This paper investigates the effects of mortgage-backed securities (MBS) hedging activity on interest-rate volatility and proposes a model that takes these effects into account. An empirical examination suggests that the inclusion of information about MBS considerably improves model performance in pricing interest-rate options and in forecasting future interest-rate volatility. The empirical res...

This paper demonstrates that an asset pricing model with least-squares learning can lead to bubbles and crashes as endogenous responses to the fundamentals driving asset prices. When agents are risk-averse they generate forecasts of the conditional variance of a stock’s return. Recursive updating of the conditional variance and expected return implies two mechanisms through which learning impac...

Competition among stock exchanges has increased dramatically over the last decade. To attract trading volume, most exchanges introduced makertaker fees, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in fees on the Toronto Stock Exchange, we analyze how the breakdown of trading fees between liquidity demanders and suppliers affects market ou...

We investigate whether stock betas vary with the release of firm-specific news. Using daily firm-level betas estimated from intraday prices, we find that betas increase on earnings announcement days and revert to their average levels two to five days later. The increase in betas is greater for earnings announcements that have larger positive or negative surprises, convey more information about ...

Fama and French [2002. The equity premium. Journal of Finance 57, 637–659] estimate the equity premium using dividend growth rates to measure expected rates of capital gain. We apply their method to study the value premium. From 1945 to 2005, the expected value premium is on average 6.1% per annum, consisting of an expected dividend growth component of 4.4% and an expected dividend price ratio ...

We study the relative risk of value and growth stocks. We find that time-varying risk goes in the right direction in explaining the value premium. Value betas tend to covary positively, and growth betas tend to covary negatively with the expected market risk premium. Our inference differs from that of previous studies because we sort betas on the expected market risk premium, instead of on the ...

It has been widely debated how much nonsynchronous trading drives asymmetric portfolio cross-autocorrelations: lagged returns on a portfolio of larger-capitalization stocks are far more heavily correlated with current returns on a portfolio of smallercapitalization stocks than the converse. This paper proposes a new method to generate precise estimates of the extent to which nonsynchronous trad...

We analyze a game of persuasion which combines information acquisition and adverse selection. The sender can credibly transmit any information she gathers but cannot directly reveal her type to the receiver. Her payoff depends both on the news content and her perceived ability. We show that a sanitization equilibrium in which the sender reveals good news and conceals bad news prevails for mild ...

This study analyses the information diffusion between Chinese A shares (restricted to domestic investors) and B shares (restricted to foreign investors). The results show that there is an important long-run information diffusion between A and B shares. In the Shanghai stock market, information flows from foreign to domestic investors. However, in the smaller and less liquid Shenzhen stock marke...

Recent research has documented that learning and evolution are capable of generating many well known features in financial times series. We extend the results of LeBaron & Yamamoto (2007) to explore the impact of varying amounts of imitation and agent learning in a simple order driven market. We show that in our framework, imitation is critical to the generation of long memory persistence in ma...