Christos I. Giannikos

Asset and commodity prices with multi-attribute durable goods

We consider a pure exchange representative agent economy with perishable and durable commodities in which the durable good provides status as well as services. We examine the effects of the durables attributes on demands and equilibrium prices. When the attributes are perfect substitutes irreversibility of the durables purchases may cause temporary excesses of actual services over their desired level. Stickiness in adjustment is asymmetric since increases in desired status level are met by immediate purchases. We show that the equilibrium interest rate depends, in particular, on the growth rates of the durables attributes and that asset risk premia satisfy a two-beta consumption CAPM. Conditions under which durability increases asset risk premia are provided. Nous considerons une economie de pur echange a agent representatif avec biens perissables et durables dans laquelle le bien durable procure du statut ainsi que des services. Nous examinons les effets de ces deux attributs du bien durable sur les demandes et les prix dequilibre. Lorsque les attributs sont des substituts parfaits lirreversibilite des achats du durable peut creer des exces temporaires de services courants par rapport a leur niveau desire. Linflexibilite de lajustement est asymmetrique puisquune augmentation du niveau de statut desire est realisee par des achats immediats. Nous demontrons que le taux dinteret dequilibre depend, en particulier, des taux de croissance des attributs du bien durable et que les primes de risque verifient un MEDAF de consommation a deux betas. Nous examinons les conditions sous lesquelles la durabilite augmente les primes de risque des actifs financiers.

The 2008 Financial Crisis and the Dynamics of Price Discovery Among Stock Prices, CDS Spreads, and Bond Spreads for US Financial Firms

Proliferation of traded derivatives that relate to the same underlying—such as stocks, bonds, and credit default swaps (CDS) all tied to the value of an underlying firm—raises questions about which instrument leads the adjustment to a new equilibrium when information enters the market. In this article, the authors explore the issue of using CDS, bonds, and stocks of 10 financial firms before and during the crisis of 2008. Using a cointegration framework, they calculate each security’s contribution to overall price discovery. They find the stock market to be the most informative, followed by the CDS market, with the bond market least of all. Before the crisis period, about two-thirds of price discovery occurred in the equity market and about one-quarter in the CDS market. From fall 2007 through 2008, however, the influence from stocks dropped to about 50%, while the CDS market’s contribution increased to close to 40%.

Short Sale Constraints and Dispersion of Opinion: Evidence from the Indian Equity Market

Short sale constraints can inflate market prices, as bearish investors cannot act on their market views. The paper uses data from the Indian equity market to test whether opinion dispersion leads to higher overpricing when short sales are prohibited. The Indian equity market provides a natural testing environment, as short sales were banned between 2001 and 2008. The empirical results offer supportive evidence of the relation between opinion dispersion and overpricing in a market with short sale constraints.

Habit Formation in an Overlapping Generations Model with Borrowing Constraints

We introduce habit-formation in the three-period OLG borrowing-constraint framework of Constantinides, Donaldson, and Mehra (2002) by allowing the utility of the middle-aged (old) to depend on consumption when young (middle-aged). This specification enables us to separate the effect of the two habit parameters (middle-aged and old) since each representative age-group can face different levels of habit persistence. The two-habit setup underlines some important issues with regards to savings and security returns which do not always conform to the standard findings in the literature. In addition, the model produces equity premium consistent with U.S. data for relatively small levels of risk aversion.

The profitability, seasonality and source of industry momentum

We systematically examine industry momentum on a global basis. The results show that industry momentum is profitable around the globe for various ranking and holding periods. The profits are larger in January than in other months. Industry momentum reverses in the long run and the reversal does not concentrate in January; these findings are consistent with behavioural explanations for the profitability of industry momentum.

A note on demand for information: the OCE preferences case

Abstract This paper considers the optimal decisions of an investor with ‘ordinal certainty equivalent’ preferences. We prove that, if risk preferences are of the ‘constant absolute risk aversion’ type, optimal demand for the risky asset and information are independent of time preferences.

Short Sale Constraints, Correlation and Market Efficiency

This paper models a market where short sales are prohibited and investors have heterogeneous beliefs on asset values. We show that short sale constraints may cause overpricing, the magnitude of which depends on not only investors’ opinion dispersion on the value of the particular asset, but also on its correlation to other assets, as well as, the investors’ opinion dispersion for the values of those other assets.

Hedge Funds and the Housing Bubble

This article documents that hedge funds specializing in subprime mortgages did not take advantage of the housing bubble and they did not trade against it. Hedge fund capitalization is an important factor regarding how funds suffered during the crisis. Small funds suffered the most. Mid-cap portfolio relied on macroeconomic indicators (subprime foreclosures) and, as a result, suffered less compared to their peers above. Duration and quality of the credit instruments are significant factors in explaining hedge fund returns. Naturally, our study, in line with the existing literature during turbulent periods, documents that the lack of liquidity was a key driver of performance.

A Note on the Interrelation of Volatility Puzzle, Equity Premium Puzzle, and Mean Reversion through State Dependent Preferences

According to empirical studies, there is a systematic pattern in the temporal behavior of asset returns and this is related to the business cycle. We propose a simple model that captures this behavior. This model is built around a state dependent preference structure where the state dependency is related to the business cycle. In this setting the volatility puzzle, the equity premium puzzle and mean-reversion appear to be indeed interrelated phenomena. A necessary condition for the three puzzles to be explained is that the state variable is negatively correlated with the market portfolio cum business cycle.

Short sale constraints: the impact on the return distribution

This paper tests empirically Hong and Steins theoretical finding, that in an environment of short sale constraints, investor disagreement over future equity prices leads to negatively skewed return distributions. This study uses data from the Indian equity market to examine the third and fourth moments of the return distribution. The skewness of the return distribution is estimated both from realized returns and option prices. Empirical results provide partial supportive evidence for Hong and Steins hypothesis.