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Publication Metadata only A dynamic asset pricing model with time-varying factor and idiosyncratic risk(Oxford University Press (OUP), 2009) Department of Economics; Glabadanidis, Paskalis; Faculty Member; Department of Economics; College of Administrative Sciences and Economics; N/AThis paper uses a multivariate GaRCH model to account for time variation in factor loadings and idiosyncratic risk in improving the performance of the CaPM and the three-factor Fama-French model. I show how to incorporate time variation in betas and the second moments of the residuals in a very general way. Both the static and conditional CaPM substantially outperform the three-factor model in pricing industry portfolios. Using a dynamic CaPM model results in a 30% reduction in the average absolute pricing error of size/book-to-market portfolios. ad hoc analysis shows that the market beta of a value-minus-growth portfolio decreases whenever the default premium increases as well as during economic recessions.Publication Metadata only A note on the valuation of compound options(John Wiley & Sons Inc, 2002) N/A; Department of Economics; Lajeri-Chaherli, Fatma; Faculty Member; Department of Economics; College of Administrative Sciences and Economics; N/AThe value of a compound option, an option on an option, has been derived by Geske (1976) using Fourier integrals. This article presents two alternative proofs to derive the value of a compound option. One proof is based on the martingale approach, which provides a simple and powerful tool for valuing contingent claims, The second proof uses the expectation of a truncated bivariate normal variable. These proofs allow for an intuitive interpretation of the three elements constituting the value of a compound option.Publication Metadata only A theory of collateral for the lender of last resort(Oxford Univ Press, 2021) Choi, Dong Beom; Santos, Joao A. C.; N/A; Yorulmazer, Tanju; Faculty Member; Graduate School of Social Sciences and Humanities; 328768We consider a macroprudential approach to analyze the optimal lending policy for the central bank, focusing on spillover effects that policy exerts on money markets. Lending against high-quality collateral protects central banks against losses, but can adversely affect liquidity creation in markets since high-quality collateral gets locked up with the central bank rather than circulating in markets. Lending against low-quality collateral creates counterparty risk but can improve liquidity in markets. We illustrate the optimal policy incorporating these trade-offs. Contrary to what is generally accepted, lending against high-quality collateral can have negative effects, whereas it may be optimal to lend against low-quality collateral.Publication Metadata only Aggregate earnings, firm-level earnings, and expected stock returns(Cambridge Univ Press, 2008) Tehranian, Hassan; Demirtaş Özgür; Department of Economics; Bali, Turan; Other; Department of Economics; College of Administrative Sciences and Economics; N/AThis paper provides an analysis of the predictability of stock returns using market-, industry-, and firm-level earnings. Contrary to Lamont (1998), we find that neither dividend payout ratio nor the level of aggregate earnings can forecast the excess market return. We show that these variables do not have robust predictive power across different stock portfolios and sample periods. In contrast to the aggregate-level findings, earnings yield has significant explanatory power for the time-series and cross-sectional variation in firm-level stock returns and the 48 industry portfolio returns. The mean reversion of stock prices as well as the earnings' correlation with expected stock returns are responsible for the forecasting power of earnings yield. These results are robust after controlling for book-to-market, size, price momentum, and post-earnings announcement drift. At the aggregate level, the information content of firm-level earnings about future cash flows is diversified away and higher aggregate earnings do not forecast higher returns.Publication Metadata only Aggregate investor preferences and beliefs: a comment(Elsevier Science Bv, 2013) Kopa, Milos; N/A; Post, Gerrit Tjeerd; Other; Graduate School of Business; N/AA recent study in this journal presents encouraging results of a daunting simulation analysis of the statistical properties of a centered bootstrap approach to stochastic dominance efficiency analysis. However, by relying on the first-order optimality condition in a situation where multiple optima may occur, the empirical analysis draws the questionable conclusion that some of the toughest data sets in empirical asset pricing can be rationalized by the representative investor maximizing an S-shaped utility function, consistent with the so-called Prospect Stochastic Dominance criterion. Further research could be directed to developing global optimization algorithms and consistent re-sampling methods for statistical inference for general risky choice problems.Publication Metadata only Analyzing federal reserve asset purchases: from whom does the Fed buy?(Elsevier Science Bv, 2015) Carpenter, Seth; Ihrig, Jane; Klee, Elizabeth; Department of Economics; Demiralp, Selva; Faculty Member; Department of Economics; College of Administrative Sciences and Economics; 42533Asset purchases have become an important monetary policy tool of the Federal Reserve in recent years. To date, most studies of the Federal Reserve's asset purchases have tried to measure the interest rate effects of the purchases, and several provide evidence that these purchases do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to "preferred habitat" models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities of securities. To study this more closely, we exploit Flow of Funds data to assess the types of investors that are selling to the Federal Reserve and their portfolio adjustment after these sales, which could provide a view to the plausibility of preferred habitat models and the transmission of unconventional monetary policy across asset markets. We find that the Federal Reserve is ultimately buying from only a handful of investor types, primarily households (which includes hedge funds), with a different reaction to changes in Federal Reserve holdings of longer-term versus shorter-term assets. Although not evident for all investors, the key participants are shown to rebalance their portfolios toward more risky assets during this period. These results can be interpreted as supporting, at least in part, the preferred habit theory and the view that the monetary policy transmission is working across asset markets.Publication Metadata only Bank lending standards and access to lines of credit(Wiley, 2012) James, Christopher; Kizilaslan, Atay; Department of Business Administration; Demiroğlu, Cem; Faculty Member; Department of Business Administration; College of Administrative Sciences and Economics; 18073This paper examines how changes in bank lending standards are related to the availability of bank lines of credit for private and comparable public firms. Overall, we find that access to lines of credit is more contingent on bank lending standards for private than for public firms. The impact of bank lending standards is however asymmetric: while private firms are less likely than public firms to gain access to new lines when credit market conditions are tight, we find no difference between public and private firms in terms of their use or retention of pre-existing lines. We also find that private firms without lines of credit use more trade credit when bank lending standards are tight, which is suggestive of a supply effect. Overall, the evidence suggests that credit crunches are likely to have a disproportionate impact on private firms. However, pre-existing banking relationships appear to mitigate the impact of these contractions on private firms.Publication Metadata only Bank loans and troubled debt restructurings(Elsevier Science Sa, 2015) James, Christopher; Department of Business Administration; Demiroğlu, Cem; Faculty Member; Department of Business Administration; College of Administrative Sciences and Economics; 18073This paper examines the relation between the number and type of lenders that participate in corporate loan facilities and the nature of troubled debt restructurings. We find that loans from traditional bank lenders are significantly easier to restructure out of court than loans from institutional lenders. We also find that the existence of a past banking relationship between the borrower and the lead arranger of a syndicated loan adversely affects the ease of restructuring. Finally, we find that reliance on loans that are held in part by collateralized loan obligations (CLOs) is positively related to the likelihood of a prepackaged bankruptcy, consistent with greater holdout problems when loans are held by CLOs. Overall, our findings suggest that the role of banks in the restructuring process is quite different when bank loans are diffusely held or securitized. (C) 2015 Elsevier B.V. All rights reserved.Publication Metadata only Bank risk management in emerging markets after the enhanced Basel rules(World Scientific Publishing Co., 2011) Candan, Hasan; N/A; Özün, Alper; Faculty Member; Graduate School of BusinessN/APublication Metadata only Benchmark replication portfolio strategies(Palgrave Macmillan Ltd, 2013) Zolotoy, Leon; Department of Business Administration; Glabadanidis, Paskalis; Faculty Member; Department of Business Administration; College of Administrative Sciences and Economics; N/AWe propose a novel approach to the benchmark replication problem that uses a minimum tracking error variance as an objective subject to a target expected outperformance. When no budget constraint is imposed on the replicating portfolio, the solution is a two-fund portfolio involving the standard hedge portfolio and the tangent portfolio constructed using the replicating securities. In the presence of a budget constraint, the solution is a three-fund portfolio, which includes, in addition, the minimum variance portfolio constructed using the replicating securities. We implement our theoretical results using recent data for three widely followed US stock indices with very good out-of-sample performance.