Levent Akdeniz

Time-Varying Betas Help in Asset Pricing: The Threshold CAPM

Although there is a consensus about time variation in market betas, it is not clear how this variation should be captured. Several researchers continue to analyze different versions of the conditional CAPM. However, Ghysels (1998) shows that these conditional CAPM models fail to capture the dynamics of beta risk. In this study, we introduce a new model, threshold CAPM, which outperforms both the conditional and unconditional CAPMs by generating smaller pricing errors. We also show that the beta risk changes through time with the changes in the economic environment and the dynamics of time variation of beta differ across industries. These findings have important implications for asset allocation, portfolio selection, and hedging decisions.

Are stock prices too volatile to be justified by the dividend discount model

This study investigates excess stock price volatility using the variance bound framework of LeRoy and Porter (1981) and of Schiller (1981). The conditional variance bound relationship is examined using cross-sectional data simulated from the general equilibrium asset pricing model of Brock (1982). Results show that the conditional variance bounds hold, hence, our hypothesis of the validity of the dividend discount model cannot be rejected. Moreover, in our setting, markets are efficient and stock prices are neither affected by herd psychology nor by the outcome of noise trading by naive investors; thus, we are able to control for market efficiency. Consequently, we show that one cannot infer any conclusions about market efficiency from the unconditional variance bounds tests.

Interdependence of the Banking Sector and the Real Sector: Evidence from OECD Countries

This article investigates the validity of the credit view hypothesis in eleven OECD (Organization for Economic Cooperation and Development) countries over the period 1987:QI to 2003:QIII. The existence of a long-run relationship between the banking sector and the real sector is supported by cointegration test results. For some of the countries in the sample, Granger causality tests show the leading role of the banking sector in the real sector, thus supporting the credit view hypothesis, whereas for other countries, the same tests indicate no interdependence.

Do CAPM results hold in a dynamic economy? A numerical analysis

In this paper we present a method for solving the multifirm stochastic growth model of Brock (1979). After obtaining a solution to the growth model, we derive a solution to the asset pricing model of brock (1982) using the duality between the two models.

The evolving role of supply chain managers in global channels of distribution and logistics systems

Purpose – Supply chains have become a strategic strength to many firms due to the nature of the globalization of business. The past roles of supply chain managers have changed dramatically and now also include various new duties that will enhance firm competitiveness due to their boundary spanning nature and the new focus of learning organizations. The paper aims to discuss these issues. Design/methodology/approach – This was a theoretically developed paper exploring trust, learning organizations, and supply chains. Findings – Researchers are now focussing on the relationship among the supply chain network through the paradigm of relational marketing as the governance structures of contractual arrangements globally cannot be anticipated. Originality/value – The research through the lens of relational marketing explores how supply chain managers’ core duties are now compounded by global/cultural nuances in respect to implicit knowledge acquisition and relationship development through strong-form trust.

Foreign Equity Trading and Average Stock-return Volatility: FOREIGN EQUITY TRADING AND VOLATILITY

We examine whether there is a relationship between foreign equity trading and average total volatility, measured as the value-weighted average of stock-return variance in the Istanbul Stock Exchange. We employ foreign equity purchase and sale data to track changes in foreign equity trading, which not only enable us to capture effective foreign investor participation but also to observe the potential asymmetric effects of incoming and outgoing funds on the average total volatility. Consistent with the implications of the asymmetric information hypothesis, we find that net equity flow is positively associated with average total volatility. Furthermore, we show that net equity flow affects the average total volatility through the local and idiosyncratic volatilities, suggesting that foreign investors engage in the production of firm specific and market wide information.

Risk and return in a dynamic general equilibrium model

Abstract In this paper we examine the relationship between risk and return on productive assets using the intertemporal general equilibrium model of Brock (1982, Asset Prices in a Production Economy, the University of Chicago Press, Chicago, pp. 1–42) as a basis for a simulation study. Current computational techniques are used to solve the growth model of Brock (1979, An Integration of Stochastic Growth and the Theory of Finance — Part I: The Growth Model, Academic Press, New York, pp. 165–192) in order to analyze the underlying financial model. Contrary to recent empirical findings, we find that there is a theoretical basis for the linear relationship between risk and return. This apparent contradiction is due in part to the fact that the dynamic relationship between risk and return depends on the level of output.

Do Time-Varying Betas Help in Asset Pricing? Evidence from Borsa Istanbul

ABSTRACT We investigate the time variation in the market risk of industry portfolios of Borsa Istanbul with respect to changes in economic conditions by employing the threshold CAPM. The threshold CAPM defines beta as a function of an underlying economic variable, the threshold variable, to allow beta to change between two different regimes when the threshold variable hits a certain threshold level. We use interest rate, currency basket, real effective currency index, and market volatility as candidates for the threshold variable. We find there is a significant time variation in betas with respect to changes in the currency basket level.

Do Stock Index Futures Affect Economic Growth? Evidence from 32 Countries

ABSTRACT This article investigates the relationship between stock index futures markets development and economic growth using time-series methods for 32 developed and developing countries. Evidence of cointegration between stock index futures and real economy in 29 countries suggests the presence of co-movements among the variables, indicating long-run stationarity in those countries. Our findings show that there is Granger-causality from stock index futures markets development to economic growth for middle-income countries with relatively low real per capita GDP, and Granger-causality in the reverse direction for the countries with high real per capita GDP. Variance decomposition and impulse-response function (IRF) analyses results support the existence of a relationship between stock index futures and real economy.

Aggregate Volatility Expectations and Threshold CAPM

We propose a volatility-based capital asset pricing model (V-CAPM) in which asset betas change discretely with respect to changes in investors’ expectations regarding near-term aggregate volatility. Using a novel measure to proxy uncertainty about expected changes in aggregate volatility, i.e. monthly range of the VIX index (RVIX), we find that portfolio betas change significantly when uncertainty about aggregate volatility expectations is beyond a certain threshold level. Due to changes in their market betas, small and value stocks are perceived as riskier than their big and growth counterparts in bad times, when uncertainty about aggregate volatility expectations is high. The proposed model yields a positive and significant market risk premium during periods when investors do not expect significant uncertainty in near-term aggregate volatility. Our findings support a volatility-based time-varying risk explanation.