Evaluating alternative methods for testing asset pricing models with historical data

We follow the correct Jagannathan and Wang (2002) framework for comparing the estimates and specification tests of the classical Beta and Stochastic Discount Factor/Generalized Method of Moments (SDF/GMM) methods. We extend previous studies by considering not only single but also multifactor models, and by taking into account some of the prescriptions for improving empirical tests suggested by Lewellen, Nagel and Shanken (2009). Our results reveal that SDF/GMM first-stage estimators lead to lower pricing errors than OLS, while SDF/GMM second-stage estimators display higher pricing errors than the classical Beta GLS method. While Jagannathan and Wang (2002), and Cochrane (2005) conclude that there are no differences when estimating and testing by the Beta and SDF/GMM methods for the CAPM, we show that their conclusion can not be extensible for multifactor models. Moreover, the Beta method (OLS and GLS) seem to dominate the SDF/GMM (first and second-stage) procedure in terms of estimators’ properties. These results are consistent across benchmark portfolios and sample periods.Beta Pricing Models; Stochastic Discount Factor; Pricing Errors; Evaluation of Factor Models.

A nonparametric dimension test of the term structure

This paper addresses the problem of conducting a nonparametric test of the dimension of the state variable vector in a continuous-time term structure model. The paper shows that a bivariate diffusion function of the short rate process is a sufficient condition for the term structure to be driven by two stochastic factors. Using an easy-to-implement kernel smoothing method the number of state variables can be tested under very unrestrictive assumptions. The results suggest that continuous-time models for the US interest rates should contain at least two stochastic factors

The Liquidity Premium in Equity Pricing under a Continuous Auction System.

The paper shows that the cost of illiquidity is not (positively) priced over all months in the Spanish continuous auction system, where liquidity is provideh in the absence of market makers. Two distinct approaches are employed. Both the two-step traditional cross-sectional method and the pooled cross-section time series analysis tend to indicate that the liquidity premium is negative during months other than January. Morever, the liquidity premium in January is positive (although not significant) and at the 10% level it seems to be significantly higher than the liquidity premium over the rest of the year. Therefore, given the previous results for the US market, we conclude that, independently of the market trading mechanism with the exception of NASDAQ, the behaviour of the relationship between the bid-ask spread and stock returns is rather similar.asset pricing; market microstructure; liquidity premium;

Measuring time-varying economic fears with consumption-based stochastic discount factors

This paper analyzes empirically the volatility of consumption-based stochastic discount factors as a measure of implicit economic fears by studying its relationship with future economic and stock market cycles. Time-varying economic fears seem to be well captured by the volatility of stochastic discount factors. In particular, the volatility of recursive utility-based stochastic discount factor with contemporaneous growth explains between 9 and 34 percent of future changes in industrial production at short and long horizons respectively. They also explain ex-ante uncertainty and risk aversion. However, future stock market cycles are better explained by a similar stochastic discount factor with long-run consumption growth. This specification of the stochastic discount factor presents higher volatility and lower pricing errors than the specification with contemporaneous consumption growth.Stochastic discount factor, economic fears, distance between probability measures, volatility of stochastic discount factor, consumption

Adverse selection, volume and transactions around dividend announcements in a continuous auction system.

We show that liquidity providers do not significantly respond to changes in information asymmetry risks, at least when we analyse their trading behaviour around dividend announcements of a representative sample of stocks in a continuous auction trading mechanism. the implicit bid-ask spread does not seem to change beyond what is normally conveyed through an increased number of transactions. We also document that the information in the trading behaviour of investors is primarily contained in the number of daily transactions.adverse selection; bid-ask spread; limit orders; dividend announcements;

Portfolio choice and the effects of liquidity

This paper shows how to introduce liquidity into the well known mean-variance framework of portfolio selection. Either by estimating mean-variance liquidity constrained frontiers or directly estimating optimal portfolios for alternative levels of risk aversion and preference for liquidity, we obtain strong effects of liquidity on optimal portfolio selection. In particular, portfolio performance, measured by the Sharpe ratio relative to the tangency portfolio, varies significantly with liquidity. Moreover, although mean-variance performance becomes clearly worse, the levels of liquidity on optimal portfolios obtained when there is a positive preference for liquidity are much lower than on those optimal portfolios where investors show no sign of preference for liquidity.Liquidity, mean-variance frontiers, performance, portfolio selection

The Automatic External Cardioverter-Defibrillator

In-hospital cardiac arrest remains a major problem but new technologies allowing fully automatic external defibrillation are available. These technologies allow the concept of “external therapeutic monitoring” of lethal arrhythmias. Since early defibrillation improves outcome by decreasing morbidity and mortality, the use of this device should improve the outcome of in-hospital cardiac arrest victims. Furthermore, the use of these devices could allow safe monitoring and treatment of patients at risk of cardiac arrest who not necessarily must be in conventional monitoring units (Intensive or Coronary Care Units) saving costs with a more meaningful use of resources. The capability to provide early defibrillation within any patient-care areas should be considered as an obligation (“standard of care”) of the modern hospital

Smiling under stochastic volatility

This paper studies the behavior of the implied volatility function (smile) when the true distribution of the underlying asset is consistent with the stochastic volatility model proposed by Heston (1993). The main result of the paper is to extend previous results applicable to the smile as a whole to alternative degrees of moneyness. The conditions under which the implied volatility function changes whenever there is a change in the parameters associated with Hestons stochastic volatility model for a given degree of moneyness are given.volatility smile, stochastic volatility, skewness, kurtosis, option pricing

A NONPARAMETRIC DIMENSION TEST OF THE TERM STRUCTURE

This paper addresses the problem of conducting a nonparametric test of the dimension of the state variable vector in a continuous-time term structure model. The paper shows that a bivariate diffusion function of the short rate process is a sufficient condition for the term structure to be driven by two stochastic factors. Using an easy-to-implement kernel smoothing method the number of state variables can be tested under very unrestrictive assumptions. The results suggest that continuous-time models for the US interest rates should contain at least two stochastic factors.

Multipath and interference errors reduction in gps using antenna arrays

The Global Positioning System (GPS) is a worldwide satellite based positioning system that provides any user with tridimensional position, speed and time information. The measured pseudorange is affected by the multipath propagation, which probably is the major source of errors for high precision systems. After a presentation of the GPS and the basic techniques employed to perform pseudorange measurements, the influence of the multipath components on the pseudorange measurement is explained. Like every system the GPS is also exposed to the errors that can be caused by the interferences, and a lot of civil applications need robust receivers to interferences for reasons of safety. In this paper some signal array processing techniques for reducing the code measurement errors due to the multipath propagation and the interferences are presented. Firstly, a non-adaptive beamforming is used. Secondly, a variant of the MUSIC and the maximum likelihood estimator can be used to estimate the DOA of the reflections and the interferences, and then a weight vector that removes these signals is calculated. In the third place, a beamforming with temporal reference is presented; the reference is not the GPS signal itself, but the output of a matched filter to the code. An interesting feature of the proposed techniques is that they can be applied to an array of arbitrary geometry.Peer ReviewedPostprint (published version