Consistent Valuation Across Curves Using Pricing Kernels

The general problem of asset pricing when the discount rate differs from the rate at which an asset's cash flows accrue is considered. A pricing kernel framework is used to model an economy that is segmented into distinct markets, each identified by a yield curve having its own market, credit and liquidity risk characteristics. The proposed framework precludes arbitrage within each market, while the definition of a curve-conversion factor process links all markets in a consistent arbitrage-free manner. A pricing formula is then derived, referred to as the across-curve pricing formula, which enables consistent valuation and hedging of financial instruments across curves (and markets). As a natural application, a consistent multi-curve framework is formulated for emerging and developed inter-bank swap markets, which highlights an important dual feature of the curve-conversion factor process. Given this multi-curve framework, existing multi-curve approaches based on HJM and rational pricing kernel models are recovered, reviewed and generalised, and single-curve models extended. In another application, inflation-linked, currency-based, and fixed-income hybrid securities are shown to be consistently valued using the across-curve valuation method.

I investigate a pricing kernel in which coskewness and the market volatility risk factors are endogenously determined. I show that the price of coskewness and market volatility risk are restricted by investor risk aversion and skewness preference. The risk aversion is estimated to be between two and five and significant. The price of volatility risk ranges from -1.5% to -0.15% per year. Consistent with theory, I find that the pricing kernel is decreasing in the aggregate wealth and increasing in the market volatility. When I project my estimated pricing kernel on a polynomial function of the market return, doing so produces the puzzling behaviors observed in pricing kernel. Using pricing kernels, I examine the sources of the idiosyncratic volatility premium. I find that nonzero risk aversion and firms' non-systematic coskewness determine the premium on idiosyncratic volatility risk. When I control for the non-systematic coskewness factor, I find no significant relation between idiosyncratic volatility and stock expected returns. My results are robust across different sample periods, different measures of market volatility and firm characteristics.

Edited by Rajnish Mehra, this volume focuses on the equity risk premium puzzle, a term coined by Mehra and Prescott in 1985 which encompasses a number of empirical regularities in the prices of capital assets that are at odds with the predictions of standard economic theory.

This book provides a unifying structure for the activities that fall under the process typically called "standard setting" on tests of proficiency. Standard setting refers to the methodology used to identify performance standards on tests of proficiency. The results from standard setting studies are critical for supporting the use of many types of tests. The process is frequently applied to educational, psychological, licensure/certification, and other types of tests and examination systems. The literature on procedures for standard setting is extensive, but the methodology for standard setting has evolved in a haphazard way over many decades without a unifying theory to support the evaluation of the methods and the validation of inferences made from the standards. This text provides a framework for going beyond specific standard setting methods to gain an understanding of the goals for the methods and how to evaluate whether the goals have been achieved. The unifying structure provided in this text considers policy that calls for the existence of performance standards, the relationship of proficiency test design to the policy, and tasks assigned to subject matter experts to help them convert the policy to estimates of locations on the reporting score scale for the test. Guidance is provided for how to connect the psychometric aspects of the standard setting process to the intentions of policy makers as expressed in policy statements. Further, the structure is used support validity arguments for inferences made when using standards. Examples are provided to show how the unifying structure can be used to evaluate and improve standard setting methodology.

I derive pricing kernels in which the market volatility is endogenously determined. Using the Taylor expansion series of the representative investor's marginal utility, I show that the price of market volatility risk is restricted by the investor's risk aversion and skewness preference. The risk aversion is estimated to be between two and five and is significant. The price of the market volatility is negative. Consistent with economic theory, I find that the pricing kernel decreases in the market index return and increases in market volatility. The projection of the estimated pricing kernel onto a polynomial function of the market return produces puzzling behaviors, which can be observed in the pricing kernel and absolute risk aversion functions. The inclusion of additional terms in the Taylor expansion series of the investor's marginal utility produces a pricing kernel function of market stochastic volatility, stochastic skewness, and stochastic kurtosis. The prices of risk of these moments are restricted by the investor's risk aversion, skewness preference, and kurtosis preference. The prices of risk of these moments should not be confused with the price of risk of powers of the market return, such as co-skewness and co-kurtosis.

The determinants of yield curve dynamics have been thoroughly discussed in finance models. However, little can be said about the macroeconomic factors behind the movements of short- and long-term interest rates as well as the risk compensation demanded by financial investors. By taking on a macro-finance perspective, the book’s approach explicitly acknowledges the close feedback between monetary policy, the macroeconomy and financial conditions. Both theoretical and empirical models are applied in order to get a profound understanding of the interlinkages between economic activity, the conduct of monetary policy and the underlying macroeconomic factors of bond price movements. Moreover, the book identifies a broad risk-taking channel of monetary transmission which allows a reassessment of the role of financial constraints; it enables policy makers to develop new guidelines for monetary policy and for financial supervision of how to cope with evolving financial imbalances.

Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities. We study changes in risk taking behavior in a low interest rate environment by estimating a market stochastic discount factor that is non-linear and therefore consistent with the empirical properties of cashflow valuations identified in the literature. We provide evidence that non-linearities arise from hedging strategies of investors exposed to interest rate risk. Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.

Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.

What happens to risk as the economic horizon goes to zero and risk is seen as an exposure to a change in state that may occur instantaneously at any time? All activities that have been undertaken statically at a fixed finite horizon can now be reconsidered dynamically at a zero time horizon, with arrival rates at the core of the modeling. This book, aimed at practitioners and researchers in financial risk, delivers the theoretical framework and various applications of the newly established dynamic conic finance theory. The result is a nonlinear non-Gaussian valuation framework for risk management in finance. Risk-free assets disappear and low risk portfolios must pay for their risk reduction with negative expected returns. Hedges may be constructed to enhance value by exploiting risk interactions. Dynamic trading mechanisms are synthesized by machine learning algorithms. Optimal exposures are designed for option positioning simultaneously across all strikes and maturities.

Provides coverage of the major theories and technologies involved in the lifecycle of 3D video content delivery Presenting the technologies used in end-to-end 3D video communication systems, this reference covers 3D graphics and video coding, content creation and display, and communications and networking. It covers the full range of key areas from the fundamentals of 3D visual representation to the latest 3D video coding techniques, relevant communication infrastructure and networks to the 3D quality of experience. The book is structured to logically lead readers through the topic, starting with generic and fundamental information, continuing with a detailed section of different visualisation techniques before concluding with an extensive view of 3D mobile communication systems and trends. The authors give most focus to four important areas: 3D video coding and communications; 3D graphics/gaming and mobile communications; end-to-end 3D ecosystem (including 3D display, 3D player, networking facility and 3D quality issues), and future communications and networks advances for emerging 3D experience. Presents the theory and key concepts behind the latest 3D visual coding framework, standards, and corresponding quality assessment Provides fundamental material which forms the basis for future research on enhancing the performance of 3D visual communications over current and future wireless networks Covers important topics including: 3D video coding and communications; 3D graphics/gaming and mobile communications; end-to-end 3D ecosystem; and future communications and networks advances for emerging 3D experience Essential reading for engineers involved in the research, design and development of 3D visual coding and 3D visual transmission systems and technologies, as well as academic and industrial researchers.