Dynamic Equilibrium with Two Stocks, Heterogeneous Investors, and Portfolio Constraints

Chabakauri, Georgy

doi:10.1093/rfs/hht030

Cited by 88 publications

(32 citation statements)

References 83 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…20 In this setting, there are N risky stocks and N of investors (a continuum) as in our model rather than finitely many investors, which again leads to nonvanishing belief dispersion. 20 Solving multi-stock pure-exchange economies is typically a daunting task, but there have been recent successes in the literature (e.g., Cochrane, Longstaff, and Santa-Clara (2007), Martin (2013), Chabakauri (2013)). Introducing belief dispersion on individual stock payoffs in these sources of risk, generated by a standard N-dimensional Brownian motion ω = (ω 1 , .…”

Section: Multiple-stock Economymentioning

confidence: 99%

Belief Dispersion in the Stock Market

Atmaz¹,

Basak

2018

The Journal of Finance

164

View full text Add to dashboard Cite

We develop a dynamic model of belief dispersion with a continuum of investors differing in beliefs. The model is tractable and qualitatively matches many of the empirical regularities in a stock price and its mean return, volatility, and trading volume. We find that the stock price is convex in cash‐flow news and increases in belief dispersion, while its mean return decreases when the view on the stock is optimistic, and vice versa when pessimistic. Moreover, belief dispersion leads to higher stock volatility and trading volume. We demonstrate that otherwise identical two‐investor heterogeneous‐beliefs economies do not necessarily generate our main results.

show abstract

Section: Multiple-stock Economymentioning

confidence: 99%

Belief Dispersion in the Stock Market

Atmaz¹,

Basak

2018

The Journal of Finance

164

View full text Add to dashboard Cite

show abstract

“…To demonstrate the main properties of the equilibrium, I use a specific calibration of the model parameters. Following other studies (e.g., Kogan, Makarov, and Uppal (), Chabakauri ()), I calibrate the process for fundamentals

D_{t}

using the historical mean and the volatility of the aggregate consumption growth rate in the United States. In particular, I set

μ_{D} = 0.018

and

σ_{D} = 0.032

.…”

Section: Numerical Analysismentioning

confidence: 99%

“…Although this assumption often delivers tractability, it limits the scope of analysis, making it impossible to explore the impact of hedging motives on equilibrium properties. An exception is Chabakauri (), who extends the analysis to models with constrained investors and arbitrary levels of risk aversion.…”

mentioning

confidence: 99%

Asset Pricing with Dynamic Margin Constraints

Rytchkov¹

2014

The Journal of Finance

View full text Add to dashboard Cite

This paper provides a novel theoretical analysis of how endogenous time‐varying margin requirements affect capital market equilibrium. I find that margin requirements, when there are no other market frictions, reduce the volatility and correlation of returns as well as the risk‐free rate, but increase the market price of risk, the risk premium, and the price of risky assets. Furthermore, margin requirements generate a strong cross‐sectional dispersion of stock return volatilities. The results emphasize that a general equilibrium analysis may reverse the conclusions of a partial equilibrium analysis often employed in the literature.

show abstract

“…Similar to Geanakoplos (), Aiyagari and Gertler (), Coen‐Pirani (), Rytchkov (), and Chabakauri (), we focus on the effects of collateral requirements on asset‐price volatility. As in our article, in the models of Geanakoplos and Aiyagari and Gertler asset prices may deviate substantially from the corresponding prices in economies with frictionless markets.…”

Section: Introductionmentioning

confidence: 99%

“…They show that it can explain phenomena like deviations from the law of one price and cross‐sectional asset pricing properties like “flight to collateral.” These theoretical results are in line with the quantitative results in our article. Chabakauri () examines a continuous‐time model with two stocks. In an economy with heterogeneous CRRA preferences, he finds a positive relation between the amount of leverage and the conditional stock‐return correlations and volatilities.…”

Section: Introductionmentioning

confidence: 99%

Collateral Requirements and Asset Prices

Brumm

Grill

Kübler

et al. 2015

Int Economic Review

View full text Add to dashboard Cite

Reproduction permitted only if source is stated. ISBN Non-technical summary Many financial securities derive their value not only from future cash flows but also from their ability to serve as collateral. This second source of value varies with macroeconomic condi-tions. In this paper, we investigate this collateral premium and its impact on security returns.We examine a model with two agents facing collateral constraints for borrowing. The agents can borrow against positions in assets which differ only by their "collateralizability". The collateralizability of an asset determines the fraction of the asset that can be confiscated in case of default and depends on its physical and legal properties. We document that borrowing against collateral contributes substantially to the return volatility of the assets. In our calibration of the model there are two types of agents who differ with respect to their risk aversion. The agent with the low risk aversion is the natural buyer of risky assets, and leverages to finance these investments. The agent with the high risk aversion has a strong desire to insure against bad shocks and thus is a natural buyer of safe bonds. When the economy is hit by a negative shock, the collateral constraint forces the leveraged agent to reduce consumption and to sell risky assets to the risk-averse agent, leading to substantial changes in the wealth distribution, which in turn affect agents' portfolios and asset prices.We further show that assets with different degrees of collateralizability which are otherwise identical exhibit substantially different return dynamics. In particular, the more collateralizable asset has both a smaller excess return and a smaller return volatility. However, the main economic mechanism leading to this result is straightforward; in response to negative shocks, the less risk-averse agent, holding both infinitely-lived assets and a large negative bond position against the collateralizable asset, must deleverage. She first sells the less col-lateralizable asset since it does not provide collateral value to her. In contrast, the less risk-averse agent holds on to the collateralizable asset as long as possible which leads only to a small drop in its price. As a consequence of this trading pattern, the less collateralizable asset has both a higher excess return and a higher return volatility than the more collateralizable asset.Finally, we document that the prices of collateralizable assets contain a sizable collateral premium which depends strongly on the difference in the collateralizability between the assets and much less so on an asset's expected future cash flows. In fact, assets that never pay dividends can still have a positive price in equilibrium if they are much more collateralizable than other assets in the economy. In der vorliegenden Arbeit wird darüber hinaus gezeigt, dass sich die Renditen unterschiedlich besicherungsfähiger, aber ansonsten gleicher Aktiva sehr verschieden entwickeln. So erzielen Aktiva mit höherer Besicherungsfähigkeit eine niedrig...

show abstract

Dynamic Equilibrium with Two Stocks, Heterogeneous Investors, and Portfolio Constraints

Cited by 88 publications

References 83 publications

Belief Dispersion in the Stock Market

Belief Dispersion in the Stock Market

Asset Pricing with Dynamic Margin Constraints

Collateral Requirements and Asset Prices

Contact Info

Product

Resources

About