nep-bec New Economics Papers
on Business Economics
Issue of 2012‒02‒15
seven papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Myths and facts about the alleged over-pricing of U.S. real estate. Evidence from multi-factor asset pricing models of REIT returns By Massimo Guidolin; Francesco Ravazzolo; Andrea Donato Tortora
  2. The asymmetric effects of scarcity and abundance on storable commodity price dynamics and hedge ratios. By Carbonez, Katelijne; Nguyen, Thi Tuong Van; Sercu, Piet
  3. A Random Matrix Approach to Dynamic Factors in macroeconomic data By Ma{\l}gorzata Snarska
  4. A mathematical treatment of bank monitoring incentives By Henri Pag\`es; Dylan Possamai
  5. Making the case for a low intertemporal elasticity of substitution By R. Anton Braun; Tomoyuki Nakajima
  6. A tractable LIBOR model with default risk By Zorana Grbac; Antonis Papapantoleon
  7. Modeling electricity spot prices using mean-reverting multifractal processes By Martin Rypdal; Ola L{\o}vsletten

  1. By: Massimo Guidolin (IGIER, Bocconi University and CAIR, Manchester Business School); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)); Andrea Donato Tortora (Bocconi University, Milan)
    Abstract: This paper uses a multi-factor pricing model with time-varying risk exposures and premia to examine whether the 2003-2006 period has been characterized, as often claimed by a number of commentators and policymakers, by a substantial missprcing of publicly traded real estate assets (REITs). The estimation approach relies on Bayesian methods to model the latent process followed by risk exposures and idiosynchratic volatility. Our application to monthly, 1979-2009 U.S. data for stock, bond, and REIT returns shows that both market and real consumption growth risks are priced throughout the sample by the cross-section of asset returns. There is weak evidence at best of structural misspricing of REIT valuations during the 2003-2006 sample.
    Keywords: REIT returns, Bayesian estimation, Structural instability, Stochastic volatility, Linear factor models
    JEL: G11 C53
    Date: 2011–12–27
  2. By: Carbonez, Katelijne; Nguyen, Thi Tuong Van; Sercu, Piet
    Abstract: This paper revisits the asymmetric effect of the basis on commodity spot and futures price volatilities documented by Kogan, Livdan and Yaron (2008) and Lien and Yang (2008). Kogan et al. (2008) show both theoretically and empirically that, for a non-storable consumption good, the relationship between commodity price volatility and the basis exhibits a V-shape. Lien and Yang (2008) illustrate the existence of an asymmetric effect of the basis on commodity price volatilities for storable commodities. Their results seem to imply that both scarcity and abundance increase spot and futures price volatility, a counter-intuitive result. The aim of this article is twofold: (i) test the presence and the robustness of the asymmetric effect for storable agricultural commodities by analyzing different sample periods, longer horizons and alternative utility functions; and - given that this asymmetric effect turns out not to be robust - (ii) explore new variables besides the basis to proxy for scarcity, analyze whether they exhibit an asymmetric effect and test their performance in modeling storable commodity price volatility and in hedging futures positions. Our results provide little support for a V-shaped relationship between the basis and storable agricultural commodity price volatilities. Though an asymmetric effect is present in that the size of the coe±cient for a positive basis is much larger than for a negative basis, a negative basis does not lead to higher volatilities. Moreover, we find that the strong hedging performance documented by Lien and Yang (2008) when including the asymmetric basis in the volatility specification is not robust across sample periods, for longer hedging horizons and for alternative utility functions. More positively, though, our results indicate that alternative scarcity specifications do have the expected positive link with volatility and often outperform more simple models in terms of hedging performance. Unfortunately, no single variable consistently leads to better results out-of-sample and there is often no correspondence between the best performing model in- and out-of-sample.
    Date: 2010–02–23
  3. By: Ma{\l}gorzata Snarska
    Abstract: We show how random matrix theory can be applied to develop new algorithms to extract dynamic factors from macroeconomic time series. In particular, we consider a limit where the number of random variables N and the number of consecutive time measurements T are large but the ratio N / T is fixed. In this regime the underlying random matrices are asymptotically equivalent to Free Random Variables (FRV).Application of these methods for macroeconomic indicators for Poland economy is also presented.
    Date: 2012–01
  4. By: Henri Pag\`es; Dylan Possamai
    Abstract: In this paper, we take up the analysis of a principal/agent model with moral hazard introduced in \cite{pages}, with optimal contracting between competitive investors and an impatient bank monitoring a pool of long-term loans subject to Markovian contagion. We provide here a comprehensive mathematical formulation of the model and show using martingale arguments in the spirit of Sannikov \cite{san} how the maximization problem with implicit constraints faced by investors can be reduced to a classic stochastic control problem. The approach has the advantage of avoiding the more general techniques based on forward-backward stochastic differential equations described in \cite{cviz} and leads to a simple recursive system of Hamilton-Jacobi-Bellman equations. We provide a solution to our problem by a verification argument and give an explicit description of both the value function and the optimal contract. Finally, we study the limit case where the bank is no longer impatient.
    Date: 2012–02
  5. By: R. Anton Braun; Tomoyuki Nakajima
    Abstract: We provide two ways to reconcile small values of the intertemporal elasticity of substitution (IES) that range between 0.35 and 0.5 with empirical evidence that the IES is large. We do this reconciliation using a model in which all agents have identical preferences and the same access to asset markets. We also conduct an encompassing test, which indicates that specifications of the model with small values of the IES are more plausible than specifications with a large IES.
    Date: 2012
  6. By: Zorana Grbac; Antonis Papapantoleon
    Abstract: We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.
    Date: 2012–02
  7. By: Martin Rypdal; Ola L{\o}vsletten
    Abstract: We discuss stochastic modeling of volatility persistence and anti-correlations in electricity spot prices, and for this purpose we present two mean-reverting versions of the multifractal random walk (MRW). In the first model the anti-correlations are modeled in the same way as in an Ornstein-Uhlenbeck process, i.e. via a drift (damping) term, and in the second model the anti-correlations are included by letting the innovations in the MRW model be fractional Gaussian noise with H < 1/2. For both models we present approximate maximum likelihood methods, and we apply these methods to estimate the parameters for the spot prices in the Nordic electricity market. The maximum likelihood estimates show that electricity spot prices are characterized by scaling exponents that are significantly different from the corresponding exponents in stock markets, confirming the exceptional nature of the electricity market. In order to compare the damped MRW model with the fractional MRW model we use ensemble simulations and wavelet-based variograms, and we observe that certain features of the spot prices are better described by the damped MRW model. The characteristic correlation time is estimated to approximately half a year.
    Date: 2012–01

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