The Experts below are selected from a list of 360 Experts worldwide ranked by ideXlab platform
Robert A Jarrow - One of the best experts on this subject based on the ideXlab platform.
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testing for Asset Price bubbles using options data
Social Science Research Network, 2020Co-Authors: Nicola Fusari, Robert A Jarrow, Sujan LamichhaneAbstract:We present a new approach to identifying Asset Price bubbles based on options data. Given their forward-looking nature, options are ideal instruments with which to investigate market expectations about the future evolution of Asset Prices, which are key to understanding Price bubbles. By exploiting the differential pricing between put and call options, we can detect and quantify bubbles in the Prices of underlying Asset. We apply our methodology to two stock market indexes, the S&P 500 and the Nasdaq-100, and two technology stocks, Amazon and Facebook, over the 2014-2018 sample period. We find that, while indexes exhibit rare and modest bubbles, Amazon and Facebook show more frequent and much larger bubbles. Since our approach can be implemented in real time, it is useful to both policy-makers and investors. As an illustration, our methodology applied to GameStop identifies a significant bubble between December 2020 and January 2021.
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Asset Price bubbles, market liquidity, and systemic risk
Mathematics and Financial Economics, 2019Co-Authors: Robert A Jarrow, Sujan LamichhaneAbstract:This paper studies an equilibrium model with heterogeneous agents, Asset Price bubbles, and trading constraints. Market liquidity is modeled as a stochastic quantity impact from trading on the Price. Bubbles are larger in liquid markets and when trading constraints are more binding. Systemic risk is defined as an unanticipated shock that results in the nonexistence of an equilibrium in the economy. A realization of systemic risk results in a significant loss of wealth. Systemic risk increases as: (i) the fraction of agents seeing an Asset Price bubble increases, (ii) as the market becomes more illiquid, and (iii) as trading constraints are relaxed.
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capital Asset market equilibrium with liquidity risk portfolio constraints and Asset Price bubbles
Mathematics and Financial Economics, 2019Co-Authors: Robert A JarrowAbstract:This paper derives an equilibrium Asset pricing model with endogenous liquidity risk, portfolio constraints, and Asset Price bubbles. Liquidity risk is modeled as a stochastic quantity impact on the Price from trading, where the size of the impact depends on trade size. Asset Price bubbles are generated by the existence of portfolio constraints, e.g. short sale prohibitions and margin requirements. Under a restrictive set of assumptions, we prove a unique equilibrium Price process exists for our economy. We characterize the market’s state Price density, which enables the derivation of the risk-return relation for the stock’s expected return including both liquidity risk and Asset Price bubbles. This yields a generalized intertemporal and consumption CAPM for our economy. In contrast to the traditional models without liquidity risk or Asset Price bubbles, there are additional systematic liquidity risk and Asset Price bubble factors which are related to the stock return’s covariation with liquidity risk and Asset Price bubbles.
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a capm with trading constraints and Price bubbles
International Journal of Theoretical and Applied Finance, 2017Co-Authors: Robert A JarrowAbstract:This paper derives an equilibrium capital Asset pricing model (CAPM) in a market with trading constraints and Asset Price bubbles. The Asset Price processes are general semimartingales including Markov jump-diffusion processes as special cases, and the trading constraints considered include short sale restrictions, borrowing constraints, and margin requirements, among others. We derive a generalized intertertemporal CAPM and consumption CAPM for these markets. The implications for empirical testing are that additional systematic risk factors will exist in a market with trading constraints and Price bubbles as contrasted with an otherwise equivalent unconstrained market with no Price bubbles.
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a capital Asset pricing model capm with trading constraints and Price bubbles
2017Co-Authors: Robert A JarrowAbstract:This paper derives an equilibrium capital Asset pricing model (CAPM) in a market with trading constraints and Asset Price bubbles. The Asset Price processes are general semimartingales including Markov jump-diffusion processes as special cases, and the trading constraints considered include short sale restrictions, borrowing constraints, and margin requirements, among others. We derive a generalized intertertemporal CAPM and consumption CAPM for these markets. The implications for empirical testing are that additional systematic risk factors will exist in a market with trading constraints and Price bubbles as contrasted with an otherwise equivalent unconstrained market with no Price bubbles.
Carsten Detken - One of the best experts on this subject based on the ideXlab platform.
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quasi real time early warning indicators for costly Asset Price boom bust cycles a role for global liquidity
European Journal of Political Economy, 2011Co-Authors: Lucia Alessi, Carsten DetkenAbstract:We test the performance of a host of real and financial variables as early warning indicators for costly aggregate Asset Price boom/bust cycles, using data for 18 OECD countries. A quasi real time signaling approach is used to predict Asset Price booms that have serious real economy consequences. We use a loss function to rank the indicators given policy makers' relative preferences with respect to missed crises and false alarms and suggest a new measure for assessing the usefulness of indicators. Global measures of liquidity, in particular a global private credit gap, are the best performing indicators and display forecasting records, which are informative for policy makers interested in timely reactions to growing financial imbalances.
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real time early warning indicators for costly Asset Price boom bust cycles a role for global liquidity
Social Science Research Network, 2010Co-Authors: Lucia Alessi, Carsten DetkenAbstract:We test the performance of a host of real and financial variables as early warning indicators for costly aggregate Asset Price boom/bust cycles, using data for 18 OECD countries. A 'real time' signaling approach is used to predict Asset Price booms that have serious real economy consequences. We use a loss function to rank the indicators given policy makers' relative preferences with respect to type I and II errors and suggest a new measure for assessing the usefulness of indicators. Global measures of liquidity, in particular a global private credit gap, are the best performing indicators and display forecasting records, which are informative for policy makers interested in timely reactions to growing financial imbalances.
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real time early warning indicators for costly Asset Price boom bust cycles a role for global liquidity
Research Papers in Economics, 2009Co-Authors: Carsten Detken, Lucia AlessiAbstract:We test the performance of a host of real and financial variables as early warning indicators for costly aggregate Asset Price boom/bust cycles, using data for 18 OECD countries between 1970 and 2007. A signalling approach is used to predict Asset Price booms that have relatively serious real economy consequences. We use a loss function to rank the tested indicators given policy makers' relative preferences with respect to missed crises and false alarms. The paper analyzes the suitability of various indicators as well as the relative performance of financial versus real, global versus domestic and money versus credit based liquidity indicators. We find that global measures of liquidity are among the best performing indicators and display forecasting records, which provide useful information for policy makers interested in timely reactions to growing financial imbalances, as long as aversion against type I and type II errors is not too unbalanced. Furthermore, we explore out-of-sample whether the most recent wave of Asset Price booms (2005-2007) would be predicted to be followed by a serious economic downturn. JEL Classification: E37, E44, E51
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liquidity shocks and Asset Price boom bust cycles 1
Social Science Research Network, 2007Co-Authors: Ramon Adalid, Carsten DetkenAbstract:We provide systematic evidence for the association of liquidity shocks and aggregate Asset Prices during mechanically identified Asset Price boom/bust episodes for 18 OECD countries since the 1970s, while taking care of the endogeneity of money and credit. Our derivation of liquidity shocks allows for frequent shifts in velocity as they are derived as structural shocks from VARs in growth rates. Residential property Price developments and money growth shocks accumulated over the boom periods are able to well explain the depth of post-boom recessions. We further suggest that liquidity shocks are a driving factor for real estate Prices during boom episodes. During normal times however, the relative predictive power of liquidity shocks seems to shift from Asset Price inflation to consumer Price inflation. The results only hold for broad money growth based liquidity shocks and not for private credit growth shocks.
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Asset Price booms and monetary policy
2004Co-Authors: Carsten Detken, Frank SmetsAbstract:The paper aims at deriving some stylised facts for financial, real, and monetary policy developments during Asset Price booms by means of aggregating information contained in 38 boom periods since the 1970s for 18 OECD countries. We observe 26 macroeconomic variables in a pre-boom, boom and post-boom phase. Not all booms lead to large output losses. We divide our sample in high-cost and low-cost booms and analyse the differences. High-cost booms are clearly those in which real estate Prices and investment crash in the post-boom periods. In general it is difficult to distinguish a high-cost from a low-cost boom at an early stage. However, high-cost booms seem to follow very rapid growth in the real money and real credit stocks just before the boom and at the early stages of a boom. During high-cost booms, rates of change of real estate Prices and consumption growth are significantly higher and the investment (especially housing) GDP ratio deviation from trend rises faster over the whole boom period. There is also evidence that high-cost booms are associated with significantly looser monetary policy conditions over the boom period, especially towards the late stage of a boom. We finally discuss the results with regard to the theoretical literature. The looser monetary policy at the later stage of high-cost booms could be interpreted in different ways. It could be that excessively loose monetary policy contributes to extending the boom and exacerbating the real and financial imbalances. Alternatively, observed monetary policy could reflect a desirable, pre-emptive loosening in anticipation of an Asset Price crash to come. JEL Classification: E44, E52, E58
Sujan Lamichhane - One of the best experts on this subject based on the ideXlab platform.
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testing for Asset Price bubbles using options data
Social Science Research Network, 2020Co-Authors: Nicola Fusari, Robert A Jarrow, Sujan LamichhaneAbstract:We present a new approach to identifying Asset Price bubbles based on options data. Given their forward-looking nature, options are ideal instruments with which to investigate market expectations about the future evolution of Asset Prices, which are key to understanding Price bubbles. By exploiting the differential pricing between put and call options, we can detect and quantify bubbles in the Prices of underlying Asset. We apply our methodology to two stock market indexes, the S&P 500 and the Nasdaq-100, and two technology stocks, Amazon and Facebook, over the 2014-2018 sample period. We find that, while indexes exhibit rare and modest bubbles, Amazon and Facebook show more frequent and much larger bubbles. Since our approach can be implemented in real time, it is useful to both policy-makers and investors. As an illustration, our methodology applied to GameStop identifies a significant bubble between December 2020 and January 2021.
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Asset Price bubbles, market liquidity, and systemic risk
Mathematics and Financial Economics, 2019Co-Authors: Robert A Jarrow, Sujan LamichhaneAbstract:This paper studies an equilibrium model with heterogeneous agents, Asset Price bubbles, and trading constraints. Market liquidity is modeled as a stochastic quantity impact from trading on the Price. Bubbles are larger in liquid markets and when trading constraints are more binding. Systemic risk is defined as an unanticipated shock that results in the nonexistence of an equilibrium in the economy. A realization of systemic risk results in a significant loss of wealth. Systemic risk increases as: (i) the fraction of agents seeing an Asset Price bubble increases, (ii) as the market becomes more illiquid, and (iii) as trading constraints are relaxed.
Jordi Gali - One of the best experts on this subject based on the ideXlab platform.
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monetary policy and rational Asset Price bubbles
The American Economic Review, 2014Co-Authors: Jordi GaliAbstract:I examine the impact of alternative monetary policy rules on a rational Asset Price bubble, through the lens of an OLG model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the ‡uctuations in the latter,
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monetary policy and rational Asset Price bubbles
The American Economic Review, 2014Co-Authors: Jordi GaliAbstract:I examine the impact of alternative monetary policy rules on a rational Asset Price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.
Viral V Acharya - One of the best experts on this subject based on the ideXlab platform.
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the seeds of a crisis a theory of bank liquidity and risk taking over the business cycle 1
Journal of Financial Economics, 2012Co-Authors: Viral V Acharya, Hassan NaqviAbstract:Abstract We examine how the banking sector could ignite the formation of Asset Price bubbles when there is access to abundant liquidity. Inside banks, to induce effort, loan officers are compensated based on the volume of loans. Volume-based compensation also induces greater risk taking; however, due to lack of commitment, loan officers are penalized ex post only if banks suffer a high enough liquidity shortfall. Outside banks, when there is heightened macroeconomic risk, investors reduce direct investment and hold more bank deposits. This ‘flight to quality’ leaves banks flush with liquidity, lowering the sensitivity of bankers’ payoffs to downside risks and inducing excessive credit volume and Asset Price bubbles. The seeds of a crisis are thus sown.
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the seeds of a crisis a theory of bank liquidity and risk taking over the business cycle
Journal of Financial Economics, 2012Co-Authors: Viral V Acharya, Hassan NaqviAbstract:We examine how the banking sector could ignite the formation of Asset Price bubbles when there is access to abundant liquidity. Inside banks, to induce effort, loan officers are compensated based on the volume of loans. Volume-based compensation also induces greater risk taking; however, due to lack of commitment, loan officers are penalized ex post only if banks suffer a high enough liquidity shortfall. Outside banks, when there is heightened macroeconomic risk, investors reduce direct investment and hold more bank deposits. This ‘flight to quality’ leaves banks flush with liquidity, lowering the sensitivity of bankers’ payoffs to downside risks and inducing excessive credit volume and Asset Price bubbles. The seeds of a crisis are thus sown.
