New Economics Papers
on Financial Markets
Issue of 2007‒08‒14
five papers chosen by

  1. Determinants of the time varying risk premia By Pornpinun Chantapacdepong
  2. Risk, Uncertainty, and Option Exercise By Jianjun Miao; Neng Wang
  3. The Eclipse of Private Equity By Brian Cheffins; John Armour
  5. Volatility Forecasting for Crude Oil Futures By M. Marzo; P. Zagaglia

  1. By: Pornpinun Chantapacdepong
    Abstract: This paper generates monthly risk premia data using zero coupon government treasury bills for 43 countries over the period of 1994-2006. The measure of risk premia is based on the ARCH-in-Mean (ARCH-M) model introduced by Engle, Lilien and Robins (1987). We show that the risk premia are time varying and also vary considerably across sample countries. Countries with better financial development and higher income generally have lower risk premia of government assets. This study also examines the macroeconomic and political determinants of the risk premia by using cross-section and dynamic panel regression analyses. The results show that the risk premia are significantly affected by macroeconomic circumstances, especially economic growth and the real e¤ective exchange rate. The results are robust across the majority of countries in our study.
    Keywords: ARCH-in-Mean, term structure of interest rates, risk premium, dynamic panel regression analysis.
    JEL: E43 E44 G12 G15
  2. By: Jianjun Miao (Department of Economics, Boston University and Department of Finance, the Hong Kong University of Science and Technology); Neng Wang (Columbia Business School)
    Abstract: Many economic decisions can be described as an option exercise or optimal stopping problem under uncertainty. Motivated by experimental evidence such as the Ellsberg Paradox, we follow Knight (1921) and distinguish risk from uncertainty. To afford this distinction, we adopt the multiple-priors utility model. We show that the impact of ambiguity on the option exercise decision depends on the relative degrees of ambiguity about continuation payoffs and termination payoffs. Consequently, ambiguity may accelerate or delay option exercise. We apply our results to investment and exit problems, and show that the myopic NPV rule can be optimal for an agent having an extremely high degree of ambiguity aversion.
    Keywords: industry ambiguity, multiple-priors utility, real options, optimal stopping problem
    JEL: D81 G31
    Date: 2007–03
  3. By: Brian Cheffins; John Armour
    Abstract: Private equity, characterized by firms operating as privately held partnerships organizing the acquisition and 'taking private' of public companies, is currently dominating the business news due to deals growing rapidly in number and size. If the trend continues unabated, the 1989 prediction by economist Michael Jensen of 'the eclipse of the public corporation' could be proved accurate soon. This paper argues matters will work out much differently, with private equity being at least partially eclipsed. One possibility is that current market and legal conditions, which are highly congenial to public-to-private transactions, could be disrupted in ways that cause the private equity surge to stall or even go into reverse. The paper draws on history to make this point, discussing how the spectacular rise of conglomerates in the 1960s was reversed in subsequent decades and how the 1980s buyout boom led by LBO associations -- the private equity firms of the day -- collapsed. Factors that undercut conglomerate mergers and buyouts by LBO associations (e.g. the tightening of debt markets and increased regulation) potentially could do the same with the current wave of private equity buyouts, and cause at least a temporary eclipse of private equity deals. Even if conditions remain favorable to private equity, its eclipse is likely to occur in a different way. Privacy has been a hallmark of private equity, with industry leaders operating as secretive partnerships that negotiate buyouts behind closed doors and restructure portfolio companies outside the public gaze. However, assuming market conditions remain sufficiently favorable, top private equity firms, following the lead of the Blackstone Group, may well carry out public offerings. If this happens, then even if the taking private of publicly quoted companies remains a mainstream pursuit, the exercise will occur largely under the umbrella of public markets.
    JEL: K22 N20
    Date: 2007–03
  4. By: Francois Gourio (Boston University, Department of Economics)
    Abstract: I derive a production-based asset pricing formula to infer aggregate stock market returns from macroeconomic time series when the technology is putty-clay. Capital heterogeneity leads to variation in the aggregate stock market value through a new compositional effect. The asset pricing formula, which holds regardless of the stochastic discount factor, predicts that stock returns are high when the ratio of investment to gross job creation is low. This contrasts with the adjustment cost model which predicts that stock returns are high when the investment-capital ratio is high. Incorporating the putty-clay technology increases substantially the ability of the adjustment cost model to match the data on U.S. stock returns.
    Date: 2007–01
  5. By: M. Marzo; P. Zagaglia
    Date: 2007–07

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. 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.