Implications of return predictability for consumption dynamics and asset pricing

Two broad classes of consumption dynamics—long-run risks and rare disasters—have proven successful in explaining the equity premium puzzle when used in conjunction with recursive preferences. We show that bounds a-là Gallant, Hansen, and Tauchen that restrict the volatility of the stochastic discount factor by conditioning on a set of return predictors constitute a useful tool to discriminate between these alternative dynamics. In particular, we document that models that rely on rare disasters meet comfortably the bounds independently of the forecasting horizon and the asset returns used to construct the bounds. However, the specific nature of disasters is a relevant characteristic at the 1-year horizon: disasters that unfold over multiple years are more successful in meeting the predictors-based bounds than one-period disasters. Instead, at the 5-year horizon, the sole presence of disasters—even if one-period and permanent—is sufficient for the model to satisfy the bounds. Finally, the bounds point to multiple volatility components in consumption as a promising dimension for long-run risk models

Implications of return predictability for consumption dynamics and asset pricing

Two broad classes of consumption dynamics—long-run risks and rare disasters—have proven successful in explaining the equity premium puzzle when used in conjunction with recursive preferences. We show that bounds a-là Gallant, Hansen, and Tauchen that restrict the volatility of the stochastic discount factor by conditioning on a set of return predictors constitute a useful tool to discriminate between these alternative dynamics. In particular, we document that models that rely on rare disasters meet comfortably the bounds independently of the forecasting horizon and the asset returns used to construct the bounds. However, the specific nature of disasters is a relevant characteristic at the 1-year horizon: disasters that unfold over multiple years are more successful in meeting the predictors-based bounds than one-period disasters. Instead, at the 5-year horizon, the sole presence of disasters—even if one-period and permanent—is sufficient for the model to satisfy the bounds. Finally, the bounds point to multiple volatility components in consumption as a promising dimension for long-run risk models

Existence of equivalent Martingale measures in finite dimensional securities markets

we characterize the set of all price-dividend systems that admit numeraire

Consumption and portfolio policies with incomplete markets and short-sale constraints in the finite-dimensional case: some remarks

2nonenoneGIROTTO B.; ORTU F.Girotto, Bruno; Ortu, F

Consumption and Portfolio Policies with Incomplete Markets and Short-Sales Constraints in the Finite Dimensional Case: Some Remarks

This paper extends He and Pearson's (1991) martingale approach to the study of optimal intertemporal consumption and portfolio policies with incomplete markets and short‐sale constraints to a framework in which no assumptions are made on the price process for the securities. We show how both their characterization of the budget‐feasible set and duality result can be extended to account for an unbounded set II of Arrow‐Debreu state prices compatible with the arbitrage‐free assumption. We also supply a (fairly general) sufficient condition for II to be bounded, as required in their setting

Arbitrage theory in discrete and continuous time : lecture notes for the course Quantitative finance and derivatives

Lecture notes for the graduate course Quantitative FInance and Derivatives I, MS in Finance, Bocconi universit

"Generic Existence and Robust Non-Existence of Numeraires in Finite-Dimensional Securities Markets"

We supply necessary and sufficient conditions for the existence of numeraires. We also supply a characterization of robust non-existence of numeraires

Teoria dell'arbitraggio in tempo discreto e continuo : materiale didattico per il corso di Finanza quantitativa e derivati

Dispense per il corso di laurea specialistica Finanza Quantitativa e Derivati, I parte, Università Boccon