Rene Garcia
Université de Montréal, Economics, Faculty Member
We derive new bounds and distance measures for stochastic discount factors (SDFs) that generalize the original variance bounds and distance of Hansen and Jagannathan (1991, 1997) and higher moment bounds of Snow (1991). These generalized... more
We derive new bounds and distance measures for stochastic discount factors (SDFs) that generalize the original variance bounds and distance of Hansen and Jagannathan (1991, 1997) and higher moment bounds of Snow (1991). These generalized measures are suitable to analyze nonlinearities in asset pricing models and trading strategies. They imply nonlinear admissible SDFs that provide a more robust discounting than the positive linear SDFs used in many asset pricing empirical applications. We illustrate the empirical usefulness of these new discount factors by revisiting the admissibility of consumption-based asset pricing models, examining the information structure embedded in industry and Fama and French portfolios, and evaluating the performance of hedge funds.
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RÉSUMÉ Dans cet article, nous faisons un survol des modèles d’évaluation des actifs financiers étudiés dans le contexte des marchés boursiers en émergence. Nous soulignons qu’il est plus facile de prévoir les rendements et leur... more
RÉSUMÉ Dans cet article, nous faisons un survol des modèles d’évaluation des actifs financiers étudiés dans le contexte des marchés boursiers en émergence. Nous soulignons qu’il est plus facile de prévoir les rendements et leur variabilité pour de tels marchés que pour ceux des pays développés, et nous essayons de vérifier si ceci peut être expliqué par l’existence de mesures prévisibles du risque et des primes de risque. À cet égard, nous insistons sur l’importance des tests de changement structurel et des tests diagnostiques pour vérifier si les relations sont stables dans le temps et si des facteurs importants n’ont pas été oubliés. Ces tests sont d’autant plus importants dans le contexte d’un environnement économique et politique d’une plus grande instabilité. Nous terminons par une analyse de l’intégration de ces marchés boursiers en émergence au marché mondial et décrivons un modèle qui permet de capter l’évolution de cette intégration à travers le temps.
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Page 1. A Consumption CAPM with a Reference Level* René Garcia Université de Montréal ... the benchmark consumption the agent has in mind when deciding his risk-taking behavior, Et[St+h] = Et[Ct+h], for all h ≥ 0. This formulation leaves... more
Page 1. A Consumption CAPM with a Reference Level* René Garcia Université de Montréal ... the benchmark consumption the agent has in mind when deciding his risk-taking behavior, Et[St+h] = Et[Ct+h], for all h ≥ 0. This formulation leaves open two possibilities. Either ...
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In this paper, we present an estimation procedure which uses both option prices and high-frequency spot price feeds to estimate jointly the objective and risk-neutral parameters of stochastic volatility models. The procedure is based on a... more
In this paper, we present an estimation procedure which uses both option prices and high-frequency spot price feeds to estimate jointly the objective and risk-neutral parameters of stochastic volatility models. The procedure is based on a method of moments that uses analytical ...
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We evaluate the investment performance of hedge funds using an asset pricing model that is characterized by a piecewise-linear stochastic discount factor, and which we estimate using the generalized method of moments by minimizing the... more
We evaluate the investment performance of hedge funds using an asset pricing model that is characterized by a piecewise-linear stochastic discount factor, and which we estimate using the generalized method of moments by minimizing the Hansen–Jagannathan distance. Our results show that, once non-linearities and public information are taken into account, there is only evidence of positive performance for the overall
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... Author Info. René Garcia Eric Ghysels () Maral Kichian ... Contact details of provider: Postal: 2020 rue University, 25e tage, Montr al, Qu c, H3A 2A5 Phone: (514) 985-4000 Fax: (514) 985-4039 Email: Web page: http://www.cirano.qc.ca/... more
... Author Info. René Garcia Eric Ghysels () Maral Kichian ... Contact details of provider: Postal: 2020 rue University, 25e tage, Montr al, Qu c, H3A 2A5 Phone: (514) 985-4000 Fax: (514) 985-4039 Email: Web page: http://www.cirano.qc.ca/ More information through EDIRC. ...
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This paper studies the impact of financial market structure on investment decisions by firms using company panel data from six countries: Germany and Japan, where borrower-lender relationships are more of a long-term nature, Canada,... more
This paper studies the impact of financial market structure on investment decisions by firms using company panel data from six countries: Germany and Japan, where borrower-lender relationships are more of a long-term nature, Canada, France, United Kingdom, and United States, where financial markets tend to favour short-term relationships. Market imperfections between lenders and borrowers should be reduced in financial Systems
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Asymétrie Information, Liquidity Constraints and Investment : An International Comparison. This paper studies the impact of financial market structure on investment décisions by firms using company panel data from six countries : Germany... more
Asymétrie Information, Liquidity Constraints and Investment : An International Comparison. This paper studies the impact of financial market structure on investment décisions by firms using company panel data from six countries : Germany and Japan, where borrower-lender relationships are more of a long-term nature, * Nous tenons à remercier le Fonds pour la Formation de Chercheurs et l'Aide à la
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This paper surveys recent developments in the theory of option pricing. The emphasis is on the interplay between option prices and investors' impatience and their aversion to risk. The traditional view, steeped in the risk-neutral... more
This paper surveys recent developments in the theory of option pricing. The emphasis is on the interplay between option prices and investors' impatience and their aversion to risk. The traditional view, steeped in the risk-neutral approach to derivative pricing, has been that these preferences play no role in the determination of option prices. However, the usual lognormality assumption required to obtain preference-free option pricing formulas is at odds with the empirical properties of financial assets. The lognormality assumption is easily reconcilable with those properties by the introduction of a latent state variable whose values can be interpreted as the states of the economy. The presence of a covariance risk with the state variable makes option prices depend explicitly on preferences. Generalized option pricing formulas, in which preferences matter, can explain several well-known empirical biases associated with preference-free models such as that of Black and Scholes (...
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ABSTRACT The relationship between conditional volatility and expected stock market returns, the so-called risk-return trade-off, has been studied at high- and low-frequency. We propose an asset pricing model with generalized... more
ABSTRACT The relationship between conditional volatility and expected stock market returns, the so-called risk-return trade-off, has been studied at high- and low-frequency. We propose an asset pricing model with generalized disappointment aversion preferences and short- and long-run volatility risks that captures several stylized facts associated with the risk-return trade-off at short and long horizons. Writing the model in Bonomo et al. (2011) at the daily frequency, we aim at reproducing the moments of the variance premium and realized volatility, the long-run predictability of cumulative returns by the past cumulative variance, the short-run predictability of returns by the variance premium, as well as the daily autocorrelation patterns at many lags of the and of the variance premium, and the daily cross-correlations of these two measures with leads and lags of daily returns. By keeping the same calibration as in this previous paper, we ensure that the model is capturing the first and second moments of the equity premium and the risk-free rate, and the predictability of returns by the dividend ratio. Overall adding generalized disappointment aversion to the Kreps-Porteus specification improves the fit for both the short-run and the long-run risk-return trade-offs.
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Research Interests: Dimension Reduction, Factor analysis, Latent variable, Multivariate Time Series, Stochastic Volatility, and 15 moreLatent Variables, Cross Section, Option pricing, Statistical Model, Conditional Heteroskedasticity, Factor structure, Condition Factor, Asset Prices, Conditional Independence, Idiosyncratic risk, Leverage effect, State Space Model, Asset pricing model, Factor model, and pricing kernel
ABSTRACT I investigate a pricing kernel in which coskewness and the market volatility risk factors are en-dogenously determined. I show that the price of coskewness and market volatility risk are restricted by investor risk aversion and... more
ABSTRACT I investigate a pricing kernel in which coskewness and the market volatility risk factors are en-dogenously determined. I show that the price of coskewness and market volatility risk are restricted by investor risk aversion and skewness preference. Consistent with theory, I find that the pricing kernel is decreasing in the aggregate wealth and increasing in the market volatility. When I project my estimated pricing kernel on a polynomial function of the market return, doing so produces the puzzling behaviors observed in pricing kernel. Using pricing kernels, I examine the sources of the idiosyncratic volatility premium. I find that nonzero risk aversion and firms non-systematic coskew-ness determines the premium on idiosyncratic volatility risk. When I control for the non-systematic coskewness factor, I find no significant relation between idiosyncratic volatility and stock expected return. My results are robust across different sample periods, different measures of market volatility and firms characteristics.
ABSTRACT This chapter surveys and compares Monte Carlo methods that have been proposed for the computation of optimal portfolio policies. The candidate approaches include the Monte Carlo Malliavin derivative (MCMD) method proposed by... more
ABSTRACT This chapter surveys and compares Monte Carlo methods that have been proposed for the computation of optimal portfolio policies. The candidate approaches include the Monte Carlo Malliavin derivative (MCMD) method proposed by Detemple et al. [Detemple, J.B., Garcia, R., Rindisbacher, M. (2003). A Monte-Carlo method for optimal portfolios. Journal of Finance 58, 401–446], the Monte Carlo covariation (MCC) method of Cvitanic et al. [Cvitanic, J., Goukasian, L., Zapatero, F. (2003). Monte Carlo computation of optimal portfolio in complete markets. Journal of Economic Dynamics and Control 27, 971–986], the Monte Carlo regression (MCR) method of Brandt et al. [Brandt, M.W., Goyal, A., Santa-Clara, P., Stroud, J.R. (2005). A simulation approach to dynamic portfolio choice with an application to learning about return predictability. Review of Financial Studies 18, 831–873] and Monte Carlo finite difference (MCFD) methods. The asymptotic properties of the various portfolio estimators obtained are described. A numerical illustration of the convergence behavior of these estimators is provided in the context of a dynamic portfolio choice problem with exact solution. MCMD is shown to dominate other approaches.
RÉSUMÉ Le présent article étudie l’influence de la structure des marchés financiers sur les décisions d’investissement des entreprises à partir de données longitudinales d’entreprises de six pays : l’Allemagne et le Japon d’une part, où... more
RÉSUMÉ Le présent article étudie l’influence de la structure des marchés financiers sur les décisions d’investissement des entreprises à partir de données longitudinales d’entreprises de six pays : l’Allemagne et le Japon d’une part, où s’établissent plutôt des relations de long terme entre prêteurs et emprunteurs, le Canada, les États-Unis, la France et le Royaume-Uni d’autre part, dont les marchés financiers tendent à privilégier les relations de court terme. Les systèmes financiers qui favorisent les relations de long terme devraient réduire les imperfections de marché et permettre donc aux entreprises de moins recourir aux fonds autogénérés pour financer leurs investissements. Les résultats de nos estimations confirment qu’en Allemagne et au Japon, les coefficients des variables de flux et de stocks de liquidités dans les équations d’investissement sont soit faibles soit statistiquement non différents de zéro. Par ailleurs, indépendamment du système financier d’un pays, ces même...
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Résumé Le présent article fournit un exposé synthétique de la riche littérature sur l’économie de l’information. L’introduction situe la théorie économique de l’information dans la théorie économique générale et la définit par rapport au... more
Résumé Le présent article fournit un exposé synthétique de la riche littérature sur l’économie de l’information. L’introduction situe la théorie économique de l’information dans la théorie économique générale et la définit par rapport au modèle des marchés contingents de Arrow-Debreu. Trois sections intitulées : Asymétrie d’information et structure des marchés, Transmission d’information par les prix et Information asymétrique et échange, analysent les principaux articles et leurs résultats. En conclusion, on aborde le thème de la valeur de l’information, on présente les caractéristiques de l’information en tant que bien et on souligne le défi que représente son intégration dans un modèle d’équilibre général.
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This paper analyzes optimal investment decisions, in the presence of non-redundant hedge funds, for investors with constant relative risk aversion. Factor regression models with option-like risk factors and no-arbitrage principles are... more
This paper analyzes optimal investment decisions, in the presence of non-redundant hedge funds, for investors with constant relative risk aversion. Factor regression models with option-like risk factors and no-arbitrage principles are used to identify and estimate the market ...
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ABSTRACT We derive new bounds for stochastic discount factors (SDFs) that naturally extend the original variance bounds of Hansen and Jagannathan (1991) to access nonlinearities on empirical applications. We also produce new distance... more
ABSTRACT We derive new bounds for stochastic discount factors (SDFs) that naturally extend the original variance bounds of Hansen and Jagannathan (1991) to access nonlinearities on empirical applications. We also produce new distance measures that extend Hansen and Jagannathan (1997) for assessing model misspecification in higher dimensions than mean and variance. We argue that these extensions are particularly useful to diagnose asset pricing models with nonlinear factors as well as to analyze trading strategies with nonlinear payoffs. Three empirical applications illustrate the usefulness of our approach. First, we revisit the admissibility of consumption-based asset pricing models (CCAPMs). In a second application, we examine the information structure of industry portfolios and Fama and French portfolios through the lens of a family of nonlinear SDFs implied by the new methodology. In the last application, we adopt the same family of implied SDFs to evaluate the performance of hedge funds.
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We assess the aggregate asset pricing implications of generalized disappointment aversion (GDA)in the long-run risks model of Bansal and Yaron (2004). Using analyt- ical formulas for asset valuation ratios and several moment and... more
We assess the aggregate asset pricing implications of generalized disappointment aversion (GDA)in the long-run risks model of Bansal and Yaron (2004). Using analyt- ical formulas for asset valuation ratios and several moment and predictive regression statistics we compare thoroughly several recursive utility models with long-run risks. While persistence of expected consumption growth is fundamental for the moment matching ability of
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ABSTRACT The willingness of a firm to hedge its activities is difficult to measure. A single indicator for the use of derivatives or even the notional or fair value of its hedging positions have been shown to entail limitations. In this... more
ABSTRACT The willingness of a firm to hedge its activities is difficult to measure. A single indicator for the use of derivatives or even the notional or fair value of its hedging positions have been shown to entail limitations. In this paper, we introduce a new measure based on the number of risks hedged. From the US EDGAR database, we extract information on the hedging activity in four types of risks: interest rate, currency, commodity and equity. This allows us to better test the theoretical determinants of hedging. In a sample of firms from the S&P 500 over the period 2001 to 2005, we study the hedging behavior by industry and type of risk. While we confirm that leverage, foreign sales and size are the main empirical determinants for corporate hedging, we find significant variations across industries. We also provide empirical support for other determinants such as dividend policy, liquidity, tax credits, growth opportunities and managerial shareholdings. Confirming Adam, Dasgupta and Titman (2007) prediction, we observe that hedging policy heterogeneity is positively related to the competitive structure of the industry.
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... Guo, Levent Guntay, Hua He, Mike Hemmler, Harrison Hong, Ming Huang, Jon Ingersoll, Bob Jarrow, Nengjiu Ju, Hossein Kazemi, Inanc Kirgiz, Haitao Li, Nour Meddahi, Maureen O'Hara, Jun Pan, Gurupdesh Pande, Nagpurnanand Prabhala,... more
... Guo, Levent Guntay, Hua He, Mike Hemmler, Harrison Hong, Ming Huang, Jon Ingersoll, Bob Jarrow, Nengjiu Ju, Hossein Kazemi, Inanc Kirgiz, Haitao Li, Nour Meddahi, Maureen O'Hara, Jun Pan, Gurupdesh Pande, Nagpurnanand Prabhala, Chandrasekhar Reddy Gokhul ...
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We evaluate the investment performance of hedge funds using an asset pricing model that is characterized by a piecewise-linear stochastic discount factor, and which we estimate using the generalized method of moments by minimizing the... more
We evaluate the investment performance of hedge funds using an asset pricing model that is characterized by a piecewise-linear stochastic discount factor, and which we estimate using the generalized method of moments by minimizing the Hansen–Jagannathan distance. Our results show that, once non-linearities and public information are taken into account, there is only evidence of positive performance for the overall