SSRN Author: Robert A. JarrowRobert A. Jarrow SSRN Content
http://www.ssrn.com/author=16130
http://www.ssrn.com/rss/en-usFri, 06 Mar 2015 11:40:25 GMTeditor@ssrn.com (Editor)Fri, 06 Mar 2015 11:40:25 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: 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 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/1322623.htmlTue, 29 Jul 2014 07:30:16 GMTNew: Optimal Cash Holdings Under Heterogeneous BeliefsThis paper explores a one-period model for a company that finances its operations through debt provided by heterogeneous creditors. Creditors differ in their beliefs about the company's investment outcomes. We analyze the joint equilibrium for the creditors' and the company's optimal investment policies. We show the existence of equilibria in which the company holds cash reserves in order to provide incentives for pessimistic creditors to invest in the company, thereby increasing the debt capacity. This proves the existence of a signaling motive that can help explain the recent high cash holdings puzzle.
http://www.ssrn.com/abstract=2449972
http://www.ssrn.com/1312084.htmlSat, 14 Jun 2014 07:27:26 GMTREVISION: Risk Measures and the Impact of Asset Price BubblesThis paper analyzes the impact of asset price bubbles on a firm's standard risk measures, including value-at-risk (VaR) and conditional value-at-risk (CVaR). Comparing a bubble and non-bubble economy, it is shown that asset price bubbles cause (i) a firm's VaR and CVaR to decline, but (ii) increase its expected daily and maximum daily losses. This decline in the standard risk measures is due to the increased right skew in a firm value's distribution due to bubble expansion. The increase in the expected daily losses is due to bubble bursting. This implies that the standard risk measures are not adequate for equity capital determination in the present of asset price bubbles, and that scenario analysis which include bursting bubbles are essential for the proper determination of equity capital.
http://www.ssrn.com/abstract=2341641
http://www.ssrn.com/1303374.htmlThu, 08 May 2014 03:36:26 GMTREVISION: Estimating Risk Premia Changes from the Fed's Large-Scale Asset PurchasesThis paper estimates the impact of the Federal Reserve's large-scale asset purchase program on risk premia across the US economy. Whereas much of previous literature focuses upon the direct impact to yields as a result of the Fed's unconventional monetary policies, we study the changes induced to expected returns for both bond and equity investors. Our analysis supports the notion that the Federal Reserve lowered Treasury yields by decreasing the risk premia for interest rate risk. All else equal, this action would contribute to lower expected excess equity returns. However, risk premia for equities actually rose due to the Fed's bond purchases in order to induce investors to shift their holdings from bonds to equities. This rise helps to explain the extraordinary returns realized by equity investors since the financial crisis began in 2008.
http://www.ssrn.com/abstract=2428784
http://www.ssrn.com/1300484.htmlFri, 25 Apr 2014 21:19:25 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/1298413.htmlThu, 17 Apr 2014 08:28:21 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/1296433.htmlTue, 08 Apr 2014 11:59:46 GMT