145 research outputs found
Efficient Consumption Set Under Recursive Utility and Unknown Beliefs
In a context of complete financial markets where asset prices follow Ito's processes, we characterize the set of consumption processes which are optimal for a given stochastic differential utility (e.g. Duffie and Epstein (1992)) when beliefs are unknown. Necessary and sufficient conditions for the efficiency of a consumption process, consists of the existence of a solution to a quadratic backward stochastic differential equation and a martingale condition. We study the efficiency condition in the case of a class of homothetic stochastic differential utilities and derive some results for those particular cases. In a Markovian context, this efficiency condition becomes a partial differential equation.recursive utility; quadradtic backward stochastic differential equations; beliefs; martingale condition
Monte Carlo computation of optimal portfolios in complete markets
We introduce a method that relies exclusively on Monte Carlo simulation in order to compute numerically optimal portfolio values for utility maximization problems. Our method is quite general and only requires complete markets and knowledge of the dynamics of the security processes. It can be applied regardless of the number of factors and of whether the agent derives utility from intertemporal consumption, terminal wealth or both. We also perform some comparative statics analysis. Our comparative statics show that risk aversion has by far the greatest influence on the value of the optimal portfolio
Asset pricing implications of benchmarking: A two-factor CAPM
In this paper we consider the equilibrium effects of an institutional investor whose performance is benchmarked to an index. In a partial equilibrium setting, the objective of the institutional investor is modeled as the maximization of expected utility (an increasing and concave function, in order to accommodate risk aversion) of final wealth minus a benchmark. In equilibrium this optimal strategy gives rise to the two-beta CAPM in Brennan (1993): together with the market beta a new risk-factor (that we call active management risk) is brought into the analysis. This new beta is deffined as the normalized (to the benchmark's variance) covariance between the asset excess return and the excess return of the market over the benchmark index. Different to Brennan, the empirical test supports the model's predictions. The cross-section return on the active management risk is positive and signifficant especially after 1990, when institutional investors have become the representative agent of the market.Asset pricing, benchmark portfolio, relative performance
Monte Carlo Valuation of Optimal Portfolios in Complete Markets
We introduce a method that relies exclusively on Monte Carlo simulation in order to compute optimal portfolios. Our method is completely general and only requires complete markets and knowledge of the dynamics of the security processes. It is precise and easy to implement. It can be applied regardless or the number of factors and of whether the agent derives utility from intertemporal consumption, terminal wealth or both. We perform some comparative statics and find that portfolios are sensitive to parameter values outside the class of affine models traditionally considered in the literature. The method we suggest can also be applied to the computation of the optimal hedge of a derivative when Monte Carlo simulation is used as a pricing method.
Keeping up with the Joneses: An international asset pricing model
We derive an international asset pricing model that assumes local investors have preferences of the type "keeping up with the Joneses." In an international setting investors compare their current wealth with that of their peers who live in the same country. In the process of inferring the country's average wealth, investors incorporate information from the domestic market portfolio. In equilibrium, this gives rise to a multifactor CAPM where, together with the world market price of risk, there exists country-speciffic prices of risk associated with deviations from the country's average wealth level. The model performs signifficantly better, in terms of explaining cross-section of returns, than the international CAPM. Moreover, the results are robust, both for conditional and unconditional tests, to the inclusion of currency risk, macroeconomic sources of risk and the Fama and French HML factor.Consumption externalities, multifactor asset pricing model
The role of institutional investors in international trading: an explanation of the home bias puzzle
We postulate that the growing participation of institutional investors in capital markets along with their particular
o~jective function might help to explain the home equity bias puzzle. We model an institutional investor as a
risk averse investor that has access to international financial marckets and tries to maximize expected utility
resulting from the difference between final wealth and an exogenously given index formed exlusively by
domestic securities (the benchmark index); we show that for some values of the covariances and betas, this
objective will induce a home bias. We study the effects of this optimal strategy on a simple one-period
equilibrium and obtain a multibeta CAPM; as a novelty, one of the betas is refered to the excess return of the
benchmark index. We test this model using data from six countries and we show that the index helps to explain
the excess return of domestic securites. This effect is obvious when we compare a recent subperiod (when
institutional investors have a larger weight in capital markets) with a previous subperiod
Asset pricing implications of the mismatch between performance window and benchmark duration
Short performance windows shrink fund managers' investment horizons well below
value investors' long-term investment mandates. We unravel that the frictions tied to
the asset management industry are responsible for the recent empirical ndings show-
ing that the risk premium, volatility, and Sharpe ratio on short-term dividend strips
are higher than long-term dividend strips | ndings that are at odds with the lead-
ing equilibrium asset pricing models. The interplay between fund managers' relative
performance objective and short-term performance window is the primary equilibrium
channel, which remains robust to various extensions. Our continuous-time setup admits
closed-form expressions and is supported by additional empirical evidence.https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3852487First author draf
The intensity of keeping up with the Joneses: evidence from neighbour effects in car purchases
We show that status-driven behaviour is largely determined by how connected a
community is. Using a unique dataset on car purchases in Southern California, we show
that social influence intensifies in suburban communities in which neighbours are likely
to know each other well. The effect of connected communities cannot be fully explained by word of mouth, as it spills over across different makes, and is particularly apparent in higher price segments. We argue that, in connected communities, the signalling of income or wealth through the public display of consumption has a substantial effect on the behaviour of neighbours.https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1805206First author draf
Uncertainty and dispersion of opinions
Other (The paper is a revised version of a paper, "The Distorting Incentives of Relative Performance Evaluationfor Equity Analysts." We thank Ricardo Alonso, Wayne Ferson, Javier Gil-Bazo (the discussant), Christopher Jones, Anthony Marino, Kevin Murphy, Oguzhan Ozbas, Selale Tuzel, Mark WesterÖeld, and the participants at the Second Brazilian Workshop of the Game Theory Society in honor of John Nash on the occasion of the 60th anniversary of Nash Equilibrium, the second CNMV International Conference on Securities Market, and the seminars at the University of Southern California and McMaster University, for their helpful comments. Min S. Kim, Boston University, Department of Finance (email: [email protected], homepage: https://sites.google.com/view/minskim/home. Fernando Zapatero, Corresponding author; Boston University, Department of Finance (email: [email protected]; homepage: https://www.bu.edu/questrom/proÖle/fernando-zapatero/
Uncertainty and dispersion of opinions
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1569888First author draf
- …