Essen, Univ., Diss--Duisburg, 2008.

Economics

This dissertation presents three essays on asset pricing and econometrics. The first chapter identifies rare events and long-run risks simultaneously from a rich data set (the Barro-Ursua macroeconomic data set) and evaluates their contributions to asset pricing in a unified framework. The proposed model of rare events and long-run risks is estimated using a Bayesian Markov-chain Monte-Carlo method, and the estimates for the disaster process are closer to the data than those in the previous studies. Major evaluation results in asset pricing include: (1) for the unleveraged annual equity premium, the predicted values are 4.8%, 4.2%, and 1.0%, respectively; (2) for the Sharpe ratio, the values are 0.72, 0.66, and 0.15, respectively. / Economics

Στην παρούσα εργασία περιγράφεται η έννοια του CAPM, πρόκειται για ένα υπόδειγμα αποτίμησης μετοχών. Σκοπός της μελέτης αυτής είναι να παρουσιάσουμε τα βασικά χαρακτηριστικά του υποδείγματος, η κριτική που του έχει ασκηθεί, τα πλεονεκτήματα και τα μειονεκτήματα αυτού. Ουσιαστικά πρόκειται για ένα μοντέλο αποτίμησης το οποίο χρησιμοποιείται για την τιμολόγηση αξιογράφων λαμβάνοντας υπόψη τον κίνδυνο αυτών. Να αναφέρουμε στο σημείο αυτό ότι ο κίνδυνος αποτελείται από δυο επιμέρους συστατικά, τον συστηματικό και τον μη συστηματικό κίνδυνο. Προκειμένου να περιοριστεί ο μη συστηματικός κίνδυνος καλό είναι οι επιχειρήσεις να επενδύουν σε πληθώρα περιουσιακών στοιχείων δηλαδή να έχουν ένα χαρτοφυλάκιο έντονα διαφορποιημένο. Οπότε ο μόνος κίνδυνος που καλείται να αντιμετωπίσει ο επενδυτής είναι ο συστηματικός κίνδυνος. / --

I find evidence of predictability in out-of-sample data for four risk premia using simple econometric models. Two factor return models are used, an APT model and the Wilshire Atlas. I demonstrate that investors can exploit conditioning information to manage their exposures to risk factors. The results suggest that the investment opportunities set changes in a large and an economically significant way. I show that the growth rate in money supply and trend in stock market valuations are the main drivers respectfully of the risk premia associated with the Book-to-Market and Size factors from the Wilshire model. The predictability results are mixed with respect to Business Cycle Theory. At times investors price business cycle risk while at other times they exhibit herding tendencies.

The thesis consists of three self-contained essays on public policy in the macroeconomy. “Government Policy in the Formal and Informal Sectors” quantitatively investigates the interaction between the firms' choice to operate in the formal or the informal sector and government policy on taxation and enforcement. Taxes, enforcement, and regulation are incorporated in a general equilibrium model of firms differing in their productivities. The model quantitatively accounts for the keys aspects in the data and allows me to back out country-specific enforcement levels. Some policy reforms are analyzed and the welfare gains can be fairly large. “Determinants of Capital Intensive and R&D Intensive Foreign Direct Investment” studies the determinants of capital intensity and technology content of FDI. Using industry data on U.S. FDI abroad and data on many different host countries' institutional characteristics, we show that there is a differential response of FDI flows to investment climate according to the capital intensity of the industries receiving the investments. We find that better protection of property rights has a significant positive effect on R&D intensive capital flows. We find evidence that an increase in workers' bargaining power results in a reduction of both kinds of FDI. “Ambiguity Aversion, the Equity Premium, and the Welfare Costs of Business Cycles” examines the relevance of consumers’ ambiguity aversion for asset prices and how consumption fluctuations influence consumer welfare. First, in a Mehra-Prescott-style endowment economy, we calibrate ambiguity aversion so that asset prices are consistent with data: a high return on equity and a low return on risk-free bonds. We then use this calibration to investigate how much consumers would be willing to pay to reduce endowment fluctuations to zero, thus delivering a Lucas-style welfare cost of fluctuations. These costs turn out to be very large: consumers are willing to pay over 10% of consumption in permanent terms.

The earnings game and myopic performance focus induce managers to use judgment and influence to alter the reported earnings. Earnings management is the umbrella term for such manipulative actions, by accruals management or real activates management. The implicit market reactions by the stock returns indicate the effect of EM and if the behaviors are opportunistic or informative for the stakeholders. Accounting variables explain less of the stock return variation and speculative short-term news drives the variation of stock return. Research Question: Can earnings management indicators improve the forecasting of stock returns? The main purpose of the study is to investigate whether EM can be utilized to forecast returns from improving the forecasting of earnings. The authors will include both AM and RAM measures to investigate the different inherent forecasting abilities, adding to the asset pricing research and valuation area. The authors aim to enhance the explanation of cross-sectional variation of stock returns from accounting variables. The authors aim to develop a model more specified to explain the future stock returns from the accounting relationships. An additional purpose is to include transactions with the firm (stock repurchases) to potentially increase the signaling value of the manipulation behaviors. The theoretical framework consists of a discussion of theories and empirical findings regarding the accounting characteristic and relationship with stock returns. Earnings management is explained in-depth along with the empirical findings related to the concept. The capital market perspective is explained by the efficient market and behavioral finance. The chapter is concluded by concepts explaining the relationship and explanations for earnings management and the impact of information. The sample consists of 3545 firms from NASDAQ and NYSE for the years 1992-2012, which equates to around 40 000 observations. We utilize 11 different EM indicators, constructed to capture abnormal components which indicate manipulative actions. The EM indicators’ association with future stock returns is tested by yearly and industry-yearly firm characteristics framework regressions. The firm characteristic framework is developed to control for firm characteristics and evaluate the standalone effect of EM. The result is expanded by investigating earnings persistence, correlations, robust regression and portfolio sorts. The results suggest that total accruals, discretionary accruals, unexpected core earnings, production cost and stock returns are associated with subsequent stock returns. Abnormal SG&A expenses, Abnormal R&D expenses and abnormal cash flows from operations are not associated with stock returns. Earnings are downward manipulated prior and during stock repurchases. The change in ATO and PM diagnostic captures AM but not RAM. The concluding remarks are that EM indicators are associated with future stock returns and improve the forecasting of stock returns via a more accurate forecast of earnings.

In a production-based general equilibrium model, I study the impact of time-to-build and time-to-produce technology constraints and inventory on asset prices and macroeconomic quantity dynamics. A time-to-build constraint captures the delay in transforming new investment into productive capital; a time-to-produce constraint captures the delay in transforming productive capital into final products. Empirically, I find that the U.S. economy in aggregate exhibits approximately a three-quarter time-to-build and a four-quarter time-to-produce constraint. These delays in the production process introduce short-run risks in the economy where inventory accumulation facilitates consumption smoothing over time. Using this structure for time-to-build and time-to-produce constraints, I numerically calibrate a production-based general equilibrium model where the representative investor has recursive preferences over consumption and inventory. The model delivers first and second moments of macroeconomic quantities and asset prices consistent with the data. A small elasticity of intertemporal substitution is necessary to positively price the short-run risks induced by the production constraints. Inventories help fit the volatilities of asset returns, while the time-to-produce feature ensures nontrivial inventory holdings. In addition, the model is able to match empirical lead-lag patterns between asset prices and macroeconomic quantities as well as observed equity return predictability.

This thesis contains empirical studies of portfolio choice and asset prices. The first two chapters deal with incorporating labor supply into models traditionally only focusing on consumption. Can the risk premium on stocks be better understood when taking labor supply into account? This is the topic of the first chapter. Do possibilities of varying labor supply, and thus hedging stock market risk, help explain the stock ownership patterns of households? This question is what the second chapter tries to answer. If labor income moves with the stock market, an attempt should be made to hedge this with a lower share of stocks in the portfolio and, but do households act according to this rule? This is what the third chapter investigates. Chapter one, Labor Supply Flexibility and Portfolio Choice: Evidence from the PSID, examines the relationship between labor supply flexibility and portfolio choice. Theoretical articles have shown that, ceteris paribus, the optimal portfolio share of risky assets (stocks) increases with labor supply flexibility, due to increased possibilities of hedging financial risk by adjusting the labor supply. Using PSID household data, this hypothesis is tested using a direct measure of labor supply flexibility from survey questions. The results indicate that the total portfolio share is increased by labor supply flexibility. When separated, most of this effect seems to come from the increased probability of stock ownership due to flexible labor, rather than an increased portfolio share among stockholders. Chapter two, Can Leisure Explain the Equity Premium Puzzle? An Empirical Investigation, investigates the asset pricing properties of non-separable utility functions with consumption and leisure. The parameter restrictions needed to match the historical equity premium are explored using US data on consumption, hours and returns. Empirically, it is shown that to match the equity premium with a low level of risk aversion, consumption and leisure need to be strong complements, i.e. have a very low substitution elasticity. Chapter three, Income Risk and Stockholdings: Evidence from Swedish Microdata, examines the relationship between income risk and portfolio choice. It empirically investigates whether the stock market risk (the covariation with the stock market) in labor income is reflected by an offsetting lower share of stocks in financial portfolios, an effect that has been shown to exist in theoretical articles. Swedish microdata from HINK on households’ income and wealth are used for this purpose. In repeated cross-sections, households are divided into "portfolio cohorts" corresponding to percentiles of the share of stocks in financial assets. Income risk, i.e. the regression beta of (log) income growth on aggregate stock returns, is compared for the different groups. As predicted by theory, the results provide some support for a negative relationship between income risk and the share of stocks. / Diss. Stockholm : Handelshögsk., 2004

Diss. Stockholm : Handelshögskolan, 2005.