Impact of Investor's Varying Risk Aversion on the Dynamics of Asset Price Fluctuations

While the investors' responses to price changes and their price forecasts are well accepted major factors contributing to large price fluctuations in financial markets, our study shows that investors' heterogeneous and dynamic risk aversion (DRA) preferences may play a more critical role in the dynamics of asset price fluctuations. We propose and study a model of an artificial stock market consisting of heterogeneous agents with DRA, and we find that DRA is the main driving force for excess price fluctuations and the associated volatility clustering. We employ a popular power utility function, $U(c,\gamma)=\frac{c^{1-\gamma}-1}{1-\gamma}$ with agent specific and time-dependent risk aversion index, $\gamma_i(t)$, and we derive an approximate formula for the demand function and aggregate price setting equation. The dynamics of each agent's risk aversion index, $\gamma_i(t)$ (i=1,2,...,N), is modeled by a bounded random walk with a constant variance $\delta^2$. We show numerically that our model reproduces most of the ``stylized'' facts observed in the real data, suggesting that dynamic risk aversion is a key mechanism for the emergence of these stylized facts.Comment: 17 pages, 7 figure

The US stock market leads the Federal funds rate and Treasury bond yields

Using a recently introduced method to quantify the time varying lead-lag dependencies between pairs of economic time series (the thermal optimal path method), we test two fundamental tenets of the theory of fixed income: (i) the stock market variations and the yield changes should be anti-correlated; (ii) the change in central bank rates, as a proxy of the monetary policy of the central bank, should be a predictor of the future stock market direction. Using both monthly and weekly data, we found very similar lead-lag dependence between the S&P500 stock market index and the yields of bonds inside two groups: bond yields of short-term maturities (Federal funds rate (FFR), 3M, 6M, 1Y, 2Y, and 3Y) and bond yields of long-term maturities (5Y, 7Y, 10Y, and 20Y). In all cases, we observe the opposite of (i) and (ii). First, the stock market and yields move in the same direction. Second, the stock market leads the yields, including and especially the FFR. Moreover, we find that the short-term yields in the first group lead the long-term yields in the second group before the financial crisis that started mid-2007 and the inverse relationship holds afterwards. These results suggest that the Federal Reserve is increasingly mindful of the stock market behavior, seen at key to the recovery and health of the economy. Long-term investors seem also to have been more reactive and mindful of the signals provided by the financial stock markets than the Federal Reserve itself after the start of the financial crisis. The lead of the S&P500 stock market index over the bond yields of all maturities is confirmed by the traditional lagged cross-correlation analysis.Comment: 12 pages, 7 figures, 1 tabl

What drives idiosyncratic volatility over time?

We document the patterns of market-wide and firm-specific volatility in the Portuguese stock market over the 1991–2005 period and test several explanations for the behavior of firm-level idiosyncratic volatility. Unlike previous studies we find no evidence of a statistically significant rise in firm- specific volatility. On the contrary, the ratio of firm-specific risk to total risk slightly decreases. We show that this result stems from new listings of large privatized companies that display lower firm-specific risk. Our findings are consistent with the idea that changes in idiosyncratic volatility are related to changes in the composition of the market.info:eu-repo/semantics/publishedVersio

The Role of the Proteinase Inhibitor Ovorubin in Apple Snail Eggs Resembles Plant Embryo Defense against Predation

BACKGROUND: Fieldwork has thoroughly established that most eggs are intensely predated. Among the few exceptions are the aerial egg clutches from the aquatic snail Pomacea canaliculata which have virtually no predators. Its defenses are advertised by the pigmented ovorubin perivitellin providing a conspicuous reddish coloration. The nature of the defense however, was not clear, except for a screening for defenses that identified a neurotoxic perivitellin with lethal effect on rodents. Ovorubin is a proteinase inhibitor (PI) whose role to protect against pathogens was taken for granted, according to the prevailing assumption. Through biochemical, biophysical and feeding experiments we studied the proteinase inhibitor function of ovorubin in egg defenses. METHODOLOGY/PRINCIPAL FINDINGS: Mass spectrometry sequencing indicated ovorubin belongs to the Kunitz-type serine proteinase inhibitor family. It specifically binds trypsin as determined by small angle X-ray scattering (SAXS) and cross-linking studies but, in contrast to the classical assumption, it does not prevent bacterial growth. Ovorubin was found extremely resistant to in vitro gastrointestinal proteolysis. Moreover feeding studies showed that ovorubin ingestion diminishes growth rate in rats indicating that this highly stable PI is capable of surviving passage through the gastrointestinal tract in a biologically active form. CONCLUSIONS: To our knowledge, this is the first direct evidence of the interaction of an egg PI with a digestive protease of potential predators, limiting predator's ability to digest egg nutrients. This role has not been reported in the animal kingdom but it is similar to plant defenses against herbivory. Further, this would be the only defense model with no trade-offs between conspicuousness and noxiousness by encoding into the same molecule both the aposematic warning signal and an antinutritive/antidigestive defense. These defenses, combined with a neurotoxin and probably unpalatable factors would explain the near absence of predators, opening new perspectives in the study of the evolution and ecology of egg defensive strategies

Do dividends signal future earnings in the Nordic stock markets?

We study the informational content of dividends on three Nordic civil law markets, where other simultaneous but blurring motives for dividends may be weaker. Using aggregate data on real earnings per share and payout ratios, long time series from 1969 to 2010, and methodologies which address problems of endogeneity, non-stationarity and autocorrelation (including a Vector Error Correction Model approach), we find evidence on dividend signaling in Nordic markets. However, we also find heterogeneity in the relationship between dividends and earnings on markets similar in many respects, suggesting that even small variations in the institutional surroundings may be important for the results

Publisher Connection: Export-Led Growth in the UAE: Multivariate Causality Between Primary Exports, Manufactured Exports and Economic Growth

The principal question that this research addresses is the validity of the Export-Led Growth hypothesis (ELG) in the United Arab Emirates (UAE) over the period 1981–2012, focusing on the causality between primary exports, manufactured exports and economic growth. Unit root tests are applied to examine the time-series properties of the variables, while the Johansen cointegration test is performed to confirm or not the existence of a long-run relationship between the variables. Moreover, the multivariate Granger causality test and a modified version of Wald test are applied to examine the direction of the short-run and long-run causality respectively. The cointegration analysis reveals that manufactured exports contribute more to economic growth than primary exports in the long-run. In addition, this research provides evidence to support a bi-directional causality between manufactured exports and economic growth in the short-run, while the Growth-Led Exports (GLE) hypothesis is valid in the long-run for UAE