Search Results
Journal Article
Can risk aversion explain stock price volatility?
Why are the prices of stocks and other assets so volatile? Efficient capital markets theory implies that stock prices should be much less volatile than actually observed, reflecting an unrealistic assumption that investors are risk neutral. If instead investors are assumed to be risk averse, predicted volatility is higher. However, models that incorporate investor avoidance of risk can explain real-world stock price volatility only under levels of risk aversion that are unrealistically high. Thus, price volatility remains unexplained.
Working Paper
Stochastic bubbles in Markov economies
Discussion Paper
Efficient use of current information in short-run monetary control
Journal Article
Mutual deposit insurance
Conference Paper
Liquidity and fire sales
A ?fire sale? occurs when the owner of a good offers it for sale at a price strictly below the price that some buyers would willingly pay for the good. He does so because the advantage of the quick sale made possible by the lower price outweighs the higher price that other potential buyers would pay, given the likely delay in locating these buyers in the latter case. Fire sales can occur only in illiquid markets. This paper generalizes earlier treatments of illiquid markets by assuming that the asset can be offered for sale at any time, rather than only after its owner loses his capacity to ...
Journal Article
Risky mortgages and mortgage default premiums
Mortgage lenders impose a default premium on the loans they originate to compensate for the possibility that borrowers won?t make payments. The housing boom of the 2000s was characterized by increasing riskiness of the borrowers approved for mortgages and the structures of the loans themselves. Despite these changes in risk, a pricing model can justify the spreads contained in mortgages made during this period based on what at the time seemed to be reasonable expectations for house price appreciation. Contrary to those expectations, prices fell dramatically.
Journal Article
Capital market efficiency: an update
Working Paper
Examining the Sources of Excess Return Predictability: Stochastic Volatility or Market Inefficiency?
We use a consumption based asset pricing model to show that the predictability of excess returns on risky assets can arise from only two sources: (1) stochastic volatility of fundamental variables, or (2) departures from rational expectations that give rise to predictable investor forecast errors and market inefficiency. While controlling for stochastic volatility, we find that a variable which measures non-fundamental noise in the Treasury yield curve helps to predict 1-month-ahead excess stock returns, but only during sample periods that include the Great Recession. For these sample ...
Discussion Paper
Determining the monetary instrument: a diagrammatic exposition
Working Paper
Risk aversion and stock price volatility
Researchers on variance bounds tests of stock price volatility recognized early that risk aversion can increase the volatility of prices implied by the present-value model. This finding suggests that specifying risk neutrality may induce a bias toward rejecting the present-value model insofar as real-world investors are risk averse. However, establishing that risk aversion may increase stock price volatility does not, by itself, have implications for the presence or absence of excess volatility. This is so because risk aversion also affects the upper-bound volatility measure computed from ...