The Asymmetric Effect of the Business Cycle on the Realtion between Stock Market Returns and their Volatility

We examine the relation between US stock market returns and the US business cycle for the period 1960 - 2003 using a new methodology that allows us to estimate a time-varying equity premium. We identify two channels in the transmission mechanism. One is through the mean of stock returns via the equity risk premium, and the other is through the volatility of returns. We provide support for previous findings based on simple correlation analysis that the relation is asymmetric with downturns in the business cycle having a greater negative impact on stock returns than the positive effect of upturns. We also obtain a new result, that demand and supply shocks affect stock returns differently. Our model of the relation between returns and their volatility encompasses CAPM, consumption CAPM and Merton's (1973) inter-temporal CAPM. It is implemented using a multi-variate GARCH-in-mean model with an asymmetric time-varying conditional heteroskedasticity and correlation structure.Equity returns, risk premium, asymmetry

An Asset Market Integration Test Based on Observable Macroeconomic Stochastic Discount Factors

There are a number of tests and measures of the degree of integration in the literature. An example is the idea that integrated markets should provide rates of return that are highly correlated with one another and that a measure of correlation provides an appropriate test. This particular idea is clearly false; for substantial periods of time we don't ever see stocks traded on the same market moving together. Specific models of what prices risk in individual markets could provide the basis of a test of integration. However, as has been widely shown, any differences between these pricing models will be subject to arbitrage by informed traders and so cannot form the basis for a test. In this paper we exploit the absence of arbitrage possibilities and the operation of the 'Law of One Price' in stochastic discount factor (SDF) theory to construct a test of integration based on a common approach to pricing assets in all markets, not only for stocks. The SDF approach that we adopt says that one SDF should price all assets as the model is not market or asset-specific.Unlike much of the literature, we adopt a direct parametric approach which takes estimates of an identical SDF from two asset markets and asks whether the price of risk associated with this SDF is the same for the two assets as SDF theory says it should. Another distinctive feature of our approach is that we employ observable macroeconomic factors. This allows us to estimate and compare the estimated risk premia in the markets concerned, with and without the integration restriction being applied. The paper uses this methodology to test market integration between the UK equity and FOREX markets. Our test rejects market integration for the consumption-based capital asset pricing model (CCAPM) and two variable SDF models based on consumption growth and inflation and on output and money growth. As equity and FOREX returns have a similar degree of variability, the finding that the risk premium in the FOREX market is generally much more variable than that in the equity market may contribute to the the test outcome.

Macroeconomic Sources of Equity Risk

There are very few estimates of a time-varying equity risk premium based on models that satisfy a no-arbitrage condition. The main aim of this paper is to estimate the US and UK equity risk premia implied by a number of well-known asset pricing models using monthly data for 1975-2001. The models include consumption-based CAPM with power utility, the Epstein-Zin general equilibrium model with time non-separable preferences, CAPM, and the SDF model. We show that most of the theoretical models of the equity risk premium that have been proposed in the literature are special cases the SDF model. We explain why some of them are unable to do this as formulated. In addition to examining existing theories of the equity risk premium, we use the SDF model to generate new theories. We find that macroeconomic variables not previously considered, and not consistent with standard general equilibrium theory, such as production, appear to be priced for the equity risk premium. This suggests that traditional general equilibrium considerations may not be the sole explanation for the equity risk premium; other short-term factors associated with pure price risk may also be involved. A related, and rapidly growing, literature adopts a more statistical approach. It focusses on the empirical relation between the return on equity (or the Sharpe ratio) and return volatility. We use SDF theory to show that this relation is misconceived. The reason for the absence of estimates of the equity risk premium is the difficulty of estimating it. Most of the empirical evidence on these asset pricing models is based on calibration, or the estimation of the Euler equation by GMM, neither of which delivers an estimate of the risk premium. We use a new empirical approach that does produce estimates of the risk premium and allows tests of the theories. As a result we provide the first estimates of the equity risk premium for some of these models. We then use our estimates to investigate the importance of different components of the equity risk premium including, amongst others, return volatility.

Effect of resonance decays on hadron elliptic flows

The influence of resonance decays on the elliptic flows of stable hadrons is studied in the quark coalescence model. Although difference between the elliptic flow of pions from resonance decays, except the rho meson, and that of directly produced pions is appreciable, those for other stable hadrons are small. Since there are more pions from the decays of rho mesons than from other resonances, including resonance decays can only account partially the deviation of final pion elliptic flow from the observed scaling of hadron elliptic flows, i.e., the hadron elliptic flow per quark is the same at same transverse momentum per quark. The remaining deviation can be explained by including the effect due to the quark momentum distribution inside hadrons.Comment: 13 pages and 5 figures, version pubblished in PRC, updated references and figure

Strong coupling of single emitters to surface plasmons

We propose a method that enables strong, coherent coupling between individual optical emitters and electromagnetic excitations in conducting nano-structures. The excitations are optical plasmons that can be localized to sub-wavelength dimensions. Under realistic conditions, the tight confinement causes optical emission to be almost entirely directed into the propagating plasmon modes via a mechanism analogous to cavity quantum electrodynamics. We first illustrate this result for the case of a nanowire, before considering the optimized geometry of a nanotip. We describe an application of this technique involving efficient single-photon generation on demand, in which the plasmons are efficiently out-coupled to a dielectric waveguide. Finally we analyze the effects of increased scattering due to surface roughness on these nano-structures.Comment: 34 pages, 7 figure

Observation of modified hadronization in relativistic Au+Au collisions: a promising signature for deconfined quark-gluon matter

Measurements of identified particles from Au+Au collisions at $\sqrt{s_{_{NN}}}=200$ GeV are reviewed. Emphasis is placed on nuclear modification, baryon-to-meson ratios, and elliptic flow at intermediate transverse momentum ($1.5 < p_T < 5$ GeV/c). Possible connections between (1) these measurements, (2) the running coupling for static quark anti-quark pairs at finite temperature, and (3) the creation of a deconfined quark-gluon phase are presented. Modifications to hadronization in Au+Au collisions are proposed as a likely signature for the creation of deconfined colored matter.Comment: 8 pages, 5 figures, invited talk at the Strange Quark Matter 2004 conference, Cape Town, South Afric

Evidence from Identified Particles for Active Quark and Gluon Degrees of Freedom

Measurements of intermediate pT (1.5 < pT < 5.0 GeV/c) identified particle distributions in heavy ion collisions at SPS and RHIC energies display striking dependencies on the number of constituent quarks in the corresponding hadron. One finds that elliptic flow at intermediate pT follows a constituent quark scaling law as predicted by models of hadron formation through coalescence. In addition, baryon production is also found to increase with event multiplicity much faster than meson production. The rate of increase is similar for all baryons, and seemingly independent of mass. This indicates that the number of constituent quarks determines the multiplicity dependence of identified hadron production at intermediate pT. We review these measurements and interpret the experimental findings.Comment: 8 pages, 5 figures, proceedings for SQM2006 conference in Los Angele

Fluctuation and flow probes of early-time correlations in relativistic heavy ion collisions

Fluctuation and correlation observables are often measured using multi-particle correlation methods and therefore mutually probe the origins of genuine correlations present in multi-particle distribution functions. We investigate the common influence of correlations arising from the spatially inhomogeneous initial state on multiplicity and momentum fluctuations as well as flow fluctuations. Although these observables reflect different aspects of the initial state, taken together, they can constrain a correlation scale set at the earliest moments of the collision. We calculate both the correlation scale in an initial stage Glasma flux tube picture and the modification to these correlations from later stage hydrodynamic flow and find quantitative agreement with experimental measurements over a range of collision systems and energies.Comment: Proceedings of the 28th Winter Workshop on Nuclear Dynamics, Dorado del Mar, Puerto Rico, April 7-14, 201

Finite hadronization time and unitarity in quark recombination model

The effect of finite hadronization time is considered in the recombination model, and it is shown that the hadron multiplicity turns out to be proportional to the initial quark density and unitarity is conserved in the model. The baryon to meson ratio increases rapidly with the initial quark density due to competition among different channels.Comment: 4 pages in RevTeX, 3 eps figures, to appear in J. Phys.G as a lette