Essays in asset pricing

My dissertation aims at understanding the impact of uncertainty and disagreement on asset prices. It contains three main chapters. Chapter One gives a general introduction into the topic of partial information and heterogeneous beliefs. Chapter Two explains the link between credit spreads and the heterogeneous formation of expectations in an economy where agents with different perception of economic uncertainty disagree about future cash flows of a defaultable firm. The intertemporal risk-sharing of disagreeing investors gives rise to three testable implications: First, larger belief heterogeneity increases credit spreads and their volatility. Second, it implies a higher frequency of capital structure arbitrage violations. Third, it reduces expected equity returns of low levered firms, but the link can be reversed for high levered firms. We use a data-set of firm-level differences in beliefs, credit spreads, and stock returns to empirically test these predictions. The economic and statistical significance of the intertemporal risk-sharing channel of disagreement is substantial and robust to the inclusion of control variables such as Fama and French, liquidity, and implied volatility factors. Chapter Three studies the link between market-wide uncertainty, difference of opinions and co- movement of stock returns. We show that this link plays an important role in explaining the dynamics of equilibrium volatility and correlation risk premia, the differential cross-sectional pricing of index and individual options, and the risk-return profile of several option trading strategies. We use firm-specific data on analyst forecasts and test the model predictions. We obtain the following novel results: (a) The difference of index and individual volatility risk premia is linked to a counter-cyclical common disagreement component about future earnings; (b) This common component helps to explain the differential pricing of index and individual volatility smiles in the cross-section, as well as the time-series of correlation risk premia extracted from option prices; (c) The time series of returns on straddle and dispersion option portfolios reflects a significant time-varying risk premium, which compensates investors for bearing common disagreement risk; (d) Common disagreement is priced in the cross-section of option strategy returns

Bond variance risk premiums

This paper studies variance risk premiums in the Treasury market. We first develop a theory to price variance swaps and show that the realized variance can be perfectly replicated by a static position in Treasury futures options and a dynamic position in the underlying. Pricing and hedging is robust even in the underlying jumps. Using a large options panel data set on Treasury futures with different tenors, we report the following findings: First, the term structure of implied variances is downward sloping across maturities and increases in tenors. Moreover, the slope of the term structure is strongly linked to economic activity. Second, returns to the Treasury variance swap are negative and economically large. Shorting a variance swap produces an annualized Sharpe ratio of almost two and the associated returns cannot be explained by standard risk factors. Finally, the returns remain highly statistically significant even when accounting for transaction costs and margin requirements

Vibration stimuli and the differentiation of musculoskeletal progenitor cells: Review of results in vitro and in vivo

Due to the increasing burden on healthcare budgets of musculoskeletal system disease and injury, there is a growing need for safe, effective and simple therapies. Conditions such as osteoporosis severely impact on quality of life and result in hundreds of hours of hospital time and resources. There is growing interest in the use of low magnitude, high frequency vibration (LMHFV) to improve bone structure and muscle performance in a variety of different patient groups. The technique has shown promise in a number of different diseases, but is poorly understood in terms of the mechanism of action. Scientific papers concerning both the in vivo and in vitro use of LMHFV are growing fast, but they cover a wide range of study types, outcomes measured and regimens tested. This paper aims to provide an overview of some effects of LMHFV found during in vivo studies. Furthermore we will review research concerning the effects of vibration on the cellular responses, in particular for cells within the musculoskeletal system. This includes both osteogenesis and adipogenesis, as well as the interaction between MSCs and other cell types within bone tissue

Assessing the impact of the ECB's Corporate Sector Purchase Programme on SMEs

The European Central Bank's Governing Council is due to hold a policy meeting on 26 October, with many observers anticipating there could be a change to the ECB's monetary stimulus programme. Corrado Macchiarelli, Mara Monti and Andrea Vedolin examine some of the measures that should be considered as the ECB looks to respond to changing conditions in the euro area

Exchange rates and monetary policy uncertainty

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies

Some currency trading positions yield increased returns around Fed announcements

That reflects the high monetary policy uncertainty, argue Alireza Tahbaz-Salehi, Andrea Vedolin and Philippe Muelle

Bond variance risk premia

Using data from 1983 to 2010, we propose a new fear measure for Treasury markets, akin to the VIX for equities, labeled TIV. We show that TIV explains one third of the time variation in funding liquidity and that the spread between the VIX and TIV captures flight to quality. We then construct Treasury bond variance risk premia as the difference between the implied variance and an expected variance estimate using autoregressive models. Bond variance risk premia display pronounced spikes during crisis periods. We show that variance risk premia encompass a broad spectrum of macroeconomic uncertainty. Uncertainty about the nominal and the real side of the economy increase variance risk premia but uncertainty about monetary policy has a strongly negative effect. We document that bond variance risk premia predict excess returns on Treasuries, stocks, corporate bonds and mortgage-backed securities, both in-sample and out-of-sample. Furthermore, this predictability is not subsumed by other standard predictors

Mortgage hedging in fixed income markets

We study the feedback from hedging mortgage portfolios on the level and volatility of interest rates. We incorporate the supply shocks resulting from hedging into an otherwise standard dynamic term structure model, and derive two sets of predictions which are strongly supported by the data: First, the duration of mortgage-backed securities (MBS) positively predicts excess bond returns, especially for longer maturities. Second, MBS convexity increases yield and swaption implied volatilities, and this effect has a hump-shaped term structure. Empirically, neither duration, nor convexity are spanned by yield factors. A calibrated version of our model replicates salient features of first and second moments of bond yields

Robustness and dynamic sentiment

Errors in survey expectations display waves of pessimism and optimism and significant sluggishness. This paper develops a novel theoretical framework of time-varying beliefs capturing these empirical characteristics. The dynamic beliefs arise endogenously due to agents’ attitude toward alternative models. Decision-maker’s distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, countercyclical equilibrium asset returns, and excess volatility. A calibrated version of our model is shown to match salient features in equity markets.Errors in survey expectations display waves of pessimism and optimism and significant sluggishness. This paper develops a novel theoretical framework of time-varying beliefs capturing these empirical facts. In our model, the dynamic beliefs arise endogenously due to agents’ attitude toward alternative models. Decision-maker’s distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, countercyclical equilibrium asset returns, and excess volatility. A calibrated version of our model is shown to match salient features in equity markets.https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3798445First author draf

Mortgage risk and the yield curve

We study feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate supply shocks resulting from changes in MBS duration into a parsimonious equilibrium dynamic term structure model and derive three predictions that are strongly supported in the data: (1) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (2) the predictive power of MBS duration is transitory in nature; and (3) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure