SSRN Author: Robert A. JarrowRobert A. Jarrow SSRN Content
http://www.ssrn.com/author=16130
http://www.ssrn.com/rss/en-usSat, 25 Mar 2017 02:55:32 GMTeditor@ssrn.com (Editor)Sat, 25 Mar 2017 02:55:32 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: Volatility Uncertainty, Time Decay, and Option Bid-Ask Spreads in an Incomplete MarketThis paper documents the fact that in options markets, the (percentage) implied volatility bid-ask spread increases at an increasing rate as the option’s maturity date approaches. To explain this stylized fact, this paper provides a market microstructure model for the bid-ask spread in options markets. We first construct a static equilibrium model to illustrate the aforementioned phenomenon where risk averse and competitive option market makers quote bid and ask prices to minimize their inventory risk in an incomplete market with both directional and volatility risk. We extend this model to multi-periods and show that the same phenomenon occurs there as well. Two new implications are generated: a volatility level effect and a volatility variance effect. These implications are empirically tested, and the empirical results confirm the model’s validity. Finally, we document the importance of de-trending the maturity effect by showing that the de-trended percentage volatility spread ...
http://www.ssrn.com/abstract=2264261
http://www.ssrn.com/1576744.htmlFri, 24 Mar 2017 07:26:19 GMTNew: A Rational Asset Pricing Model for Premiums and Discounts on Closed-End Funds: The Bubble TheoryThis paper provides a new explanation for closed-end fund (CEF) discounts and premiums using the local martingale theory of asset price bubbles. This is a rational asset pricing model that is shown to be consistent with the existing empirical evidence on CEF discounts/premiums. Additional testable implications of the model are derived which await subsequent research for their resolution. This bubble theory also applies equally well to understanding discounts and premiums on exchange traded funds (ETFs).
http://www.ssrn.com/abstract=2935272
http://www.ssrn.com/1575520.htmlMon, 20 Mar 2017 08:20:21 GMTNew: The Distributional Effects of Yield Control Monetary Policy: A Helicopter Money Drop to Financial InstitutionsOn September 21st, 2016, the Bank of Japan (BOJ) embarked on a new unconventional monetary policy, yield curve control (YCC). This paper studies the consequences of this new and unconventional monetary policy tool. We characterize YCC in an arbitrage-free term structure model and show its economic implications. YCC has two effects. First, it creates an arbitrage opportunity in otherwise arbitrage-free government bond markets which financial institutions, but not individuals, can exploit. Second, this arbitrage opportunity creates a wealth transfer from the BOJ to these financial institutions, analogous to a helicopter money drop. Such a wealth transfer has negative distributional effects. Using recent market data, we estimate a lower bound on this wealth transfer from the BOJ to financial institutions for the first four months of its implementation to be between 0.048 - 2.37 billion US dollars per year, the midpoint being $1.209 billion.
http://www.ssrn.com/abstract=2922132
http://www.ssrn.com/1569074.htmlFri, 24 Feb 2017 08:08:38 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 to heterogeneous beliefs about the evolution of an asset’s market price process.
http://www.ssrn.com/abstract=2688600
http://www.ssrn.com/1568897.htmlFri, 24 Feb 2017 00:19:18 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/1561806.htmlSat, 28 Jan 2017 15:26:54 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/1560663.htmlTue, 24 Jan 2017 17:33:46 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/1522004.htmlTue, 23 Aug 2016 14:41:15 GMTREVISION: Exploring Statistical Arbitrage Opportunities in the Term Structure of CDS SpreadsBased on a reduced-form model of credit risk, we explore statistical arbitrage opportunities in the CDS spreads of North American companies. Specifically, we develop a trading strategy using the model to trade market-neutral portfolios while controlling for realistic transaction costs. Empirical results show that our arbitrage strategy is of significant economic value, and also cast doubt on the efficiency of the CDS market. The aggregate returns of the trading strategy are positively related to the square of market-wide credit and liquidity risks, indicating that the market is less efficient when it is more volatile.
http://www.ssrn.com/abstract=2686284
http://www.ssrn.com/1516811.htmlTue, 02 Aug 2016 14:32:23 GMTREVISION: Exploring Statistical Arbitrage Opportunities in the Term Structure of CDS SpreadsBased on a reduced-form model of credit risk, we explore statistical arbitrage opportunities in the CDS spreads of North American companies. Specifically, we develop a trading strategy using the model to trade market-neutral portfolios while controlling for realistic transaction costs. Empirical results show that our arbitrage strategy is of significant economic value, and also cast doubt on the efficiency of the CDS market. The aggregate returns of the trading strategy are positively related to the square of market-wide credit and liquidity risks, indicating that the market is less efficient when it is more volatile.
http://www.ssrn.com/abstract=2686284
http://www.ssrn.com/1494301.htmlFri, 06 May 2016 14:08:29 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/1490395.htmlSun, 24 Apr 2016 14:34:09 GMT