Abstract not found

We investigate the performance of a battery of standard unit root tests when the true data generating process has a Markov-switching trend growth rate and variance. Regime switching under both the null hypothesis of a unit root and the alternative hypothesis of trend stationarity is considered. In contrast to the case of a single break in trend growth rate, multiple Markov-switching breaks under the null hypothesis do not create size distortions in the Augmented Dickey-Fuller test. Markov-switching in variance under the null hypothesis does not adversely affect standard unit root tests but can lead to overrejection in tests which allow for structural change. All tests have very low power when regime switching occurs under an alternative hypothesis which is stationary in the periods between the switching. Key words: Unit Root, Stochastic Trends, Deterministic Trends, Markov Switching, Regime Switching, Structural Change, Heteroskedasticity J.E.L classification: C22 Address correspond...

We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.

We use a quantile-based measure of conditional skewness or asymmetry of asset returns that is robust to outliers and therefore particularly suited for recalcitrant series such as emerging market returns. We study the following portfolio returns: developed markets, emerging markets, the world, and separately 73 countries. We find that the conditional asymmetry of returns varies significantly over time. This is true even after taking into account conditional volatility effects and unconditional skewness effects in returns. Interestingly, we find that the conditional asymmetry in developing countries features low correlation with that in emerging markets. This finding has implications for portfolio allocation, given the fact that the correlation of the returns themselves has been historically high and is increasing. In contrast to conditional volatility fluctuations, which are hard to explain with macroeconomic fundamentals, we find a strong relationship between the conditional skewness and macroeconomic variables. Moreover, the low correlation between conditional asymmetry across developed and emerging markets can be explained by macroeconomic fundamental factors in the cross-section, as both markets feature opposite responses to those fundamentals. The economic significance of the

Le CIRANO est une corporation privée à but non lucratif constituée en vertu de la Loi des compagnies du Québec. Le financement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisations-membres, d'une subvention d'infrastructure du ministère de l'Industrie, du Commerce, de la Science et de la Technologie, de même que des subventions et mandats obtenus par ses équipes de recherche. La Série Scientifique est la réalisation d'une des missions que s'est données le CIRANO, soit de développer l'analyse scientifique des organisations et des comportements stratégiques. CIRANO is a private non-profit organization incorporated under the Québec Companies Act. Its infrastructure and research activities are funded through fees paid by member organizations, an infrastructure grant from the Ministère de l'Industrie, du Commerce, de la Science et de la Technologie, and grants and research mandates obtained by its research teams. The Scientific Series fulfils one of the missions of CIRANO: to develop the scientific analysis of organizations and strategic behaviour. Les organisations-partenaires / The Partner Organizations •Ministère de l'Industrie, du Commerce, de la Science et de la Technologie.

Le CIRANO est une corporation privée à but non lucratif constituée en vertu de la Loi des compagnies du Québec. Le financement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisations-membres, d�une subvention d�infrastructure du ministère de l�Industrie, du Commerce, de la Science et de la Technologie, de même que des subventions et mandats obtenus par ses équipes de recherche. La Série Scientifique est la réalisation d�une des missions que s�est données le CIRANO, soit de développer l�analyse scientifique des organisations et des comportements stratégiques. CIRANO is a private non-profit organization incorporated under the Québec Companies Act. Its infrastructure and research activities are funded through fees paid by member organizations, an infrastructure grant from the Ministère de l�Industrie, du Commerce, de la Science et de la Technologie, and grants and research mandates obtained by its research teams. The Scientific Series fulfils one of the missions of CIRANO: to develop the scientific analysis of organizations and strategic behaviour.

Le CIRANO est une corporation privée à but non lucratif constituée en vertu de la Loi des compagnies du Québec. Le financement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisations-membres, d'une subvention d'infrastructure du ministère de l'Industrie, du Commerce, de la Science et de la Technologie, de même que des subventions et mandats obtenus par ses équipes de recherche. La Série Scientifique est la réalisation d'une des missions que s'est données le CIRANO, soit de développer l'analyse scientifique des organisations et des comportements stratégiques. CIRANO is a private non-profit organization incorporated under the Québec Companies Act. Its infrastructure and research activities are funded through fees paid by member organizations, an infrastructure grant from the Ministère de l'Industrie, du Commerce, de la Science et de la Technologie, and grants and research mandates obtained by its research teams. The Scientific Series fulfils one of the missions of CIRANO: to develop the scientific analysis of organizations and strategic behaviour. Les organisations-partenaires / The Partner Organizations •Ministère de l'Industrie, du Commerce, de la Science et de la Technologie.

This paper assesses the empirical performance of an intertemporal option pricing model with latent variables which generalizes the Black-Scholes and the stochastic volatility formulas. We derive a closed-form formula for an equilibrium model with recursive preferences where the fundamentals follow a Markov switching process. In a simulation experiment based on the model, we show that option prices are more informative about preference parameters than stock returns. When we estimate the preference parameters implicit in S&P 500 call option prices given our model, we …nd quite reasonable values for the coe¢cient of relative risk aversion and the intertemporal elasticity of substitution.

We assess the aggregate asset pricing implications of generalized disappointment aversion (GDA) in the long-run risks model of Bansal and Yaron (2004). Using analytical formulas for asset valuation ratios and several moment and predictive regression statistics we compare thoroughly several recursive utility models with longrun risks. While persistence of expected consumption growth is fundamental for the moment matching ability of Kreps-Porteus preferences, GDA relies mostly on the persistence of consumption volatility. The long-run growth risk, when coupled with Kreps-Porteus preferences, has the undesirable side-effect of generating the wrong predictability pattern: dividend yields forecast consumption growth but not excess returns. With GDA preferences, the persistent volatility of consumption growth capturing economic uncertainty is enough to generate realistic moments and the observed patterns of predictability. These results are robust to an intertemporal elasticity of substitution lower or greater than one.

We introduce and study a non-equilibrium continuous-time dynamical model of the price of a single asset traded by a population of heterogeneous interacting agents in the presence of uncertainty and regulatory constraints. The model takes into account (i) the price formation delay between decision and investment by the second-order nature of the dynamical equations, (ii) the linear and nonlinear mean-reversal or their contrarian in the form of speculative price trading, (iii) market friction, (iv) uncertainty in the fundamental value which controls the amplitude of mispricing, (v) nonlinear speculative momentum effects and (vi) market regulations that may limit large mispricing drifts. We find markets with coexisting equilibrium, conventions and business cycles, which depend on (a) the relative strength of value-investing versus momentuminvesting, (b) the level of uncertainty on the fundamental value and (c) the degree of market regulation. The stochastic dynamics is characterized by nonlinear geometric random walk-like processes with spontaneous regime shifts between different conventions or business cycles. This model provides a natural dynamical framework to model regime shifts between different market phases that may result from the interplay between the effects (i-vi). 2 1