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Rare Disasters and Asset Pricing Puzzles
Kotek, Martin ; Maršál, Aleš (advisor) ; Korbel, Václav (referee)
The impact of rare disasters on equity premium and term premium in a New Keynesian DSGE model is explored in the thesis. Andreasen's (2012) model with Epstein-Zin preferences, bonds and a rare disaster shock in total factor productivity process is extended by a variable capital stock and an equity-type asset. We find that the variable capital significantly changes behavior of the model, capital depreciation must be substantially increased to counter the effect of variable capital and stochastic mean of inflation increases. The model calibrated to the US economy and a high risk aversion generates 10-year term premium of 90 basis points, rare disasters increase the premium only by 3 basis points. The equity premium is 163 basis points and rare disasters increase it also only by 3 basis points. The model with a low coefficient of relative risk aversion of 5.5 generates negative risk premia. Rare disasters increase the risk premia by mere 4 basis points in comparison to a model with i.i.d. shocks. Powered by TCPDF (www.tcpdf.org)
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Rare Disasters and Asset Pricing Puzzles
Kotek, Martin ; Maršál, Aleš (advisor) ; Korbel, Václav (referee)
The impact of rare disasters on equity premium and term premium in a New Keynesian DSGE model is explored in the thesis. Andreasen's (2012) model with Epstein-Zin preferences, bonds and a rare disaster shock in total factor productivity process is extended by a variable capital stock and an equity-type asset. We find that the variable capital significantly changes behavior of the model, capital depreciation must be substantially increased to counter the effect of variable capital and stochastic mean of inflation increases. The model calibrated to the US economy and a high risk aversion generates 10-year term premium of 90 basis points, rare disasters increase the premium only by 3 basis points. The equity premium is 163 basis points and rare disasters increase it also only by 3 basis points. The model with a low coefficient of relative risk aversion of 5.5 generates negative risk premia. Rare disasters increase the risk premia by mere 4 basis points in comparison to a model with i.i.d. shocks. Powered by TCPDF (www.tcpdf.org)
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Short-Term Determinants of the Idiosyncratic Sovereign Risk Premium: A Regime-Dependent Analysis for European Credit Default Swaps
Calice, Giovanni ; Miao, RongHui ; Štěrba, Filip ; Vašíček, Bořek
This study investigates the dynamic behavior of the sovereign CDS term premium for a group of European countries. The CDS term premium can be regarded as a forward- looking measure of idiosyncratic sovereign default risk as perceived by financial markets in real time. Using a Markov-switching unobserved component model, we decompose the daily CDS term premium into two unobserved components of statistically different nature (stationary and nonstationary) and study the determinants of their short-term dynamics. Specifically, we link these components in a vector autoregression to various daily observed financial market variables. We find that decomposition into the two components is vital for understanding the short-term dynamics of the entire CDS term premium. The strongest impacts can be attributed to CDS market liquidity, local stock returns, and overall risk aversion. By contrast, the impact of shocks from the sovereign bond market is rather muted. Therefore, the CDS market microstructure effect and investor sentiment play the main roles in sovereign risk evaluation in real time. Moreover, our results suggest that the response of the CDS term premium to shocks to financial variables is regime-dependent and can be ten times stronger during periods of high volatility.
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