Browsing by Subject "Asset pricing"
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Item Communication, confidence and asset pricing.(2008-08) Xia, ChunStandard rational expectations models assume away direct communication among speculative traders and resort to psychological traits such as traders' overconfidence in information processing ability to explain the observed enormous trading activity in financial markets. Yet, a growing literature documents that social communication affects individual trading behavior and market trading patterns, and over- and underconfident traders may coexist. The dissertation thus has two general objectives: (1) to analyze the impact of social communication on asset pricing, agents' trading behavior and welfare, and (2) to examine how traders' changing confidences resulted from communication affect asset pricing and trading behavior. Chapter 2 develops an asset pricing model in which agents communicate information in social networks prior to trading. An agent who is more confident in her private information puts greater weight on her private signal than on signal received through communication when aggregating her information. The results are as follows: Proximity between agents in networks affects correlation of agent demands; Individual agent exploits information and influences price distinctly in different networks; Under certain circumstances social communication is welfare improving for all agents; Irrespective of different network structures, market trading patterns such as market liquidity, trading volume, price volatility and informational efficiency of prices are all higher in communication economy relative to those in economy where agents exploit private signals exclusively; Market trading patterns are strictly decreasing in agents' confidence in private signals. Interestingly, social communication can alternatively explain some intriguing empirical facts such as "gender trading differences" which were attributed to overconfidence. Chapter 3 develops a multi-period market model to examine the evolution of risk averse agents' confidence degrees in learning their abilities to obtain precise information and the properties of resulting price volatility, trading volume, and expected profits. Agents initially do not know their abilities which are related to the qualities of private signals. They assess abilities from communicating and comparing quality of their own signals with that of others. Agents are assumed to credit (blame) themselves strongly for favorable (unfavorable) outcomes. I demonstrate that under reasonable circumstances excessive trading activity can be associated with underconfidence.Item Essays in macroeconomics and asset pricing.(2009-07) Manaenkov, DaniilIn this dissertation I study the role recursive preferences due to Epstein and Zin (1989) play in macroeconomics and asset pricing. First I combine recursive preferences with long-run productivity growth risk and study the implications for asset pricing. Second, I focus on the preference for the timing of resolution of uncertainty that arises when one uses Epstein-Zin recursive utility, and the interaction of such preference with incentives to invest into technology that could cause uncertainty to be realized early. In the first part of this dissertation I setup a monetary production economy with capital accumulation and recursive preferences and evaluate model's implications for pricing of equity and nominal default-free bonds. Plausibly parameterized model generates equity premium of about 1%, large and positive nominal bond term premium. Equity and nominal bond excess returns are forecastable, but considerably less so than in the data. Model generates large inflation premium, that is fairly sensitive to the parameters of interest rate rule. In the second part I investigate the interaction between government policy and incentives to invest in risk-control technology in a heterogenous preference setting. Empirical studies show that intertemporal elasticity of substitution varies a great deal within population. I setup a stylized model where such heterogeneity leads to difference in preference for the timing of the resolution of uncertainty. The uncertainty in the model is about the future productivity of a risky technology. Investors can choose to observe an early signal about their individual future productivity (hence shifting the resolution of uncertainty to the earlier date) and cut exposure in case of a bad signal via conversion of a part of risky technology investment into safe investment. Government in the model has the power to influence the cost of borrowing and the return of the safe investment. I show that government policy has important implications both for the individual choice of whether to observe a signal about future productivity and for the aggregate output.Item Essays on portfolio choice over the life cycle.(2010-08) Guo, LeiChapter 1 firstly documents that in the U.S., the stock market participation rate over the life-cycle decreases as people age. This fact, however, can not be captured by standard model where smooth expected utility function predicts the decision maker stay in the stock market, given positive equity premium and independence between older people's non-asset income and stock return. This paper successfully replicates this fact by introducing Knightian uncertainty into a dynamic model with choices on medical care and consumption, as well as saving and portfolio. We assume the agents in the model have ambiguity towards the correlations between risky stock return and risky medical price inflation. In this environment, retirees quit the stock market under reasonable range of ambiguity towards the correlation. The key mechanism is that: The agents do not hold positive amount of stocks since they worry stocks co-vary positively with the non-asset income minus the health expenses. Similarly, they do not short stocks as they also worry that stocks and their de facto non-asset income may co-move negatively. Chapter 2 investigates the nature of riskiness in borrowing costs and its implication for households' portfolio choice over the life cycle. This paper firstly documents a negative correlation between borrowing cost and stock return as well as a wedge between saving and borrowing rates. This fact is then incorporated into life cycle portfolio choice model as key ingredient to study households' risky asset, safe asset and debt holdings. The model can deliver that the households' mean assets holdings are non zero in all three categories: loans, safe bonds and risky assets. And it shows as relative risk aversion increases, the asset holdings among all categories become more realistic. This improves the life cycle models with tight borrowing cost, where loan holdings are zero, which is inconsistent with data; and it improves from the model with loose borrowing constraint and risk free borrowing cost as low as saving rate, where agents invest too much in stocks. Yet the model can't deliver realistic asset holding with low constant relative risk aversion.