Annals of Financial Economics

Copper is more popularly known as “Dr. Copper” especially in developed nations, for it is considered as the pulse of the economy. The metal is considered as most erudite to forecast the level of economic activities. But how much is it relevant for Indian Economy? The proposed study explores this face of the situation and considers if in India copper is capable of influencing the economic activities or if the vice versa situation exists. The study uses the nonlinear cointegration and causality tests to understand the direction of causality in volatility of copper prices in India. The volatility in copper prices are studied with respect to movement in Sensex which is considered as the barometer of capital market in India, movement in INR/USD exchange rate which is a major factor behind volatility in copper prices as per MCX and movement in International Copper prices.

The application of maximum likelihood estimation is not well studied for stochastic short rate models because of the cumbersome detail of this approach. We investigate the applicability of maximum likelihood estimation to stochastic short rate models. We restrict our consideration to three important short rate models, namely the Vasicek, Cox–Ingersoll–Ross (CIR) and 3/2 short rate models, each having a closed-form formula for the transition density function. The parameters of the three interest rate models are fitted to US cash rates and are found to be consistent with market assessments.

In this paper, we initiate a research on optimal bond portfolios, that are held to their maturity. We solve the problem analytically for log utility investor in the case of one risky corporate asset. We compare the behavior of these portfolios to equally weighted and portfolios with randomly selected weights. We apply simulation based on Vasicek’s copula approach to derive optimal weights for a corresponding problem involving more than one corporate bond. Further we discover that these portfolios outperform naive investment in constant maturity (CCM) bond indices with a similar maturity horizon. We explain possible application of our findings to boost asset liability management (ALM) strategies for pensions and insurance companies.

This paper discusses construction of evolution models for financial time series evolving within a given interval. We calibrated a model for the case of the USD/HKD exchange rate after the separation of strong and weak side convertibility undertakings, in which the rate is confined to a specified corridor. This process represents an interesting example of a tradable bounded process. A one-dimensional (1D) model was able to replicate the bounded distribution of the process, but a two-dimensional (2D) model better captured dynamics as measured by the volatility without losing features of the 1D model. We briefly consider the ergodic properties of these models.

Based on the annual data of internal control weakness during 2008–2012, this paper empirically analyzes Chinese listed firms’ internal control weakness and its influence on the risks and performance of banks. The aim of this paper is to examine whether the internal control weakness have long-term information content or not. In addition, this paper examines the effect of interaction term of internal control weakness and managers’ holdings on firm’s performance and risk and improves the firm’s operation. Our results are summarized as follows: First, the disclosure of internal weakness would decrease operation risk slightly but has severe effect on future performance. Second, the blockhold would decrease the operation performance for firm disclosing internal control weakness. Finally, the increase of mangers’ holdings would decrease the operating risk, and does not decrease the operating performance. These results argue that if managers increase their stock holdings after firms disclosing the internal control weakness, they would improve the firm’s operation condition and risk management.

We evaluate and compare the information contents of dividend-price ratio and consumption-wealth ratio ($cay)$ for predicting stock returns at different horizons. To do this, we conduct a canonical correlation analysis of wavelet-decomposed stock returns and a selected group of predictors. We show that predictive information is often wasted due to a weak signal problem: The highly predictive component is met with very low variation. Nevertheless, we find that cay contains valuable information about the long run and that, after allowing for structural breaks, dividend-price ratio becomes very informative about short-to-medium-horizon returns and outperforms cay in terms of in-sample $R^2$.

This paper extends Longstaff and Piazzesi (2004, Journal of Financial Economics, 74, 401–421.) to a habit formation model. By combining corporate fraction ratio, and surplus consumption ratio, we derive closed-form solutions for stock values when dividends, habit ratio and consumption follow exponential affine jump-diffusion processes. We can prove that Longstaff and Piazzesi (2004) is only a special case of our model. In addition, calibrated results show that the corporate fraction and habit ratio to shocks significantly increases the equity premium and decreases the risk-free rate. The model determines realistic values for the equity premium and the risk-free rate.

In measuring the market risks of a portfolio, value-at-risk (VaR) is one of the most commonly used tools. In this paper, the copula-generalized autoregressive conditional heteroskedasticity (GARCH) method is used to determine whether it is a better alternative for estimating the VaR of portfolios containing U.S. real estate investment trusts (REITs). The FTSE NAREIT US Real Estate Index, all REITs and the S&P 500 index are used to construct a portfolio. In total, 2800 daily data covering the period of the subprime mortgage crisis of 2007–2009 are used in this paper. We used six constant and two time-varying copula models combined with two GARCH models to form sixteen copula-GARCH models to depict the joint distribution of the two assets in the portfolio. We then computed corresponding one-day VaRs. Compared with the traditional VaR models, our results showed that the time-varying symmetrized Joe–Clayton (SJC) copula model combined with the GARCH Student-t innovation (tvSJC-copula–GARCHt) performed the best, regardless of the market situation. Hence, it could be served as a better way of detecting rare-event risk.

This paper examines the behavior of the market equilibrium in an endowment economy in continuous time setting, in which a representative investor with exponential utility consumes the dividends generated by multiple risky assets. The dividends of the assets are assumed to be mutually independent and belong to a class of non-negative stochastic processes including square root processes and increasing Lévy processes. We then characterize expected returns and volatilities on the assets as well as interest rates which is defined by risk-free assets. Based on these quantities, we construct the capital asset pricing model in an infinitesimal time period and investigate the impacts of dividend fluctuations and the risk aversion of the investor to the market equilibrium. Numerical examples show that even if the dividends are independent, the asset returns may have strong positive correlations. Moreover, heterogeneous dividend processes generate Jensen’s alpha that can be viewed as the small cap premium.

The paper proposes a partial-adjustment mechanism for the learning process of economic agents and justify the use of past information in predicting stock returns from four different perspectives. By making a pair of mild assumptions about how rational investors learn about the fundamental values of returns and dividend yield over time, I show that for one-step-ahead forecast a stable and significant improvement in terms of short-horizon $R^2$ can be achieved by recasting the classical single-equation predictive regression in a differenced form and incorporating information from the recent past. For longer horizons, the relationship reduces to the standard form.