Asset Return Dynamics
Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Doron Avramov, IDC Herzliya
A Model-Free Term Structure of United States Dividend Premiums
AbstractWe construct a model-free term structure of dividend risk premiums from option prices and aggregate analyst forecasts. Applying the method to 2004 - 2017 U.S. data, we find it is hump-shaped. Its level increases in business cycle contractions and decreases during expansions. The on average negative dividend term premium steepens in con- tractions and flattens in expansions, driven by strong variations in short-horizon div- idend premiums. Buying the next year of S&P 500 dividends whenever the one-year dividend risk premium is positive has earned twice the Sharpe ratio of the index.
Asset Pricing of International Equity under Cross-Border Investment Frictions
AbstractWe develop a tractable asset pricing model of international equity markets to investigate the impact of frictions in cross-border ﬁnancial investments on equity return dynamics and cross-border equity holdings across countries. We characterize the equilibrium of the model analytically at the limit as one country becomes large relative to all other countries. Our results clarify the distinct impact of cross-border holding costs, cash-ﬂow fundamentals comovement, and preferences on cross-border portfolio holdings, return comovement, and risk premia. The model offers a uniﬁed explanation for key empirical regularities in the cross-section of equity markets regarding cross-country return correlations, CAPM pricing errors, and equity portfolio home bias, which we document using aggregate return and portfolio holdings data from the U.S. and a cross-section of 40 other countries. Overall, our results suggest that asset pricing tests for international equity markets should take into account differences across countries in the degree of cross-border frictions.
Frequency Dependent Risk
AbstractWe provide a nonparametric framework for studying state vector dynamics and its associated risk prices. In a setting where the stochastic discount factor (SDF) decomposes into permanent and transitory components, we analyze their contribution to the unconditional asset return premium using frequency domain techniques. We show analytically that the co-spectrum between returns and the SDF only displays frequency dependencies through the state vector. Moreover, we demonstrate that state vector dynamics and its risk prices can be uncovered by studying the covariance between asset returns. Empirically, we find low and high-frequency risk to be differentially priced for US equities.
- G1 - General Financial Markets