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on Financial Markets |
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Issue of 2016‒11‒27
four papers chosen by |
| By: | Itzhak Ben-David; Francesco Franzoni; Rabih Moussawi |
| Abstract: | Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities. |
| JEL: | G12 G14 G15 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22829&r=fmk |
| By: | Chunsheng Zhou |
| Abstract: | This paper uses the term structure of interest rates to explain the variations of stock prices and stock returns. It shows that interest rates have an important impact on stock returns, especially at long horizons. The hypothesis that expected stock returns move one-for-one with ex ante interest rates, which has been rejected strongly in other studies using short horizon data, is supported by long horizon data. The paper proposes, for the first time, a single measure---the present value of forward interest rates---to summarize the information of the term structure that is useful in characterizing the comovements of the equity market and the bond market, and finds that such a single measure explains a significant part of variation in dividend-price ratios. The paper also suggests that the high volatility of the stock market is related to the high volatility of long-term bond yields and may be accounted for by changing forecasts of discount rates. The findings of this paper are quite different from the typical findings of the previous work and may provide a reasonable economic explanation for the predictability of long-horizon stock returns. |
| Keywords: | Comovement ; stock market ; term structure |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:1996-03&r=fmk |
| By: | Favero, Carlo A.; Ortu, Fulvio; Tamoni, Andrea; Yang, Haoxi |
| Abstract: | We use the evidence on predictability of returns at diff erent horizons to discriminate among competing asset pricing models. Speci cally, we employ predictors-based variance bounds, i.e. bounds on the variance of the Stochastic Discount Factors (SDFs) that price a given set of returns conditional on the information contained in a vector of return predictors. We show that return predictability delivers variance bounds that are much tighter than the classical, unconditional Hansen and Jagannathan (1991) bounds. We use the predictors-based bounds to discriminate among three leading classes of asset pricing models: rare disasters, long-run risks and external habit. We nd that the rare disasters model of Nakamura, Steinsson, Barro, and Ursua (2013) is the best performer since it satis es rather comfortably the predictors-based bounds at all horizons. As for long-run risks, while the classical version of Bansal and Yaron (2004) is the model most challenged by the introduction of conditioning information since it struggles to meet the bounds at all horizons, the more general version of Schorfheide, Song, and Yaron (2016), which accounts for multiple volatility components, satisfi es the 1- and 5-year bounds as long as the set of test assets includes only equities and T-Bills. The Campbell and Cochrane (1999) habit model lies somehow in the middle: it performs quite well at our longest 5-year horizon while it struggles at the 1-year horizon. Finally, when the set of test assets is augmented with Treasury Bonds, the only model that is able to satisfy the predictors-based bounds is the rare disasters model |
| Keywords: | asset pricing models; predictors-based bound; return predictability |
| JEL: | E21 E32 E44 G12 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11645&r=fmk |
| By: | Gregory R. Duffee |
| Abstract: | This paper empirically examines the relation between the Treasury term structure and spreads of investment grade corporate bond yields over Treasuries. I find that noncallable bond yield spreads fall when the level of the Treasury term structure rises. The extent of this decline depends on the initial credit quality of the bond; the decline is small for Aaa-rated bonds and large for Baa-rated bonds. The role of the business cycle in generating this pattern is explored, as is the link between yield spreads and default risk. I also argue that yield spreads based on commonly-used bond yield indexes are contaminated in two important ways. The first is that they are "refreshed" indexes, which hold credit ratings constant over time; the second is that they usually are constructed with both callable and noncallable bonds. The impact of both of these problems is examined. |
| Keywords: | Credit risk ; yield spreads ; business cycles |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:1996-20&r=fmk |