FrançaisEnglish

Érudit | Dépôt de documents >
CIRANO - Centre interuniversitaire de recherche en analyse des organisations >
Cahiers scientifiques >

Please use this identifier to cite or link to this item:

https://depot.erudit.org//id/003438dd

Title: Past Market Variance and Asset Prices
Authors: Bandi, Federico M.
Perron, Benoit
Issue Date: 2011-02
Publisher: Centre interuniversitaire de recherche en analyse des organisations (CIRANO)
Series/Report no.: Série scientifique (CIRANO);2011s-16
Scientific series (CIRANO);2011s-16
Abstract: Recent work in asset pricing has focused on market-wide variance as a systematic factor and on firm-specific variance as idiosyncratic risk. We study an alternative channel through which the variability of financial market returns may help our understanding of cross-sectional price formation in financial markets. Invoking the countercyclical nature of market variance, we allow the (stochastic) discounting of future cash-flows to depend on the level of past market variance (pmv). Employing pmv as a conditioning variable in a classical consumption-CAPM framework, we derive economically meaningful conditional factor loadings and conditional risk premia. We show that scaling by pmv may also yield more effective pricing results than scaling by successful, alternative variables (such as the consumption-to-wealth ratio) precisely at frequencies at which their predictive ability for excess market returns should be (in theory) and is (empirically) maximal, i.e., business-cycle frequencies.
URI: http://www.cirano.qc.ca/pdf/publication/2011s-16.pdf
https://depot.erudit.org/id/003438dd
ISSN: 1198-8177
Appears in Collections:Cahiers scientifiques

Files in This Item:

2011s-16.pdf (Adobe PDF ; 426.72 kB)

Items in the Repository are protected by copyright, with all rights reserved, unless otherwise indicated.

 

About Érudit | Subscriptions | RSS | Terms of Use | Contact us |

Consortium Érudit ©  2016