This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2024
  4. Program
  5. Asset Pricing: Preferences and Expectations
« Back to Results

Asset Pricing: Preferences and Expectations

Paper Session

Friday, Jan. 5, 2024 2:30 PM - 4:30 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon A
Hosted By: American Finance Association
  • Chair: Hengjie Ai, University of Wisconsin

Production-Based Stochastic Discount Factors

Frederico Belo
,
INSEAD
Xinwei Li
,
INSEAD

Abstract

We recover a stochastic discount factor (SDF) for asset returns from a firm’s investment Euler equation. Given a parametric statistical specification of the SDF and profitability process, we solve for the firms’ optimal investment decision with approximate analytical solutions and provide a dissection of the determinants of real investment. We estimate a specification of the model to discipline the free parameters of the SDF by matching moments of both aggregate real quantities and asset prices. We use the estimated parameters to recover the latent SDF from data on aggregate investment rates, risk-free rates, and profitability growth rates. Innovations in the recovered SDF are driven dominantly by innovations in investment rates and marginally by innovations in risk-free rates and profitability growth rates. The recovered SDF exhibits strong counter-cyclicality with large jumps in recessions and prices standard Fama-French portfolios out of sample reasonably well. Our model allows us to explicitly characterize the risk-free rate, the equity premium, the term structure of interest rates, and the term structure of equity risk premia. The framework we propose here is general and can be extended to accommodate several additional aggregate shocks and frictions that have been proposed in the literature.

Asset Pricing and Risk Sharing Implications of Alternative Pension Plan Systems

Nuno Coimbra
,
Bank of France
Francisco Gomes
,
London Business School
Alexander Michaelides
,
Imperial College London
Jialu Shen
,
University of Missouri

Abstract

We show that incorporating defined benefit pension funds in an asset pricing model with incomplete markets improves its ability to jointly match the historical equity premium and riskless rate, and has important implications for risk sharing. We emphasize the importance of the pension fund's size and asset demands in determining equilibrium asset prices and discuss a new risk channel arising from fluctuations in the fund's endowment. We use our calibrated model to study the implications of a shift from an economy with defined benefit pension schemes to one with defined contribution plans. We find that the new steady-state is characterized by a higher riskless rate and a lower equity premium. Consumption volatility increases for retirees but decreases for workers.

Identifying Preference for Early Resolution from Asset Prices

Hengjie Ai
,
University of Wisconsin-Madison
Ravi Bansal
,
Duke University
Hongye Guo
,
University of Hong Kong
Amir Yaron
,
University of Pennsylvania

Abstract

This paper develops an asset market based test for preference for the timing of resolution of uncertainty. Our main theorem provides a characterization of preference for early
resolution of uncertainty in terms of the risk premium of assets realized during the period when the informativeness of macroeconomic announcements is resolved. Empirically, we find support for preference for early resolution of uncertainty based on evidence on the dynamics of the implied volatility of S&P 500 index options before FOMC announcements.

Are Subjective Expectations Formed as in Rational Expectations Models of Active Management?

Magnus Dahlquist
,
Stockholm School of Economics
Markus Ibert
,
Copenhagen Business School and Danish Finance Institute
Felix Wilke
,
Nova School of Business & Economics

Abstract

We recover forward-looking expected net-of-fee abnormal returns (alphas) for active equity mutual funds from analyst ratings. In contrast to the typical equilibrium implication of zero alphas, analyst alphas are negative for most funds, but positive for the largest funds. We compare analysts' subjective expectations with expectations from a rational expectations learning model. The model's rational learner believes that an increase in fund size leads to a decrease in returns, but we find no evidence that analysts believe so. Overall, analysts' expectations and the capital that follows analysts' recommendations are difficult to reconcile with existing rational expectations models of active management.

Discussant(s)
Lukas Schmid
,
University of Southern California
Daniel Greenwald
,
New York University
Nina Boyarchenko
,
Federal Reserve Bank of New York
Andrea Rossi
,
University of Arizona
JEL Classifications
  • G1 - General Financial Markets