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Description
Merton (1987) predicts that idiosyncratic risk can be priced. I develop a simple equilibrium model of capital markets with information costs in which the idiosyncratic risk premium depends on the average level of idiosyncratic volatility. This dependence suggests that the idiosyncratic risk premium varies over time. I find that in U.S. markets, the covariance between stock-level idiosyncratic volatility and the idiosyncratic risk premium explains future stock returns. Stocks in the highest quintile of the covariance between the volatility and risk premium earn an average 3-factor alpha of 70 bps per month higher than those in the lowest quintile.
ContributorsXie, Daruo (Author) / Wahal, Sunil (Thesis advisor) / Mehra, Rajnish (Thesis advisor) / Arizona State University (Publisher)
Created2015
Description
This paper examines dealers' inventory holding periods and the associated price markups on corporate bonds from 2003 to 2010. Changes in these measures explain a large part of the time series variation in aggregate corporate bond prices. In the cross-section, holding periods and markups overshadow extant liquidity measures and have significant explanatory power for individual bond prices. Both measures shed light on the credit spread puzzle: changes in credit spread are positively correlated with changes in holding periods and markups, and a large portion of credit spread changes is explained by them. The economic effects of holding periods and markups are particularly sharp during crisis periods.
ContributorsQian, Zhiyi (Author) / Wahal, Sunil (Thesis advisor) / Bharath, Sreedhar (Committee member) / Coles, Jeffrey (Committee member) / Mehra, Rajnish (Committee member) / Arizona State University (Publisher)
Created2012
Description
This thesis aims to promote financial literacy in the community. It was driven by the realization that there was a lack of basic financial knowledge among people at ASU and beyond. The people involved in the reason for the guide had all heard of bonds and understood the basic concepts, but lacked the knowledge of the finite details. The research starts with an overview of the United States bond market and focuses on the creation of a short simple guide. The goal is that anyone can read the guide and have a basic understanding of bonds, talk to financial managers, and do some basic investing. The easy guide is basically a two-page crash course on investing in bonds. Anyone can take a class or watch a video on bonds, but how do they actually start investing in them? This thesis works to answer this question by providing knowledge of real world application. The goal is to take knowledge beyond a book or video and learn from actively investing in a safe and clear way. Bonds are a very useful tool in investing and provide safe returns. The investing proposed is one that would be an alternative to putting money into a savings account. The guide recommends a good starting point of a way to invest in bonds (Specifically the US Treasury). At the same time does some analysis on other investing options for more advanced investors. The work includes an analysis of five bond portfolios and the calculations of finding their actual returns after loads and other fees.
ContributorsIrwin, Carter E. (Author) / Pruitt, Seth (Thesis director) / Schreindorfer, David (Committee member) / W.P. Carey School of Business (Contributor) / Department of Finance (Contributor) / Barrett, The Honors College (Contributor)
Created2017-12
Description
This dissertation consists of two essays on corporate policy. The first chapter analyzes whether being labeled a “growth” firm or a “value” firm affects the firm’s dividend policy. I focus on the dividend policy because of its discretionary nature and the link to investor demand. To address endogeneity concerns, I use regression discontinuity design around the threshold to assign firms to each category. The results show that “value” firms have a significantly higher dividend payout - about four percentage points - than growth firms. This approach establishes a causal link between firm “growth/value” labels and dividend policy.
The second chapter develops investment policy model which associated with du- ration of cash flow. Firms are doing their business by operating a portfolio of projects that have various duration, and the duration of the project portfolio generates dif- ferent duration of cash flow stream. By assuming the duration of cash flow as a firm specific characteristic, this paper analyzes how the duration of cash flow affects firms’ investment decision. I develop a model of investment, external finance, and savings to characterize how firms’ decision is affected by the duration of cash flow. Firms maximize total value of cash flow, while they have to maintain their solvency by paying a fixed cost for the operation. I empirically confirm the positive correlation between duration of cash flow and investment with theoretical support. Financial constraint suffocates the firm when they face solvency issue, so that model with financial constraint shows that the correlation between duration of cash flow and investment is stronger than low financial constraint case.
The second chapter develops investment policy model which associated with du- ration of cash flow. Firms are doing their business by operating a portfolio of projects that have various duration, and the duration of the project portfolio generates dif- ferent duration of cash flow stream. By assuming the duration of cash flow as a firm specific characteristic, this paper analyzes how the duration of cash flow affects firms’ investment decision. I develop a model of investment, external finance, and savings to characterize how firms’ decision is affected by the duration of cash flow. Firms maximize total value of cash flow, while they have to maintain their solvency by paying a fixed cost for the operation. I empirically confirm the positive correlation between duration of cash flow and investment with theoretical support. Financial constraint suffocates the firm when they face solvency issue, so that model with financial constraint shows that the correlation between duration of cash flow and investment is stronger than low financial constraint case.
ContributorsLee, Tae Eui (Author) / Mehra, Rajnish (Thesis advisor) / Tserlukevich, Yuri (Thesis advisor) / Custodio, Claudia (Committee member) / Arizona State University (Publisher)
Created2015
Description
This dissertation is a collection of three essays relating household financial obligations to asset prices. Financial obligations include both debt payments and other financial commitments.
In the first essay, I investigate how household financial obligations affect the equity premium. I modify the standard Mehra-Prescott (1985) consumption-based asset pricing model to resolve the equity risk premium puzzle. I focus on two channels: the preference channel and the borrowing constraints channel. Under reasonable parameterizations, my model generates equity risk premiums similar in magnitudes to those observed in U.S. data. Furthermore, I show that relaxing the borrowing constraint shrinks the equity risk premium.
In the Second essay, I test the predictability of excess market returns using the household financial obligations ratio. I show that deviations in the household financial obligations ratio from its long-run mean is a better forecaster of future market returns than alternative prediction variables. The results remain significant using either quarterly or annual data and are robust to out-of-sample tests.
In the third essay, I investigate whether the risk associated with household financial obligations is an economy-wide risk with the potential to explain fluctuations in the cross-section of stock returns. The multifactor model I propose, is a modification of the capital asset pricing model that includes the financial obligations ratio as a ``conditioning down" variable. The key finding is that there is an aggregate hedging demand for securities that pay off in periods characterized by higher levels of financial obligations ratios. The consistent pricing of financial obligations risk with a negative risk premium suggests that the financial obligations ratio acts as a state variable.
In the first essay, I investigate how household financial obligations affect the equity premium. I modify the standard Mehra-Prescott (1985) consumption-based asset pricing model to resolve the equity risk premium puzzle. I focus on two channels: the preference channel and the borrowing constraints channel. Under reasonable parameterizations, my model generates equity risk premiums similar in magnitudes to those observed in U.S. data. Furthermore, I show that relaxing the borrowing constraint shrinks the equity risk premium.
In the Second essay, I test the predictability of excess market returns using the household financial obligations ratio. I show that deviations in the household financial obligations ratio from its long-run mean is a better forecaster of future market returns than alternative prediction variables. The results remain significant using either quarterly or annual data and are robust to out-of-sample tests.
In the third essay, I investigate whether the risk associated with household financial obligations is an economy-wide risk with the potential to explain fluctuations in the cross-section of stock returns. The multifactor model I propose, is a modification of the capital asset pricing model that includes the financial obligations ratio as a ``conditioning down" variable. The key finding is that there is an aggregate hedging demand for securities that pay off in periods characterized by higher levels of financial obligations ratios. The consistent pricing of financial obligations risk with a negative risk premium suggests that the financial obligations ratio acts as a state variable.
ContributorsJahangiry, Pedram (Author) / Mehra, Rajnish (Thesis advisor) / Wahal, Sunil (Committee member) / Reffett, Kevin (Committee member) / Arizona State University (Publisher)
Created2017
Description
This dissertation consists of two essays related to dynamic debt contracting and financial economics. The first chapter studies key determinants of inclusion of a financial covenant in corporate loans from theoretical and empirical angles. Using a novel manually collected loan dataset of small to medium-sized publicly-listed U.S. firms, I find that firms that issue loans without financial covenants tend to have (i) lower accounting quality, (ii) lower assets, and (iii) are experiencing faster growth in profitability relative to firms that issue loans with financial covenants. I build a theoretical model of project financing in which there is noisy public information about the project’s profitability, and the lender can privately monitor to improve the information quality. I show that if the signal precision without monitoring is sufficiently low (high), the equilibrium contract does not include (includes) a covenant. Covenant inclusion plays a key role in providing incentives to the lender to monitor. I show that the lender monitors less often relative to the first best. Insufficient monitoring leads to “excessive risk-taking,” namely, bad quality firms continuing with the project too often. Relatedly, I also show that covenants are used less often in equilibrium relative to the first best. The second chapter examines equilibrium consequences of litigation by holdout creditors in sovereign debt renegotiation. I show that given a sufficiently high probability of winning the litigation case against the borrowing country and/or a high enough defaulted sovereign debt, the presence of the holdout creditors increases the expected debt recovery rate, which makes the default option less attractive, and decreases the country’s default probability and the interest rate on the country’s debt. The country responds by borrowing more but defaults less often along the equilibrium path as it wants to avoid default and facing holdout creditors. Having a non-zero probability of successful litigation is welfare improving for the country as it sustains higher debt and defaults less frequently.
ContributorsKim, Yong (Author) / Kovrijnykh, Natalia (Thesis advisor) / Mehra, Rajnish (Committee member) / Tserlukevich, Yuri (Committee member) / Arizona State University (Publisher)
Created2021
Description
This dissertation consists of three essays studying topics in financial economicsthrough the lens of quantitative models. In particular, I provide three examples of the
effective use of data in the disciplining of financial economics models. In the first essay,
I provide evidence of a significant transitory component of aggregate equity payout.
Leading asset pricing models assume exogenous dividend growth processes which are
inconsistent with this fact. I find that imposing market clearing for consumption
and income in these models induces the relevant behaviors in dividend growth, even
when dividend growth is obtained indirectly. In the second essay, I provide a novel
decomposition of the unconditional equity risk premium. In the data, the majority of
the equity premium is attributable to moderate left tail risks, not those associated
with disaster states. In stark contrast to the data, leading asset pricing models do
not predict that this intermediate left tail region meaningfully contributes to the
equity premium. The shortcomings of the models can be pinned on unreasonably low
prices of risk for tail events relative to the data. In the third essay, I document a
large dispersion in household allocations to risky assets conditional on age. I show
that while standard household portfolio choice models can be made to match the
average risky share over the lifecycle, the models fall short of generating sufficient
heterogeneity in the cross-section of household portfolios.
ContributorsBeason, Tyler (Author) / Mehra, Rajnish (Thesis advisor) / Wahal, Sunil (Thesis advisor) / Pruitt, Seth (Committee member) / Schreindorfer, David (Committee member) / Arizona State University (Publisher)
Created2021
Description
My project has been a long journey, one that I have learned a tremendous amount on. The final version of my project has come out to be a booklet teaching first time users of code and python the basic steps of getting started and some vital information that I learned while I was learning the language. I started my thesis with the idea of creating a portfolio of stock, bonds and commodities to determine the best allocation of your money over a 30-year period. To do this, I needed to learn how to code and become proficient quickly so I could create a program that would be powerful enough as well as spit out the correct output in the end. Unfortunately, I fell short of being able to build this portfolio out. I took on the challenge of learning Python on my own with no knowledge of any coding language to see if I could pull the whole project together. I failed, but I learned so much along the way and that I think is more valuable than anything. Since I was unable to complete my code, I shifted my attention to creating a small booklet on the basics of getting started in Python as if you have never looked at a coding language. Many of the tips I discuss in my booklet are problems I struggled with when I began. In the beginning I couldn’t even figure out how to get to a coding platform to begin my work, so I began to research and found many helpful tips that took me quite a while to understand.
ContributorsToumbs, Jason David (Author) / Boguth, Oliver (Thesis director) / Schreindorfer, David (Committee member) / Department of Finance (Contributor, Contributor) / Barrett, The Honors College (Contributor)
Created2019-05
Description
This dissertation consists of three essays studying the relationship between corporate finance and monetary policy and macroeconomics. In the first essay, I provide novel estimations of the monetary policy’s working capital channel size by estimating a dynamic stochastic macro-finance model using firm-level data. In aggregate, I find a partial channel —about three-fourths of firms’ labor bill is borrowed. But the strength of this channel varies across industries, reaching as low as one-half for retail firms and as high as one for agriculture and construction. These results provide evidence that monetary policy could have varying effects across industries through the working capital channel. In the second essay, I study the effects of the Unconventional Monetary Policy (UMP) of purchasing corporate bonds on firms’ decisions in the COVID-19 crisis. Specifically, I develop a theoretical model which predicts that the firm’s default probability plays a crucial role in transmitting the effects of COVID-19 shock and the UMP. Using the model to evaluate two kinds of heterogeneities (size and initial credit risk), I show that large firms and high-risk firms are more affected by COVID-19 shock and are more responsive to the UMP. I then run cross-sectional regressions, whose results support the theoretical predictions suggesting that the firm’s characteristics, such as assets and operating income, are relevant to understanding the UMP effects. In the third essay, I document that capital utilization and short-term debt are procyclical. I show that a strong positive relationship exists at the aggregate and firm levels. It persists even when I control the regressions for firm size, profits, growth, and business cycle effects. In addition, the Dynamic Stochastic General Equilibrium (DSGE) model shows that in the presence of capital utilization, positive real and financial shocks cause the firm to change its financing of the equity payout policy from earnings to debt, increasing short-term debt.
ContributorsGalindo Gil, Hamilton (Author) / Pruitt, Seth (Thesis advisor) / Schreindorfer, David (Thesis advisor) / Bessembinder, Hendrik (Committee member) / Mehra, Rajnish (Committee member) / Arizona State University (Publisher)
Created2022