In general equilibrium, a reinforcing mechanism is that a high discount rate also implies a low market-to-book ratio and low capital expenditures, which further reduces firm size. Hence large firms with high investment and high market-to-book ratios have low alpha. Moreover, among firms with similar market-to-book ratios, profitable firms have high state risk exposure and therefore high alpha, as is evident in the data Hou, Xue, and Zhang , Novy-Marx The paper has powerful implications for the allocation of capital and the cost of equity across firms.
It predicts that a growth stocks are generally larger than value stocks, b the distribution of market values has a fatter upper tail than the distribution of book values, c expected return and volatility decrease with firm size, and d a stock's market correlation increases with firm size. All these implications, which hold both in partial and general equilibrium, are supported by the data. We provide guidance for future research.
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- Can financial theory make sense of the factor zoo?;
- Multifractal Volatility : Theory, Forecasting, and Pricing - ulcaplesu.gq.
Classic deviations from the CAPM arise naturally in general equilibrium, and they come as a pack. In particular, a firm's alpha may not solely originate from exposure to state risk but may also be driven by average profitability and other firm characteristics. Thus, the factor zoo is a natural consequence of general equilibrium, which should be of help in structuring future empirical research.
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Asness, Clifford S. Moskowitz, and Lasse H.
Pedersen, , Value and momentum everywhere, Journal of Finance 63, Mehra, ed. Fama, Eugene F. This scenario is particularly important to investigate for risk management purposes. Flash crashes are not fundamentally a new phenomenon, in that they do exhibit strong similarities with previous crashes, albeit with different specifics and of course time scales. As a consequence of the increasing inter-dependences between various financial instruments and asset classes, one can expect in the future more flash crashes involving additional markets and instruments.
The technological race is not expected to provide a stabilization effect, overall.
This is mainly due to the crowding of adaptive strategies that are pro-cyclical, and no level of technology can change this basic fact, which is widely documented for instance in numerical simulations of agent-based models of financial markets. Finally, we argue that flash crashes could be partly mitigated if the central question of the economic gains and losses provided by HFT was considered seriously. We question in particular the argument that HFT provides liquidity and suggest that the welfare gains derived from HFT are minimal and perhaps even largely negative on a long-term investment horizon.
This question at least warrants serious considerations especially on an empirical basis.
Multifractal Random Walk Models: Application to the Algerian Dinar exchange rates
As a consequence, regulations and tax incentives constitute the standard tools of policy makers at their disposal within an economic context to maximize global welfare in contrast with private welfare of certain players who promote HFT for their private gains. We believe that a complex systems approach to future research can provide important and necessary insights for both academics and policy makers. Recent searches Clear All. Update Location.
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Crashes and High Frequency Trading by Didier Sornette, Susanne von der Becke :: SSRN
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