Assessing specification errors in stochastic discount factor models

Article Abstract:

In this article we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on chi squared statistics associated with null hypotheses that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of our methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature. (Reprinted by permission of the publisher.)

Stochastic analysis, Pricing, Discount (Finance), Error analysis (Mathematics), Error analysis

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Banking panics, information, and rational expectations equilibrium

Article Abstract:

This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive "story" that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long "lines" at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when on one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations. (Reprinted by permission of the publisher.)

Queuing theory, Bank runs

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An investigation of commodity futures prices using the consumption-based intertemporal capital asset pricing model

Article Abstract:

The multigood futures pricing model of Grauer and Litzenberger is extended to a dynamic discrete time setting and tested using data on futures prices for corn, wheat, and soybeans. The parameter estimates reported previously by other researchers using stock return data are similar to those obtained by the method presented here. After rejection of the model, some suggestions are offered on which assumption may have been violated, and an interpretation to the Hansen-Singleton nonlinear instrumental variables estimation technique used in the empirical work presented is provided.

Models, Analysis, Financial futures, Comparative analysis, Mathematical models, Commodity futures, Commodities, Capital assets pricing model, Capital asset pricing model, Financial research

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