Evaluating AssetPricing Models in International Financial Markets
Forskningsoutput: Avhandling › Doktorsavhandling (sammanläggning)
Abstract
This thesis consists of three empirical studies on assetprices in international financial markets. The purpose is threefold. First, to evaluate whether good predictions of economic variables may be obtained by pooling information from a broad group of financial variables. Second, to formulate assetpricing models from seven established stock markets. Third, to evaluate the assetpricing models in the presence of shortsales.
Chapter 2 applies a large data set, consisting of 167 monthly time series for the UK, both economic and financial, to simulate outofsample predictions of industrial production, inflation, threemonth TreasuryBills and other variables. Fifteen dynamic factor models that allow forecasting based on large panels of time series are considered. The performances of these factor models are then compared to the following competing models: a simple univariate autoregressive, a vector autoregressive, a leading indicator, and a nonexpectational Phillips curve models. The results show that the dynamic factor models outperform the competing models in forecasting at 6, 12, and 24month horizons. Two main findings are highlighted. First, the financial markets have a predictive power in terms of economic activity. Second, for some variables, the dynamic factor model appears to be more reliable than other competing models.
In an attempt to analyze the equity premium puzzle and the riskfree rate puzzle, Chapter 3 compares different assetpricing models within an international framework. To do so, it evaluates the performance of the following models: time separableconstant relative risk aversion, internal habit, external habit with externality, external habits which yield a constant riskfree rate, adaptive learning with constant gain, and state nonseparability. The data are from seven industrialized countries, namely the United States, Canada, Japan, the United Kingdom, France, Denmark, and Sweden. Regarding empirical evidence, this thesis uses the HansenJagannathan approaches to impose volatility restrictions on the assetpricing models. The timeseparable, adaptive learning and external habit models fail, and the evidence favors the internal habit persistence model. However, success is limited to some countries and to the equity premium puzzle rather than the riskfree rate puzzle. Finally, the statenonseparable specification consistently resolves the equity premium puzzle for all the countries.
Chapter 4 analyzes the effect of market frictions on the equity premium puzzle. Indeed, in the standard assetpricing model with timeseparable preferences, the volatility of the intertemporal marginal rate of substitution is too low for plausible values of risk aversion to be consistent with consumption and asset return data. Following this, the HansenJagannathan method is applied to evaluate the equity premium puzzle for the UK in two directions. First, the timeseparable model, the internal and the external habit formation models and the state nonseparable model are examined under the assumptions of both frictionless markets and market frictions. Second, a bootstrap experiment is conducted to show that these assetpricing models violate the HansenJagannathan bound in almost all the samples. Indeed, because of the changes in the sample means in consumption growth and asset returns, all the models appear to be weak under frictionless markets. By contrast, assetpricing models with market frictions are much more successful in the bootstrap experiment.
Chapter 2 applies a large data set, consisting of 167 monthly time series for the UK, both economic and financial, to simulate outofsample predictions of industrial production, inflation, threemonth TreasuryBills and other variables. Fifteen dynamic factor models that allow forecasting based on large panels of time series are considered. The performances of these factor models are then compared to the following competing models: a simple univariate autoregressive, a vector autoregressive, a leading indicator, and a nonexpectational Phillips curve models. The results show that the dynamic factor models outperform the competing models in forecasting at 6, 12, and 24month horizons. Two main findings are highlighted. First, the financial markets have a predictive power in terms of economic activity. Second, for some variables, the dynamic factor model appears to be more reliable than other competing models.
In an attempt to analyze the equity premium puzzle and the riskfree rate puzzle, Chapter 3 compares different assetpricing models within an international framework. To do so, it evaluates the performance of the following models: time separableconstant relative risk aversion, internal habit, external habit with externality, external habits which yield a constant riskfree rate, adaptive learning with constant gain, and state nonseparability. The data are from seven industrialized countries, namely the United States, Canada, Japan, the United Kingdom, France, Denmark, and Sweden. Regarding empirical evidence, this thesis uses the HansenJagannathan approaches to impose volatility restrictions on the assetpricing models. The timeseparable, adaptive learning and external habit models fail, and the evidence favors the internal habit persistence model. However, success is limited to some countries and to the equity premium puzzle rather than the riskfree rate puzzle. Finally, the statenonseparable specification consistently resolves the equity premium puzzle for all the countries.
Chapter 4 analyzes the effect of market frictions on the equity premium puzzle. Indeed, in the standard assetpricing model with timeseparable preferences, the volatility of the intertemporal marginal rate of substitution is too low for plausible values of risk aversion to be consistent with consumption and asset return data. Following this, the HansenJagannathan method is applied to evaluate the equity premium puzzle for the UK in two directions. First, the timeseparable model, the internal and the external habit formation models and the state nonseparable model are examined under the assumptions of both frictionless markets and market frictions. Second, a bootstrap experiment is conducted to show that these assetpricing models violate the HansenJagannathan bound in almost all the samples. Indeed, because of the changes in the sample means in consumption growth and asset returns, all the models appear to be weak under frictionless markets. By contrast, assetpricing models with market frictions are much more successful in the bootstrap experiment.
Detaljer
Författare  

Enheter & grupper  
Forskningsområden  Ämnesklassifikation (UKÄ) – OBLIGATORISK
Nyckelord 
Originalspråk  engelska 

Kvalifikation  Doktor 
Tilldelande institution  
Handledare/Biträdande handledare 

Tilldelningsdatum  2006 maj 19 
Förlag 

Status  Published  2006 
Publikationskategori  Forskning 