The paper is the first one outside the high-frequency domain to use sentiment-signed news to directly compare news and no-news stock returns. This is done by estimating
whether returns on positive, neutral and negative news days are significantly different from the average daily return for a large sample of US stocks over the period from
January 2003 to August 2010. The general results show that positive news days indeed have above-average returns and negative news days returns are below average, while the neutral news days are economically barely distinguishable from the average. The market also proves to be fast and accurate at pricing new information, as there are no signs of drift shortly after news days. On the contrary, a directionally correct and statistically significant movement can be found on the day before the news day. The cross-sectional analysis reveals significant differences in the strength of market reactions between stocks ranked on size, book-to-market or news coverage. The general results however hold across all subsamples and are also not driven by earnings announcements or past stock returns. Moreover, the average news sensitivity is itself a priced source of risk. A portfolio of stocks with high sensitivity to news outperforms a portfolio of stocks with low sensitivity by a statistically and economically significant 0.84% per
month. This news premium seems to primarily relate to the high impact of news in situations of general uncertainty.
Lehren die Universitäten die Fähigkeiten, die in der Praxis gefragt sind? UBS-Personalchef Gery Bruederlin und Finanzprofessor Thorsten Hens im Gespräch.
We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual bank-level data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes.
While the comparative statics of asset demand have been studied extensively, surprisingly little work has been done on the behavior of equilibrium asset prices and returns in response to changes in the supplies of securities. This is despite considerable interest in the equity premium and interest rate puzzles. In this paper, we seek to fill this void for the classic case of a representative agent economy with a single risky asset and risk free asset in both one and two period settings. It would seem natural to suppose that in response to an increase in the supply of the risky asset, its price would fall and the gross equity risk premium would increase. We show that in standard settings where preferences are represented by frequently assumed forms of expected utility, one can obtain the opposite result. The necessary and su¢ cient condition for prices (gross equity premium) to increase (decrease) with supply is determined by the sign of the slope of the asset Engel curve. This observation allows us to derive (i) sufficient conditions directly in terms of the representative agent's risk aversion properties for general utility functions
and (ii) necessary and su¢ cient conditions for the widely used HARA (hyperbolic absolute risk
aversion) class.
In this paper we study the implications of valuing health in an otherwise standard real business cycle model. We contrast the model predictions over the business cycle with
the corresponding data counterparts. We find that health can improve the predictions of the standard real business cycle model. In particular, the benchmark model with health improves the predictions in terms of the comovements between investment and market hours relative to output. Considering health in the environment also increases
the volatility of consumption, investment and market hours while slightly reducing output volatility. In terms of health observables the benchmark model is able to account
for practically all comovement between health outcomes and health expenditures as well as with output.
We explore the pricing of variance risk by decomposing stocks' total variance into systematic and idiosyncratic return variances. While systematic variance risk exhibits a negative price of risk, common shocks to the variances of idiosyncratic returns carry a large positive risk premium. This implies investors pay for insurance against increases (declines) in systematic (idiosyncratic) variance, even though both variances comove countercyclically. Common
idiosyncratic variance risk is an important determinant for the cross-section of expected option returns. These findings reconcile several phenomena, including the pricing differences between index and stock options, the cross-sectional variation in stock option expensiveness,the volatility mispricing puzzle, and the signifcant returns earned on various option portfolio strategies. Our results are consistent with theories of financial intermediation under capital constraints.
This paper reproduces the slope of the uncovered interest rate parity (UIP) regression for six different country pairs within one standard deviation under rational
expectations.
While standard theory predicts a slope of one, the empirically observed slope of the regression of currency returns on the interest rate differential between two
countries is negative for most country pairs. This empirical fact that, on average, investors require higher returns on bonds denominated in a currency expected to
appreciate, poses a strong challenge for economic models. In this paper, we propose a potential explanation within an infinite horizon dynamic stochastic general equilibrium model with incomplete markets. Heterogenous investors experience varying risk aversion as a result of habit formation.
The underlying mechanism of the model relies on varying international diversification in the investors’ portfolio choice decision. In response to their changing habit
levels, investors’ hedging desire varies over time, leading to adjustments in interest rates. The habit-induced investment decisions are negatively correlated with ex-
change rate movements. This leads to a negative correlation between interest rates and expected exchange rates, as implied by a negative UIP slope.
Depending on the magnitude of habits, the model is capable of reproducing positive as well as negative UIP slopes, as seen empirically in the data.
