nep-cfn 2006-03-11 papers

on Corporate Finance

Issue of 2006‒03‒11
two papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

Agency-Based Asset Pricing By Gary Gorton; Ping He
Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics By Sandy Suardi; O.T.Henry; N. Olekalns

By:	Gary Gorton; Ping He
Abstract:	We analyze the interaction between managerial decisions and firm value/asset prices by embedding the standard agency model of the firm into an otherwise standard asset pricing model. When the manager-agent's compensation depends on the firm's stock price performance, stock prices are set to induce the creation of future cash flows, instead of representing the discounted value of exogenous cash flows, as in the standard model. In our case, stock prices are formed via trading in the market to induce the managers to hold the number of shares consistent with the optimal effort level desired by the outside investors. We compare two price formation mechanisms, corresponding to two firm ownership structures. In the first, stock prices are formed competitively among a continuum of dispersed investors. In the second, stock prices are set by a single block shareholder, as a bargaining solution. Under both mechanisms there are persistent, dynamic, patterns of asst prices, The level of the equity premium and the return volatility depend on the risk aversion of the agents in the economy and the ownership structure of firms.
JEL:	G1
Date:	2006–03
URL:	http://d.repec.org/n?u=RePEc:nbr:nberwo:12084&r=cfn

Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics

By:	Sandy Suardi (MRG - School of Economics, The University of Queensland); O.T.Henry; N. Olekalns
Abstract:	Evidence suggests that short-term interest rate volatility peaks with the level of short rates, while equity volatility responds asymmetrically to positive and negative shocks. We present an LM based test that distinguishes between level effects and asymmetry in volatility which is robust to the presence of unidentified nuisance parameters under the null. There is strong evidence of a level effect and asymmetric response in the relationship between S&P 500 Index returns and 3-month US Treasury Bills. The conditional covariance depends on the level of the short rate which has implications for hedging equity returns against short term interest rate movements.
URL:	http://d.repec.org/n?u=RePEc:qld:uqmrg6:02&r=cfn

This nep-cfn issue is ©2006 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.

General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.

NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.