In this paper we test for the inclusion of the bid-ask spread in the consumption CAPM, in the UK stock market over the time period of 1980-2000. Two econometric models are used; first, Fisher’s (1994) asset pricing model is estimated by GMM, and secondly, the VAR approach proposed by Campbell and Shiller is extended to include the bid-ask spread. Overall the statistical tests are unable to reje...

This paper concerns the effects of macroeconomic announcements on the covariance structure of US government bond returns for six different maturities; the study shows that the conditional variances, covariances, and correlation coefficients are significantly greater on announcement days. On non-announcement days, the correlation coefficients are relatively large and are greater the closer the b...

This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying risk premium associated with the investor's risk aversion. The results of nonlinear regressions ...

In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of di erent speci cations for preferences, endowments and dividends and c...

We provide evidence for the importance of information asymmetry in asset pricing by using three natural experiments. Consistent with rational expectations models with multiple assets and multiple signals, we find that prices and uninformed demand fall as asymmetry increases. These falls are larger when more investors are uninformed, turnover is larger and more variable, payoffs are more uncerta...

This paper offers an alternative explanation for what is typically referred to as an asset pricing bubble. We develop a model that formalizes the Cochrane (2002) convenience yield theory of technology company stocks to explain why a rational agent would buy an “overpriced” security. Agents have a desire to trade but short-sale restrictions and other frictions limit their trading strategies and ...

Credit spreads are large, volatile and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while fairly safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small,...

In this paper the author formulates and tests an international intertemporal capital asset pricing model in the presence of deviations from purchasing power parity (II-CAPM [PPP]). He finds evidence in favor of at least mild segmentation of international equity markets in which only global market risk appears to be priced. When using the Hansen & Jagannathan (1991, 1997) variance bounds and dis...

Large institutional investors dominate many financial markets. This paper develops a consumption-based model of markets in which all institutional traders recognize their impact on prices. Bilateral (buyer and seller) market power changes efficiency and arbitrage properties of equilibrium. Predictions match temporary and permanent price effects of supply shocks, order breakup, limits to arbitra...

This paper explores whether speculative activity can, in practice, generate the ARCHtype behavior found in financial time series. Specifically, G7 equity market indices are examined for evidence of a dynamic whereby speculative interest is self-sustaining – that is, markets can become “hot”. A straightforward model, taken from Faruqee and Redding [9], generates some testable implications of the...