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Procyclical assets tend to rise in value when the economy is expanding and fall with the advent of a recession. Countercyclical assets are instead negatively correlated with the state of the economy. Despite the use of optimization methods, hedging, and ad hoc rebalancing techniques most...
Persistent link: https://www.econbiz.de/10012919938
Accepted wisdom, assuming capital market equilibrium and low cash returns, advises investors to hold optimal portfolios containing little cash. But credit crunches - periods of non-price credit rationing when effective cash yields are very high - happen in the real world. Because of this, it is...
Persistent link: https://www.econbiz.de/10013153212
I first show that taking moving averages of the term spread, the dividend yield, and the Shiller’s CAPE, significantly increases their ability to predict one month and 12-month forward equity market excess returns, and the state of the business cycle. Dividend yield, CAPE and term spread are...
Persistent link: https://www.econbiz.de/10013245419
Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors' savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors' savings --- by enabling them to earn the aggregate risk...
Persistent link: https://www.econbiz.de/10012843488
Investors seek to hedge against interest rate risk by taking long or short positions on bonds ofdifferent maturities. We study changes in risk taking behavior in a low interest rateenvironment by estimating a market stochastic discount factor that is non-linear and thereforeconsistent with the...
Persistent link: https://www.econbiz.de/10012836549
Many monetary studies on the portfolio balance effect omit its impact to equity returns. Motivated through a simple general equilibrium model, we study how changes in the bond supply affect the overall equity market. Our model predicts that exogenous increases (decreases) in the bond supply...
Persistent link: https://www.econbiz.de/10013013046
This paper presents a present-biased general equilibrium model that explains many features of bond behavior. Present-biased investors increase (decrease) short-term (long-term) hedge demands compared to standard preferences. Hence, present bias drives up (down) short-term bond prices (yields)...
Persistent link: https://www.econbiz.de/10012822757
We provide a new portfolio decomposition formula that sheds light on the economics of portfolio choice for investors following the mean-variance (MV) criterion. We show that the number of components of a dynamic portfolio strategy can be reduced to two: the first is preference free and hedges...
Persistent link: https://www.econbiz.de/10012999249
We build a parsimonious international asset pricing model in which deviations of government bond yields from a fitted yield curve of a country measure the tightness of investors' capital constraints. We compute these measures at daily frequency for six major markets and use them to test the...
Persistent link: https://www.econbiz.de/10014122253
This paper compares the immunization performance of alternative single and multiple factor duration models, using Spanish government bond data, over 1, 2 and 3-year horizons. The aim is to assess whether the success of duration-matching strategies is primarily attributable to the particular...
Persistent link: https://www.econbiz.de/10014050760