Typically, portfolio diversification is achieved using two main strategies: investing in different classes of assets thought to have little or negative correlation or investing in similar classes of assets in multiple markets through international diversification. While these two strategies have both solid theoretical justification and strong empirical evidence exists as to the benefits, investors must be aware that correlation is dynamic and varies over time, changing the amount of portfolio diversification within a given asset allocation.
In the financial market, it is well-known that stock and bond are both of the primary investment instruments for composing the optimal investment portfolio. What is not so widely understood, however, is the relationship of stock and bond, which is of interest to both academics and financial institutions. Furthermore, for investors, stock-bond returns relation plays an important role in cross-market hedging, asset allocation, and risk diversification; See Fleming et al.(1998) , Kodres and Pritsker (2002).
It is well known that stock and bond returns exhibit a modest positive correlation over the long term. However, there is substantial time-variation in the relation between stock and bond returns over the short term, including sustained periods of negative correlation (Fleming, Kirby, and Ostdiek (2003), Gulko (2002), Li (2002), and Hartmann, Straetmans, and Devries (2001)). Characterizing this time-variation has important implications for understanding the economics of joint stock-bond price formation and may have practical applications in asset allocation and risk management.
In this paper, we attempt to better understand the correlation between the two most important financial asset returns: stock returns and bond returns. Many economists tend to believe that the prices of bonds and other assets should covary closely with stock prices because the prices of these assets are driven by a common underlying discount factor. However, bond markets may serve as a hedge during periods of stock market declines. In investments class, we regularly teach the capital allocation problem that deals with an optimal allocation between an optimal risky portfolio and risk-free assets and the asset allocation among risky assets such as stocks and bonds.
In this paper, we examine how the contemporaneous correlation between the daily corporate bond yield changes and the firms stock returns at the firm level (hereafter simply referred to as the stock-bond correlation) changes in relation to default risk, arguing that this stock-bond correlation provides useful information pertaining to the default risk of bonds for the firm. In particular, we show that the absolute value of the correlation between firm level bond yield changes and stock returns should be positively related to the default risk of the firm.
This paper studies the comovement between stock returns and long-term government bond returns, and attempts to explain the economic driving forces behind this relationship. The correlation of stock and bond returns plays a pivotal role in investors’ diversification and asset allocation decisions.
As far as a risk averse investor is concerned, uncertainty is the most important factor in pricing any financial asset. According to most asset pricing theories, uncertainty or risk is determined by the covariance between asset return and the market portfolio. Although it has been recognized for quite some time that the uncertainty of speculative prices, as measured by the variances and covariances, is changing through time, it was not until recently that financial economists have started explicitly modeling time variation in second or higherorder moments. Sufficient evidences are still to come from emerging markets like the Dhaka Stock Exchange (DSE) in Bangladesh.
Empirical studies in the capital structure find a positive relationship between firm size and leverage. Suggested explanations in the literature include: large firms tend to have more leverage perhaps because they are more transparent; have lower asset volatility; more diversified; naturally sell large enough debt issues so that the fixed costs of public borrowing are not prohibitive; have lower probability of default and less financial distress costs.
Fluctuations in leverage have come to the fore in the debate on the propagation of financial distress. In particular, the phenomenon of “de-leveraging” in which financial intermediaries as a group attempt to contract their balance sheets simultaeneously has received attention as a key part in the propagation mechanism.
One of the key predictions of modern finance is that expected returns on securities can be explained solely by their systematic risk (betas). Recent research (see Fama and French (1992, 1993)) has shown however that beta, the risk measure nominated by the Capital Asset Pricing Model (CAPM), has almost no ability to explain the cross-section of stock returns. Instead, there is considerable evidence that individual firm characteristics such as firm size, book to market (B/M) ratios and past stock returns are better predictors of the cross sectional variation in stock returns.
Determination of expected stock returns has been studied by many papers. The literature has mainly considered the US case even though more recently there have been analyses from international markets. Some research has also been conducted with data from emerging markets. There is a consensus about the relevance of multiple factors in the determination of expected stock returns, both for the US and for other markets.
There is strong empirical support for the notion that investors are crash-averse. The option pricing literature documents that deep out-of-the-money index puts, i.e. instruments that o er protection against extreme market downturns, have a high implied volatility, i.e. they are relatively expensive. Garleanu, Pedersen, and Poteshman (2009) show that this e ect is driven by high demand for out of the money puts, which drives up their price.
In the past two decades, financial economists have challenged the capital asset pricing model (CAPM) developed by Sharpe (1964) and Lintner (1965). In particular, there are three wellestablished CAPM-related anomalies: (1) the size premium (e.g., Basu, 1977 and Banz, 1981); (2) the value premium (e.g., Fama and French, 1992); and (3) the momentum profit (e.g., Jegadeesh and Titman, 1993). Some authors, e.g., Fama and French (1996) and Carhart (1997), argue that these anomalies reflect systematic risk and include them as additional risk factors in the empirical asset pricing models; others, however, attribute them to data mining or irrational pricing.
This paper investigates the impact of political cycles through the government spending channel on the cross section of U.S. stock returns. According to a partisan view of political cycles as in Alesina (1987), Republicans and Democrats differ in policies related to taxes, government spending and social benefits. We focus on government spending, which represents on average about 20% of annual U.S. gross domestic product. Most financial economists would agree that government spending has an impact on expected firm cash flows. In addition, the uncertainty about the impact of government policies may affect the rate at which future cash flows are discounted. We investigate empirically the importance of these channels.
It is now widely accepted that cross section stock returns can be forecast by the ratio of the current stock price to a number of accounting variables. For example it has been shown that returns can be forecast by the ratio of the market value to the book value of assets, Fama and French (1992), the price dividend ratio, Elton et al (1983), and the ratio of cash flow to market value of equity, Lakonishok et al (1994). Even the well known size effect, Banz (1981), falls into this class, since size is usually measured by stock price multiplied by the number of outstanding shares.
The question what door should investors care about? remains central in Asset Pricing and a variety of models continue to provide alternative answers. Investment opportunities are risky and investors face multiple sources of financial and macroeconomic risks that they should hedge themselves against when constructing their portfolios. This paper provides and supports the evidence that long-term investors care not only about variation between future and present consumption levels, but also and perhaps mostly about variation between future and present macroeconomic uncertainties.
Time-varying macroeconomic uncertainty is an important ingredient for asset valuation. When there is a great deal of uncertainty about how an economy will evolve overtime, this state is likely to be reflected in asset prices because financial markets demand premiums for bearing such non-diversifiable risk. The recent episode of financial crisis in 2008 shows that this is indeed a key link between macro variables and asset markets. However, the previous studies using macroeconomic models to explain asset prices did not pay much attention to this channel of generating risk premiums.
Countries considering whether to enter the proposed European Economic and Monetary Union (EMU) weigh the potential benefits of joining the currency union against the inevitable costs. Joining a currency union brings benefits such as a reduction in the transactions costs associated with trading goods and services between countries with different moneys.
Since the mid 1980s, a large body of literature has developed in which monetary policy is analyzed in micro founded, dynamic, stochastic, general equilibrium (DSGE) models of the business cycle with monopolistic competition and nominal rigidity. The importance of this New Keynesian literature (summarized, for instance, by Woodford, 2003) for policy making is evidenced by the current use of such models by many central banks or international institutions as input for policy decisions. Most of this literature, however, relies on monopolistic competition merely as a vehicle to introduce price (or wage) setting power and then assume that price (or wage) setting is not frictionless, resulting in nominal rigidity and a role for monetary policy.
Privatization has been a major phenomenon over the past few decades, and researchers continue to target it for both theoretical and empirical work. Given that most socialist and communist economies from every region in the world Eastern Europe, the ex-Soviet Union, China, Latin America, Africa, and the Middle East- have recently started implementing economic reform programs, the reduction in size of the public sector through privatization has therefore become an important part of such programs.
In the past decade, the financial sector has undergone large transformations in most countries around the world. Perhaps the most important factor behind these changes was the enactment of financial liberalization policies. These policies, including market deregulation, privatization of financial intermediaries, strengthening financial sector supervision and regulation, and reduction of barriers to international capital flows, were aimed at increasing the scope for market forces to operate in credit markets, thereby reducing the cost of credit or increase its availability.
Banks have always been central to the financial system in any economy, and by virtue of their role, they are the prime and undoubtedly the most prominent entities to centrally control the risk exposures existing in the financial system. The risks that I refer to here are primarily Market Risk and Credit Risk that exist because of the un-hedged exposures of Banks, Financial Institutions, corporate, and other customers towards the corresponding underlying rate.
The aim of this paper is to analyse co-movements in the fragility of EU-15 banks and verify to which extent such co-movements have increased in time, following, for example, the completion of Monetary Union and the introduction of the euro.
Concentrated ownership provides shareholders with incentives to monitor managers, and to exercise influence over decision-making within the firm. Such controlling shareholders tend to entrench managers against other corporate governance mechanisms to pursue their own interests, and enjoy private benefits of control.
How important is uncertainty about macroeconomic fundamentals for financial markets? The literature has tried to answer this question indirectly by measuring the response of asset prices, including those of derivatives, to macroeconomic announcements. Evidence that new information about the economy matters for financial markets implies that uncertainty in these markets should be associated with uncertainty about the state of the economy. Consistent with this reasoning, Ederington and Lee (1996) and Beber and Brandt (2006) document that the uncertainty implicit in options written on U.S.
The aim of this study is to explore the relationship between depression, irrational beliefs and treatment adherence in patients with type 2 diabetes. 58 adults with type 2 diabetes completed the Beck Depression Inventory (short form with 13 items), the Irrational Health Beliefs Scale (IHBS), the RIBS (Rational Irrational Beliefs Scale) and the SAAD-R (French translation of the Summary of Diabetes Self-Care Activities).
The National Institute of Dental and Craniofacial Research (NIDCR) is very pleased to sponsor this workshop on the oral complications and associations with insulin-dependent diabetes mellitus. It is estimated that more than 10 million Americans suffer from diabetes, and another six million people are yet to be diagnosed.
A recent trend in dynamic stochastic general equilibrium (DSGE) modeling has seen frictions and shocks proliferate to improve the fit of macro models. This modeling strategy has been prone to criticism. Among the new frictions, some like the rule-of-thumb behavior of price-setters and the backward indexing of wages and prices lack a convincing micro foundation (Woodford, 2007; Cogley and Sbordone, 2008), whereas of the many shocks now driving these models, some are dubiously structural and do not have a clear economic interpretation (Chari, Kehoe and McGrattan, 2009). But do DSGE models really need to rely on heavy batteries of frictions and shocks to account for the salient features of the postwar U.S. business cycle? The answer we provide in this paper is no.
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