Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets

This paper analyzes optimal portfolio choice and consumption with stochastic volatility in incomplete markets. Using the Duffie-Epstein (1992) formulation of recursive utility in continuous time, it shows that the optimal portfolio demand for stocks under stochastic volatility varies strongly with the investor's coefficient of relative risk aversion, but only slightly with her elasticity of intertemporal substitution; by contrast, optimal consumption relative to wealth depends on both preference parameters. This paper also shows that stochastic variation in volatility produces an optimal intertemporal hedging demand for stocks which is negative when changes in volatility are instantaneously negatively correlated with excess stock returns and investors have coefficients of relative risk aversion larger than one. The absolute size of this demand increases with the size of this correlation, and also with the persistence of shocks to volatility. An application to the US stock market shows that empirically this correlation is negative and large, which implies a negative hedging demand for stocks. This application also shows that only low frequency shocks to volatility exhibit enough persistence to generate sizable hedging demands by long-term, risk averse investors. A comparative statics exercise shows that the size of hedging demands is considerably more sensitive to changes in persistence than to changes in correlation.

Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets

This paper analyzes optimal portfolio choice and consumption with stochastic volatility in incomplete markets. Using the Duffie-Epstein (1992) formulation of recursive utility in continuous time, it shows that the optimal portfolio demand for stocks under stochastic volatility varies strongly with the investor's coefficient of relative risk aversion, but only slightly with her elasticity of intertemporal substitution;by contrast, optimal consumption relative to wealth depends on both preference parameters. This paper also shows that stochastic variation in volatility produces an optimal intertemporal heding demand for stocks which is negative when changes in volatility are instantaneously negatively correlated with excess stock returns and investors have coefficients of relative risk aversion larger than one. The absolute size of this demand increase with the size of this correlation, and also with the persistence of shocks to volatility. An application to the US stock market shows that empirically this correlation is negative and large, which implies a negative hedging demand for stocks. This application also shows that only low frequency shocks to volatility exhibit enough persistence to generate sizable hedging demands by long-term, risk averse investors. A comparative statics exercise shows that the size of hedging deamnds is considerably more sensitive to changes in correlation.Intertemporal portfolio choice, continuous-time, stochastic volatility, long-term investors, recursive utility, characteristic function, spectral GMM.

Cephalon, Inc. Taking Risk Management Theory Seriously

We study a firm that justifies its novel use of equity derivatives as a cash-flow hedging strategy. Our purpose is to understand the challenge of translating risk management theory into managerial action. Cephalon Inc., a biotech firm, bought a large block of call options on its own stock. If the FDA approved the firm's new drug, the firm would have large cash needs, which the options were designed to meet. We analyze this stated rationale for the firm's choice, applying the cash flow hedging concepts articulated by Froot, Scharfstein and Stein (1993). In applying the theory to practice, there are lessons for both managers and theorists. Managers consider deadweight costs of financing and of risk management, whereas theory tends to ignore the latter costs. While theory is driven by costs of external financing, managers must measure these costs to arrive at decisions and this measurement problem is severe. Cephalon's risk management decisions seem motivated as much by fluctuations in the availability and cost of external financing and by accounting considerations as by fluctuations in operating cash flows or desired investment. Finally, even a field-based examination of this strategy cannot reject the conclusion that the transaction was motivated by goals other than risk management.

The relationship of the Hebrew priesthood to the Canaanite priesthood

https://place.asburyseminary.edu/ecommonsatsdissertations/1928/thumbnail.jp

Managing Social Business Hybrids in Global Contexts: The Case of Impact Sourcing Service Providers

This dissertation consists of three related essays that seek to understand the core contingencies and strategies of managing social-business hybrids (SBHs) in global contexts. SBHs are also known as hybrid organizations that run commercial operations with the goal of addressing a social (or environmental) problem. I focus on the empirical case of Impact Sourcing Service Providers (ISSPs) which are SBHs that operate in the global business services industry. These organizations hire and train staff from disadvantaged communities to provide services to regional and international business clients. The first essay contributes to the growing interest in how hybrid organizations manage paradoxical social-business tensions. This study identifies two major growth orientations - ‘community-focused’ and ‘client-focused’ growth - their inherent tensions and ways that hybrids manage them. The former favors slow growth and manages tensions through highly-integrated client and community relations; the latter promotes faster growth and manages client and community relations separately. Both growth orientations address social-business tensions in particular ways, but also create latent constraints that manifest when entrepreneurial aspirations conflict with the current growth path. The second essay examines the strategic potential of hybrid business models in the face of Africa’s persistent difficulties with catching up in established markets. Focusing on the global business services industry in Kenya and South Africa and the practice of impact sourcing, this study argues that while regular providers struggle to compete with global peers, hybrid model adopters manage to access underutilized labor pools through community organizations, and target less competitive niche client markets. In this context, critical industry, institutional and firm-level factors affecting hybrid model adoption are identified further. The third essay investigates the variation in business model configurations of SBHs as a function of the background and aspirations of the social entrepreneur, and the level of domestic competition and global client expectations. This study further introduces the concept of liability of embeddedness, which relates to risks and costs facing hybrids targeting business clients outside of the geographic context within which their social mission is highly valued. This study contributes to research on international social ventures and international business, in specifying antecedents and contingencies of targeting international vs. domestic business clients as a social venture

Strategic Asset Allocation in a Continuous-Time VAR Model

This note derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (1999), in which the expected excess return on a risky asset follows an AR(1)process, while the riskless interest rate is constant. The note also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is numerically close to that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.

Average Interest

We develop analytic pricing models for options on averages by means of a state-space expansion method. These models augment the class of Asian options to markets where the underlying traded variable follows a mean-reverting process. The approach builds from the digital Asian option on the average and enables pricing of standard Asian calls and puts, caps and floors, as well as other exotica. The models may be used (i) to hedge long period interest rate risk cheaply, (ii) to hedge event risk (regime based risk), (iii) to manage long term foreign exchange risk by hedging through the average interest differential, (iv) managing credit risk exposures, and (v) for pricing specialized options like range-Asians. The techniques in the paper provide several advantages over existing numerical approaches.

Strategic Asset Allocation in a Continuous-Time VAR Model

This paper derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (Q. J. Econ. 114 (1999) 433) in which the expected excess return on a risky asset follows an AR(1) process, while the riskless interest rate is constant. The paper also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is the limit of that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.Economic

The Determinants of Liquidity in the Corporate Bond Markets: An Application of Latent Liquidity

We present a new measure of liquidity known as “latent liquidity” and apply it to a unique corporate bond database to discern the characteristics of bonds that lead to higher liquidity. Unlike conventional measures of liquidity,such as trading volume and bid-ask spreads, our measure of liquidity does not use transactional information; instead, it uses information about the ownership of securities to measure the accessibility of a security by a securities dealer. Therefore, our measure has the important advantage of being able to assess liquidity for markets with extremely low trading activity, where transactions data are insufficient to compute traditional measures of liquidity, but where liquidity is still an important issue. We relate our proposed latent liquidity measure to bond characteristics such as amount outstanding, credit quality, maturity, age, optionality and industry segment. In the liquid segments of the market, where trade-based measures of liquidity are available, our proposed measure exhibits similar relationships to bond characteristics as the trade-based measures. However, latent liquidity exhibits greater consistency in terms of its relationships with bond characteristics, over time. In addition, in the illiquid segment of the market, the relationships of our measure to bond characteristics are also similar to what we observe in the liquid segment. This leads us to believe that our measure is a viable measure of liquidity, when trade-based measures are unavailable