Asset Pricing: Implications of Financial Constraints
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Benjamin Hebert, Stanford University
Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing
AbstractIncentive problems make assets imperfectly pledgeable. Introducing these problems in an otherwise canonical general equilibrium model yields a rich set of implications. Asset markets are endogenously segmented. There is a basis going always in the same direction, as the price of any risky asset is lower than that of the replicating portfolio of Arrow securities. Equilibrium expected returns are concave in consumption betas, in line with empirical findings. As the dispersion of consumption betas of the risky assets increases, incentive constraints are relaxed and the basis reduced. When hit by adverse shocks, relatively risk tolerant agents sell the safest assets they hold.
Model-Free International Stochastic Discount Factors
AbstractWe provide a theoretical characterization of international stochastic discount factors (SDFs)
in incomplete markets under different degrees of market segmentation. Using 40 years of data
on a cross-section of countries, we estimate model-free SDFs and factorize them into permanent
and transitory components. We find that large permanent SDF components help to reconcile
the low exchange rate volatility, the exchange rate cyclicality, and the forward premium anomaly. However, under integrated markets, this entails highly volatile and almost perfectly comoving international SDFs. In contrast, segmented markets can generate less volatile and more dissimilar SDFs. In quest of relating the SDFs to economic fundamentals, we document strong links between proxies of financial intermediaries’ risk-bearing capacity and model-free international SDFs.
Self-Fulfilling Asset Prices
AbstractI develop a dynamic asset pricing model with collateral constraints and multiple equilibria. Expectations of the future value of collateral affect leverage and thus investor demand for assets. High collateral value implies high leverage and hence high asset prices, justifying the high value of the collateral. And conversely for low collateral value. As a consequence, asset prices can be self-fulfilling. Price crashes and booms, long price recoveries, price overshooting and misfiring, as well as leverage cycles transpire purely from investor expectations.
- G1 - General Financial Markets