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The Time-Varying Liquidity Risk of Value and Growth Stocks
The Time-Varying Liquidity Risk of Value and Growth Stocks

rpf232ImpliedTrees - Berkeley-Haas
rpf232ImpliedTrees - Berkeley-Haas

JDEP384hLecture23.pdf
JDEP384hLecture23.pdf

... dSt = a (St , t ) dt + b (St , t ) dWt , how do we model a path of the underlying stochastic process S (t )? Simple discretization might lead to what we used in Exercise 3.5 for geometric Brownian motion dS = µS δ t + σ S dX : ∆S = Sk +1 − Sk ≈ µSk δ t + σ Sk dX , where Sk = S (tk ). But this makes ...
Global Fixed Income Portfolio
Global Fixed Income Portfolio

... The farther into the future a cash flow is received, the lower its present value will be. The higher the discount rate (yield to maturity) is, the lower the value of the bond will be, all other factors being equal. A bond’s price and YTM are inversely related. An increase in YTM decreases the price ...
A Model of Growth and Informational Frictions
A Model of Growth and Informational Frictions

... when they trade, and are subject to preference shocks that re‡ect their private liquidity needs. Asset prices in my economy aggregate the private information of agents, and liquidity shocks represent a source of noise that prevents them from being fully revealing to both households and …rms. To avoi ...
Do Mutual Funds Time the Market? Evidence from
Do Mutual Funds Time the Market? Evidence from

... activities. We estimate the beta of a fund as the weighted average of betas of individual stocks held by the fund, and then measure the relations between fund betas and market returns (hereafter “holdings-based measure”). Several studies, including Grinblatt and Titman (1989, 1994), Grinblatt, Titm ...
The first widely-used model for option pricing is the Black Scholes
The first widely-used model for option pricing is the Black Scholes

... market in which the result is within the reasonable range.[10] [edit] Stochastic volatility models Main article: Heston model Since the market crash of 1987, it has been observed that market implied volatility for options of lower strike prices are typically higher than for higher strike prices, sug ...
Using Mean Reversion Skew andJoint Measure
Using Mean Reversion Skew andJoint Measure

... distant, the interest rate will be exactly at its long term average level. Even if there is an equilibrium distribution of rates within the model, the real world rate will fluctuate around its long term average. • We cannot simply draw our rate samples from this equilibrium distribution, because for ...
Dynamic Conditional Beta is Alive and Well in the
Dynamic Conditional Beta is Alive and Well in the

... the market’s aggregate reaction to shifts in a k-dimensional state vector that governs the stochastic investment opportunity set. Equation (4) states that in equilibrium, investors are compensated in terms of expected return for bearing market risk and for bearing the risk of unfavorable shifts in ...
Regulatory Capital Requirements under FTK and
Regulatory Capital Requirements under FTK and

Investor Sentiment and the Mean
Investor Sentiment and the Mean

... returns and contemporaneous volatility innovations. There are two ways to measure volatility innovation, as the unexpected change in current return volatility and as the unexpected change in future return volatility. Evidently these two measures are highly correlated, since the volatility process is ...
CSA Mutual Fund Risk Classification Methodology for Use in Fund
CSA Mutual Fund Risk Classification Methodology for Use in Fund

... funds lowered as they approached their maturity date, the shift in volatility was relatively small. The vast majority of target date funds will remain in the same risk band over the course of their existence even with the lowering of the volatility and the small minority that do shift, will not shif ...
Long-Short Commodity Investing - EDHEC
Long-Short Commodity Investing - EDHEC

The Information Content of Basel III Liquidity Risk Measures Abstract
The Information Content of Basel III Liquidity Risk Measures Abstract

... first large effort to calculate the LCR and the NSFR of U.S. commercial banks. In the second stage, we examine the links between the new liquidity risk measures and bank failures. We employ a bank failure model that links bank failure to insolvency and liquidity risks. We postulate that liquidity r ...
1 INVESTMENT: UNIT - 1 Investment involves making of a sacrifice
1 INVESTMENT: UNIT - 1 Investment involves making of a sacrifice

... price of the company’s shares goes up in the market. This allows shareholders to sell shares at profit, leading to capital gains. Investors can invest in shares either through primary market offerings or in the secondary market. Equity shares can be classified in different ways but we will be using ...
Idiosyncratic Risk and the Cross-Section of Stock Returns Ren´
Idiosyncratic Risk and the Cross-Section of Stock Returns Ren´

... further the relation between CSV and economic and financial variables. In particular, we find that there exists a substantial correlation between the equal-weighted CSV and consumption growth volatility. This is consistent with Tédongap (2010) who provides strong evidence that consumption volatilit ...
Speculative Betas - Fisher College of Business
Speculative Betas - Fisher College of Business

... We test this prediction using monthly time-series of disagreement about market earnings and economic uncertainty. Disagreement for a stock’s cash-flow is simply measured by the standard deviation of its analysts’ long-term earnings growth forecasts, as in Diether et al. (2002). The aggregate disagre ...
Speculative Betas - Harvard Business School
Speculative Betas - Harvard Business School

... We test this prediction using monthly time-series of disagreement about market earnings and economic uncertainty. Disagreement for a stock’s cash-flow is simply measured by the standard deviation of its analysts’ long-term earnings growth forecasts, as in Diether et al. (2002). The aggregate disagre ...
7 Derivatives Pricing and Applications of Stochastic Calculus
7 Derivatives Pricing and Applications of Stochastic Calculus

... cannot be observed. Thus, we often employ a traditional sample estimator for return variance: 2 = Var[rt] = Var[lnSt - lnSt-1] The difficulty with this procedure is that it requires that we assume that ...
Properties of Pricing Kernels - NYU Stern School of Business
Properties of Pricing Kernels - NYU Stern School of Business

... The first term is the lognormal term. The others illustrate the potential benefit of departing from normality, since they can increase entropy even when we hold the variance constant. Stan Zin refers to this as the never-a-dull-moment conjecture: if a model doesn’t work, you can in principle fix it ...
Expected Cost of Capital - International Actuarial Association
Expected Cost of Capital - International Actuarial Association

... Merton and Perold (1993) offered a framework for determining risk capital in a financial firm based on the cost of the implicit guarantee the firm provides to the individual financial products sold. Merton and Perold assume the price of such guarantees is observable from the market at large. For an ...
Basket Options on Heterogeneous Underlying Assets
Basket Options on Heterogeneous Underlying Assets

... non-…nancial …rms to cover some of their …nancial exposure with a single hedge and at a lower cost than if the company were to hedge each of these risks separately. This paper treats all the aspects related to basket options, such as modelization and empirical implementation of the theoretical model ...
Intergenerational risksharing and equilibrium asset prices
Intergenerational risksharing and equilibrium asset prices

... but no single generation owns the tree itself. The second tree is owned by older generations and sold to younger ones. The assumption of fixed asset supplies means that the social security system has large effects on asset prices but no effects on asset quantities; however our model suggests the direc ...
Screening techniques, sustainability and risk adjusted returns.
Screening techniques, sustainability and risk adjusted returns.

... The question remains, is this something that the financial industry itself must strive for to achieve, or is it up to individual investors to make an in-depth analysis of the companies that comprise, for example, fund portfolios. And would investors choose to invest in sustainable funds even if the ...
estimation of future volatility
estimation of future volatility

... Two different approaches are available to estimate this volatility value. The first was described in Section 3, when historical data of the underlying asset was used for the estimation. The other approach is to use the option pricing formula backward, calculating the implied volatility of the pricin ...
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Modern portfolio theory

Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics.MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has lower overall risk than any other combination of assets with the same expected return. This is possible, intuitively speaking, because different types of assets sometimes change in value in opposite directions. For example, to the extent prices in the stock market move differently from prices in the bond market, a combination of both types of assets can in theory generate lower overall risk than either individually. Diversification can lower risk even if assets' returns are positively correlated.More technically, MPT models an asset's return as a normally or elliptically distributed random variable, defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets, so that the return of a portfolio is the weighted combination of the assets' returns. By combining different assets whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient.MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, some theoretical and practical criticisms have been leveled against it. These include evidence that financial returns do not follow a normal distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). Further, there remains evidence that investors are not rational and markets may not be efficient. Finally, the low volatility anomaly conflicts with CAPM's trade-off assumption of higher risk for higher return. It states that a portfolio consisting of low volatility equities (like blue chip stocks) reaps higher risk-adjusted returns than a portfolio with high volatility equities (like illiquid penny stocks). A study conducted by Myron Scholes, Michael Jensen, and Fischer Black in 1972 suggests that the relationship between return and beta might be flat or even negatively correlated.
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