SSRN Author: Robert A. JarrowRobert A. Jarrow SSRN Content
http://www.ssrn.com/author=16130
http://www.ssrn.com/rss/en-usSat, 03 Oct 2015 02:14:26 GMTeditor@ssrn.com (Editor)Sat, 03 Oct 2015 02:14:26 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: Positive Alphas and a Generalized Multiple-Factor Asset Pricing ModelThis paper derives a generalized multiple-factor asset pricing model using only the assumptions of the existence of an equivalent martingale measure, frictionless, and competitive markets. As such, all existing multiple-factor asset pricing models, including the intertermporal CAPM and Ross' APT, are special cases of this formulation. First, similar to the standard models, a traded asset's expected return is linear in a finite number of traded risk-factor returns. Different from standard models, however, this model allows potentially an infinite number of distinct risk-factors in the economy. Different assets will, in general, depend on a different finite set of risk-factors. Second, positive alphas imply arbitrage opportunities or the existence of dominated securities, and not just abnormal expected returns. This generalization is consistent with many of the observed discrepancies between existing multiple-factor asset pricing models and the empirical evidence.
http://www.ssrn.com/abstract=2368906
http://www.ssrn.com/1433214.htmlFri, 02 Oct 2015 14:14:05 GMTREVISION: Bubbles and Multiple-Factor Asset Pricing ModelsThis paper derives a multiple-factor asset pricing model with asset price bubbles in an arbitrage-free, competitive, and frictionless market. As such it generalizes existing asset pricing models, all of which implicitly assume asset price bubbles do not exist. This generalization leads to two new empirical implications. The first is that positive alphas can exist in an arbitrage-free market due to the existence of asset price bubbles. These positive alphas do not represent abnormal profit opportunities. The second is that bubble risk factors can exist with positive risk premiums. The testing of these new empirical implications awaits subsequent research.
http://www.ssrn.com/abstract=2639374
http://www.ssrn.com/1433212.htmlFri, 02 Oct 2015 14:12:44 GMTREVISION: Asset Market Equilibrium with Liquidity RiskThis paper derives an equilibrium asset pricing model with liquidity risk. Liquidity risk is modeled as a stochastic quantity impact on the price from trading, where the size of the impact depends on trade size. Under a mild set of assumptions, we prove that an equilibrium price process exists for our economy and we characterize the market’s state price density, which enables the derivation of the risk-return relation for the stock’s expected return including liquidity risk. In contrast to the traditional models without liquidity risk, there is an additional systematic liquidity risk factor which is related to the stock return’s covariation with the market’s stochastic liquidity cost. Traditional transaction costs are a special case of our formulation.
http://www.ssrn.com/abstract=2653914
http://www.ssrn.com/1428236.htmlTue, 15 Sep 2015 08:56:43 GMTREVISION: Asset Market Equilibrium with Liquidity RiskThis paper derives an equilibrium asset pricing model with liquidity risk. Liquidity risk is modeled as a stochastic quantity impact on the price from trading, where the size of the impact depends on trade size. Under a mild set of assumptions, we prove that an equilibrium price process exists for our economy and we characterize the market’s state price density, which enables the derivation of the risk-return relation for the stock’s expected return including liquidity risk. In contrast to the traditional models without liquidity risk, there is an additional systematic liquidity risk factor which is related to the stock return’s covariation with the market’s stochastic liquidity cost. Traditional transaction costs are a special case of our formulation.
http://www.ssrn.com/abstract=2653914
http://www.ssrn.com/1424938.htmlWed, 02 Sep 2015 06:13:53 GMTREVISION: Bubbles and Multiple-Factor Asset Pricing ModelsThis paper derives a multiple-factor asset pricing model with asset price bubbles in an arbitrage-free, competitive, and frictionless market. As such it generalizes existing asset pricing models, all of which implicitly assume asset price bubbles do not exist. This generalization leads to two new empirical implications. The first is that positive alphas can exist in an arbitrage-free market due to the existence of asset price bubbles. These positive alphas do not represent abnormal profit opportunities. The second is that bubble risk factors can exist with positive risk premiums. The testing of these new empirical implications awaits subsequent research.
http://www.ssrn.com/abstract=2639374
http://www.ssrn.com/1417444.htmlWed, 05 Aug 2015 09:32:31 GMTREVISION: Optimal Cash Holdings Under Heterogeneous BeliefsThis paper explores a one-period model for a firm that finances its operations through debt provided by heterogeneous creditors. Creditors differ in their beliefs about the firm's investment outcomes. We show the existence of Stackelberg equilibria in which the firm holds cash reserves in order to provide incentives for pessimistic creditors to invest in the firm. We find interest rates and cash holdings to be complementary tools for increasing debt capacity. In markets with a high concentration of capital across a small interval of pessimistic creditors or by a few large creditors, cash holdings is the preferred tool that can lead to an upward jump in the debt capacity of the firm.
http://www.ssrn.com/abstract=2449972
http://www.ssrn.com/1410340.htmlWed, 08 Jul 2015 08:38:50 GMTREVISION: Change of Numeraires and Relative Asset Price BubblesIn models of financial bubbles, the price of a stock is a priori typically unbounded, and this plays a fundamental role in the analysis of finite horizon local martingale bubbles. It would seem that price bubbles do not apply to bounded risky asset prices, such as bond prices. To avoid this limitation, to characterize, and to identify bond price mispricings consistent with No Free Lunch with Vanishing Risk, we develop the concept of a relative asset price bubble. This notion uses a risky asset's price as the numéraire instead of the money market account's value. This change of numéraire generates some interesting mathematical complexities because some important numéraires, including risky bonds, can vanish with positive probability over the model's horizon.
http://www.ssrn.com/abstract=2265465
http://www.ssrn.com/1396662.htmlThu, 14 May 2015 06:18:09 GMTREVISION: Portfolio Balance Effects and the Federal Reserve's Large-Scale Asset PurchasesWhereas much of previous literature focuses upon the impact on yields from the Federal Reserve's large-scale asset purchases (LSAPs), we study the changes to expected returns. Through a simple general equilibrium model, we motivate how LSAPs may impact equilibrium bond and equity expected returns. Our empirical investigation offers support for changes to risk premia coincident with LSAPs. For both equity and bonds, we find evidence for supply/demand LSAPs effects; equity effects consistent with conventual theory whereas bond effects appear to be an anomaly. Such findings represent novel insight for weighing the efficacy and identifying the scope of LSAPs.
http://www.ssrn.com/abstract=2428784
http://www.ssrn.com/1378787.htmlFri, 06 Mar 2015 05:50:49 GMTREVISION: Positive Alphas and a Generalized Multiple-Factor Asset Pricing ModelThis paper derives a generalized multiple-factor asset pricing model using only the assumptions of the existence of an equivalent martingale measure, frictionless, and competitive markets. As such, all existing multiple-factor asset pricing models, including the intertermporal CAPM and Ross' APT, are special cases of this formulation. First, similar to the standard models, a traded asset's expected return is linear in a finite number of traded risk-factor returns. Different from standard models, however, this model allows potentially an infinite number of distinct risk-factors in the economy. Different assets will, in general, depend on a different finite set of risk-factors. Second, positive alphas imply arbitrage opportunities or the existence of dominated securities, and not just abnormal expected returns. This generalization is consistent with many of the observed discrepancies between existing multiple-factor asset pricing models and the empirical evidence.
http://www.ssrn.com/abstract=2368906
http://www.ssrn.com/1366831.htmlWed, 21 Jan 2015 10:44:54 GMTREVISION: Bank Runs and Self-Insured Bank DepositsThis paper studies bank runs in an extended Diamond and Dybvig model. The model is extended in two ways. One, agents have heterogeneous wealth and two, banks can invest in both liquid and illiquid assets. We argue that the underlying reason for bank runs is ambiguous property rights. Sequential conversion is an example of such ambiguity. Demand deposit insurance eliminates this ambiguity. In this regard, we characterize conditions on the economy where banks can preclude bank runs as an equilibrium by self-insuring their deposits with an FDIC deposit insurance like contract.
http://www.ssrn.com/abstract=2240001
http://www.ssrn.com/1366829.htmlWed, 21 Jan 2015 10:41:35 GMTREVISION: Liquidity Risk and the Term Structure of Interest RatesThis paper develops an arbitrage-free pricing theory for a term structure of fixed income securities that incorporates liquidity risk. In our model, there is a quantity impact on the term structure of zero-coupon bond prices from the trading of any single zero-coupon bond. We derive a set of conditions under which the term structure evolution is arbitrage-free. These no arbitrage conditions constrain both risk premia and the term structure's volatility. In addition, we also provide conditions under which the market is complete, and we show that the replication cost of an interest rate derivative is the solution to a backward stochastic differential equation.
http://www.ssrn.com/abstract=2222763
http://www.ssrn.com/1345680.htmlFri, 24 Oct 2014 04:30:49 GMT