Search Results
Working Paper
Term Premia and Interest Rate Forecasts in Affine Models
I find that the standard class of affine models produces poor forecasts of future changes in Treasury yields. Better forecasts are generated by assuming that yields follow random walks. The failure of these models is driven by one of their key features: the compensation that investors receive for facing risk is a multiple of the variance of the risk. This means that risk compensation cannot vary independently of interest rate volatility. I also describe and empirically estimate a class of models that is broader than the standard affine class. These ‘essentially affine’ models retain the ...
Working Paper
Asymmetric Cross-sectional Dispersion in Stock Returns: Evidence and Implications
This paper documents that daily stock returns of both firms and industries are more dispersed when the overall stock market rises than when it falls. This positive relation is conceptually distinct from – and appears unrelated to – asymmetric return correlations. I argue that the source of the relation is positive skewness in sector-specific return shocks. I use this asymmetric behavior to explain a previously-observed puzzle: aggregate trading volume tends to be higher on days when the stock market rises than when it falls. The idea proposed here is that trading is more active on days ...
Working Paper
A new test for mean reversion in stock prices
Working Paper
Estimating the Price of Default Risk
A firm's instantaneous probability of default is modeled as a square-root diffusion process. The parameters of these processes are estimated for 188 firms, using both the time series and cross-sectional (term structure) properties of the individual firms' bond prices. Although the estimated models are moderately successful at bond pricing, there is strong evidence of misspecification. The results indicate that single factor models of instantaneous default risk face a significant challenge in matching certain key features of actual corporate bond yield spreads. In particular, such models have ...
Working Paper
Idiosyncratic variation of Treasury bill yields
Working Paper
Trading volume and return reversals
This paper tests whether the magnitude of the serial correlation of monthly stock returns varies with trading volume. In both the 1915-1945 and 1946-1989 periods, it finds a statistically significant relationship between NYSE volume shocks and return reversals. The point estimates suggest that if month "t" has a one-standard-deviations shock to trading volume, an additional 40 to 50 percent of month t's stock return is eventually reversed. Additional results indicate that the volume shocks are not just a proxy for previously known predictors of aggregate stock returns such as the ...
Working Paper
What's good for GM...? Using auto industry stock returns to forecast business cycles and test the Q-theory of investment
We examine the ability of auto industry stock returns to forecast quarterly changes in the growth rates of real GDP, consumption, and investment. We find that auto stock returns are superior to aggregate stock market returns in predicting growth rates of GDP and various forms of consumption. The superior predictive power of auto returns holds for both in-sample and out-of-sample forecasts and has not declined over time. We then apply a finding in this paper---that market returns have no explanatory power for future output or consumption growth when auto returns are included in the ...
Working Paper
Estimating the price of default risk
A firm's instantaneous probability of default is modeled as a square-root diffusion process. The parameters of these processes are estimated for 188 firms, using both the time series and cross-sectional (term structure) properties of the individual firms' bond prices. Although the estimated models are moderately successful at bond pricing, there is strong evidence of misspecification. The results indicate that single factor models of instantaneous default risk face a significant challenge in matching certain key features of actual corporate bond yield spreads. In particular, such models have ...