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Three essays on quantitative asset pricing


Scheuring, Simon. Three essays on quantitative asset pricing. 2012, University of Zurich, Faculty of Economics.

Abstract

This thesis consists of three separate papers. The first paper, “International Diversification and the Forward Premium” reproduces the slope of the uncovered interest rate parity (UIP) regression for ten country pairs within one standard deviation under rational expectations. We propose an infinite horizon dy- namic stochastic general equilibrium model with incomplete markets. The underlying mechanism of the model relies on varying international diversification in the investors’ portfolio choice decision. This leads to adjustments in interest rates, which are negatively correlated with movements in the exchange rate, as implied by a negative UIP slope. The second paper, “Asset Pricing with Idiosyncratic Risk: The Impact of Job Loss” studies the impact of unemployment risk on risk premia in an incomplete markets economy with many infinitely-lived heterogeneous agents. Job loss is modeled as large, but rare, persistent idiosyncratic shocks with heteroskedastic countercyclical volatility. Within an otherwise standard model and despite conservative assumptions on preferences, we simul- taneously generate a sizeable equity premium and a low risk-free rate. The third paper, “Multivariate Markov Chain Approximations” discusses the problem of discretizing vector autoregressive processes (VAR) into a finite number of states which is a necessary step to solve equilibrium models numerically. Univariate Markov chain approx- imations are well studied, however, few papers address the multivariate case. This paper presents and compares three approaches to the problem: quadrature, moment matching and bin estimation

Abstract

This thesis consists of three separate papers. The first paper, “International Diversification and the Forward Premium” reproduces the slope of the uncovered interest rate parity (UIP) regression for ten country pairs within one standard deviation under rational expectations. We propose an infinite horizon dy- namic stochastic general equilibrium model with incomplete markets. The underlying mechanism of the model relies on varying international diversification in the investors’ portfolio choice decision. This leads to adjustments in interest rates, which are negatively correlated with movements in the exchange rate, as implied by a negative UIP slope. The second paper, “Asset Pricing with Idiosyncratic Risk: The Impact of Job Loss” studies the impact of unemployment risk on risk premia in an incomplete markets economy with many infinitely-lived heterogeneous agents. Job loss is modeled as large, but rare, persistent idiosyncratic shocks with heteroskedastic countercyclical volatility. Within an otherwise standard model and despite conservative assumptions on preferences, we simul- taneously generate a sizeable equity premium and a low risk-free rate. The third paper, “Multivariate Markov Chain Approximations” discusses the problem of discretizing vector autoregressive processes (VAR) into a finite number of states which is a necessary step to solve equilibrium models numerically. Univariate Markov chain approx- imations are well studied, however, few papers address the multivariate case. This paper presents and compares three approaches to the problem: quadrature, moment matching and bin estimation

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Additional indexing

Item Type:Dissertation (monographical)
Referees:Kubler Felix, Schmedders Karl
Communities & Collections:UZH Dissertations
Dewey Decimal Classification:Unspecified
Language:English
Place of Publication:Zurich
Date:2012
Deposited On:16 Apr 2019 15:26
Last Modified:15 Apr 2021 15:01
Number of Pages:94
OA Status:Green

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