unexpectedly large U.S. trade deficit news released on the Wednesday prior to the crash provided an economic catalyst for the event.

1999-09-01T00:00:00Z