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Expected Equity Returns Should Correlate with Idiosyncratic Risk

Bruno, Giovanni - 2018

law of one price, and is present in all but risk-neutral economies. We test the cross-sectional predictions of our theory … equity than for assets, and stronger for more levered firms — consistent with the theory. We test also the timeseries … implications of the theory. Time variation in asset ivol causes time variation in the option value of equity that translates into …

Persistent link: https://www.econbiz.de/10012910108

When Uncertainty and Volatility Are Disconnected : Implications for Asset Pricing and Portfolio Performance

Aït-Sahalia, Yacine; Matthys, Felix; Osambela, Emilio; … - 2021

We analyze an environment where the uncertainty in the equity market return and its volatility are both stochastic, and may be potentially disconnected. We solve a representative investor's optimal asset allocation and derive the resulting conditional equity premium and risk-free rate in...

Persistent link: https://www.econbiz.de/10013227154

Ambiguous Information, Portfolio Inertia, and Excess Volatility

Illeditsch, Philipp K. - 2011

I study the effects of risk and ambiguity (Knightian uncertainty) on optimal portfolios and equilibrium asset prices when investors receive information that is difficult to link to fundamentals. I show that the desire of investors to hedge ambiguity leads to portfolio inertia and excess...

Persistent link: https://www.econbiz.de/10013133587

Price impact and portfolio impact

Cvitanić, Jakša; Malamud, Semyon - 2010

We study survival, price impact and portfolio impact in heterogeneous economies. We show that, under the equilibrium risk-neutral measure, long-run price impact is in fact equivalent to survival, whereas longrun portfolio impact is equivalent to survival under an agent-specific, wealth-forward...

Persistent link: https://www.econbiz.de/10003979998

Volatility Ambiguity, Consumption and Asset Prices

Liu, Yu - 2020

We formulate a stylized model that admits volatility ambiguity to the Lucas framework. The model specifies an economically motivated ambiguity penalty function that makes volatility ambiguity quantifiable with χ2-statistics, and allows for analytical solutions. The addition of volatility...

Persistent link: https://www.econbiz.de/10012843681

Challenges of Indexation in S&P 500 Index Volatility Investment Strategies

Sundberg, Margaret - 2019

S&P 500 Index option-based volatility indexes have untenable risk-return profiles. These volatility indexes are not designed with consideration of important real-world risk characteristics of options and fail to represent volatility as a differentiated asset-class with relevance to the long-term...

Persistent link: https://www.econbiz.de/10012865881

Is idiosyncratic risk conditionally priced?

Mehra, Rajnish; Wahal, Sunil; Xie, Daruo - In: Quantitative economics : QE ; journal of the … 12 (2021) 2, pp. 625-646

In Merton (1987), idiosyncratic risk is priced in equilibrium as a consequence of incomplete diversification. We modify his model to allow the degree of diversification to vary with average idiosyncratic volatility. This simple recognition results in a state-dependent idiosyncratic risk premium...

Persistent link: https://www.econbiz.de/10012598449

Mean Swap Variance, Portfolio Thoery and Asset Pricing

Chow, Victor - 2018

the classical MV portfolio theory and the CAPM, is consistent with expected utility maximization for all risk …

Persistent link: https://www.econbiz.de/10012934044

Over or Under? Momentum, Idiosyncratic Volatility and Overreaction

Heidari, Mahdi - 2015

Several studies have attributed the high excess returns of the momentum strategy in the equity market to investor behavioral biases. However, whether momentum effects occur because of investor underreaction or because of investor overreaction remains a question. Using a simple model to...

Persistent link: https://www.econbiz.de/10013012436

Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions

Semmler, Willi - 2020

This paper analyzes the implications of short-termism on portfolio decisions of investors, and its potential consequences on green investments. We study a dynamic portfolio choice problem that contains two assets, one asset with fluctuating returns and another asset with a constant risk-free...

Persistent link: https://www.econbiz.de/10012823712