SSRN Author: Robert A. JarrowRobert A. Jarrow SSRN Content
http://www.ssrn.com/author=16130
http://www.ssrn.com/rss/en-usThu, 28 Jan 2016 02:21:16 GMTeditor@ssrn.com (Editor)Thu, 28 Jan 2016 02:21:16 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: Exploring Statistical Arbitrage Opportunities in the Term Structure of CDS SpreadsThe rapid growth of the CDS market makes it possible to speculate on the relative pricing of the credit risk of a company across a wide range of maturities. Based on a reduced-form model of credit risk, we explore statistical arbitrage opportunities in the term structure of CDS spreads of a large number of companies in North America. Specifically, we estimate an affine model for the term structure of CDS spreads of a given company and identify mis-valued CDS contracts along the credit curve. We trade market-neutral portfolios of mis-valued CDS contracts relative to our model, betting that the mis-valuation will disappear over time while controlling for reasonable transaction costs. Empirical analysis shows that our arbitrage strategy is of significant economic value after transaction costs, and also imply that the common impression that this market is both liquid and competitive is questionable. The aggregate returns of the trading strategy are positively related to the square of the ...
http://www.ssrn.com/abstract=2686284
http://www.ssrn.com/1464573.htmlWed, 27 Jan 2016 13:50:51 GMTREVISION: On the Existence of Competitive Equilibrium in Frictionless and Incomplete Stochastic Asset MarketsUsing a standard frictionless, continuous time, and continuous trading stochastic economy with heterogeneous beliefs, the purpose of this paper is to provide sufficient conditions for the existence of competitive equilibrium in an incomplete asset market. A new approach to proving existence is provided, which is readily generalized to markets with frictions, including trading constraints and transaction costs. As a second contribution, this paper also proves the existence of bubble equilibrium in a market without trading constraints. We show that bubbles can exist solely due heterogeneous beliefs about the evolution of an asset’s market price process.
http://www.ssrn.com/abstract=2688600
http://www.ssrn.com/1464460.htmlWed, 27 Jan 2016 11:42:48 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/1464477.htmlWed, 27 Jan 2016 11:40:10 GMTREVISION: On the Existence of Competitive Equilibrium in Frictionless and Incomplete Stochastic Asset MarketsUsing a standard frictionless, continuous time, and continuous trading stochastic economy with heterogeneous beliefs, the purpose of this paper is to provide sufficient conditions for the existence of competitive equilibrium in an incomplete asset market. A new approach to proving existence is provided, which is readily generalized to markets with frictions, including trading constraints and transaction costs. As a second contribution, this paper also proves the existence of bubble equilibrium in a market without trading constraints. We show that bubbles can exist solely due heterogeneous beliefs about the evolution of an asset’s market price process.
http://www.ssrn.com/abstract=2688600
http://www.ssrn.com/1455220.htmlWed, 23 Dec 2015 03:31:31 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/1453991.htmlFri, 18 Dec 2015 12:53:51 GMTNew: On Aggregation and Representative Agent EquilibriaAggregation is an often used tool in finance and macroeconomics, whereby economic equilibrium in a heterogeneous trader economy is characterized by means of the first order optimality conditions of a representative agent. In this paper we study the conditions under which a representative agent exists, and investigate the implications for the existence of equilibrium. The approach applies to markets which are incomplete, including markets with trading constraints, heterogeneous beliefs, and differential information.
http://www.ssrn.com/abstract=2698395
http://www.ssrn.com/1450033.htmlFri, 04 Dec 2015 14:06:21 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/1444252.htmlFri, 13 Nov 2015 08:35:59 GMTREVISION: On the Existence of Competitive Equilibrium in Frictionless and Incomplete Stochastic Asset MarketsUsing a standard frictionless, continuous time, and continuous trading stochastic economy with heterogeneous beliefs, the purpose of this paper is to provide sufficient conditions for the existence of competitive equilibrium in an incomplete asset market. A new approach to proving existence is provided, which is readily generalized to markets with frictions, including trading constraints and transaction costs. As a second contribution, this paper also proves the existence of bubble equilibrium in a market without trading constraints. We show that bubbles can exist solely due heterogeneous beliefs about the evolution of an asset’s market price process.
http://www.ssrn.com/abstract=2688600
http://www.ssrn.com/1443729.htmlWed, 11 Nov 2015 08:33:49 GMTREVISION: Exploring Statistical Arbitrage Opportunities in the Term Structure of CDS SpreadsThe rapid growth of the CDS market makes it possible to speculate on the relative pricing of the credit risk of a company across a wide range of maturities. Based on a reduced-form model of credit risk, we explore "statistical" arbitrage opportunities in the term structure of CDS spreads of a large number of companies in North America. Specifically, we estimate an affine model for the term structure of CDS spreads of a given company and identify mis-valued CDS contracts along the credit curve. We trade market-neutral portfolios of mis-valued CDS contracts relative to our model, betting that the mis-valuation will disappear over time. Empirical analysis shows that our "arbitrage" strategy can be very profitable. For most firms, the Sharpe ratios are higher than one, and for some firms, the Sharpe ratios are even above two. The empirical results imply that the common impression that this market is both liquid and competitive is questionable. Further structural reforms in the CDS market ...
http://www.ssrn.com/abstract=2686284
http://www.ssrn.com/1442514.htmlFri, 06 Nov 2015 07:44:38 GMTNew: Portfolio Balance Effects and the Equity MarketMany monetary studies on the portfolio balance effect omit its impact to equity returns. Motivated through a simple general equilibrium model, we study how changes in the bond supply affect the overall equity market. Our model predicts that exogenous increases (decreases) in the bond supply coincide with a lower (higher) equity price, all else equal. A historical investigation from 1952-2014 discovers asymmetric effects, both leading to higher equity prices. While the portfolio balance channel explains how unexpected downward shifts in the bond supply lead to higher equity prices, empirical evidence suggests unexpected upward shifts coincide with higher inflation.
http://www.ssrn.com/abstract=2681330
http://www.ssrn.com/1440326.htmlThu, 29 Oct 2015 16:53:51 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/1439931.htmlWed, 28 Oct 2015 10:58:31 GMTNew: On the Existence of Competitive Equilibrium in Frictionless and Incomplete Stochastic AssetUsing a standard frictionless, continuous time, and continuous trading stochastic economy with heterogeneous beliefs, the purpose of this paper is to provide sufficient conditions for the existence of competitive equilibrium in an incomplete asset market. A new approach to proving existence is provided, which is readily generalized to markets with frictions, including trading constraints and transaction costs. As a second contribution, this paper also proves the existence of bubble equilibrium in a market without trading constraints. We show that bubbles can exist solely due heterogeneous beliefs about the evolution of an asset’s market price process.
http://www.ssrn.com/abstract=2676656
http://www.ssrn.com/1438241.htmlWed, 21 Oct 2015 09:51:03 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/1438156.htmlWed, 21 Oct 2015 07:01:50 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/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 GMT