The paper proposes a new algorithm for the high-dimensional financial data-the Groupwise Interpre... more The paper proposes a new algorithm for the high-dimensional financial data-the Groupwise Interpretable Basis Selection (GIBS) algorithm, to estimate a new Adaptive Multi-Factor (AMF) asset pricing model, implied by the recently developed Generalized Arbitrage Pricing Theory, which relaxes the convention that the number of risk-factors is small. We first obtain an adaptive collection of basis assets and then simultaneously test which basis assets correspond to which securities, using high-dimensional methods. The AMF model, along with the GIBS algorithm, is shown to have a significantly better fitting and prediction power than the Fama-French 5-factor model.
This paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633-664] ... more This paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633-664] for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager's information set plus noise. The noise makes default a surprise to the market. In contrast, we obtain a reduced form model by constructing an economy where the market sees a reduction of the manager's information set. The reduced information makes default a surprise to the market. We provide an explicit formula for the default intensity based on an Azéma martingale, and we use excursion theory of Brownian motions to price risky debt.
Financial bubbles arise when the underlying asset's market price deviates from its fundamental va... more Financial bubbles arise when the underlying asset's market price deviates from its fundamental value. Unlike other bubble tests that use time series data and assume a reduced-form price process, we infer the existence of bubbles nonparametrically using option price data. Under no-arbitrage and acknowledging data constraints, we can partially identify asset price bubbles using a cross section of European option prices. In the empirical analysis, we obtain interval estimates of price bubbles embedded in the S&P 500 Index. The estimated index bubbles are then used to construct pro…table momentum trading strategies that consistently outperform a buy-and-hold trading strategy.
The paper proposes a new algorithm for the high-dimensional financial data-the Groupwise Interpre... more The paper proposes a new algorithm for the high-dimensional financial data-the Groupwise Interpretable Basis Selection (GIBS) algorithm, to estimate a new Adaptive Multi-Factor (AMF) asset pricing model, implied by the recently developed Generalized Arbitrage Pricing Theory, which relaxes the convention that the number of risk-factors is small. We first obtain an adaptive collection of basis assets and then simultaneously test which basis assets correspond to which securities, using high-dimensional methods. The AMF model, along with the GIBS algorithm, is shown to have a significantly better fitting and prediction power than the Fama-French 5-factor model.
This paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633-664] ... more This paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633-664] for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager's information set plus noise. The noise makes default a surprise to the market. In contrast, we obtain a reduced form model by constructing an economy where the market sees a reduction of the manager's information set. The reduced information makes default a surprise to the market. We provide an explicit formula for the default intensity based on an Azéma martingale, and we use excursion theory of Brownian motions to price risky debt.
Financial bubbles arise when the underlying asset's market price deviates from its fundamental va... more Financial bubbles arise when the underlying asset's market price deviates from its fundamental value. Unlike other bubble tests that use time series data and assume a reduced-form price process, we infer the existence of bubbles nonparametrically using option price data. Under no-arbitrage and acknowledging data constraints, we can partially identify asset price bubbles using a cross section of European option prices. In the empirical analysis, we obtain interval estimates of price bubbles embedded in the S&P 500 Index. The estimated index bubbles are then used to construct pro…table momentum trading strategies that consistently outperform a buy-and-hold trading strategy.
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Papers by Robert Jarrow