The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Risk Premia and Variance Bounds
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb02746.x
PIERLUIGI BALDUZZI, HÉDI KALLAL
If a pricing kernel assigns a premium to a risk variable that differs from the one assigned by the minimum‐variance admissible kernel, then the pricing kernel must exhibit more variability than the minimum‐variance kernel. Based on this intuition, we derive a variance bound that is more stringent than that of Hansen and Jagannathan (1991). When we apply our bound to the kernel of a representative consumer with power utility, we find that the consumption risk premium increases the severity of the “equity‐premium puzzle” of Mehra and Prescott (1985).
Predictability and Transaction Costs: The Impact on Rebalancing Rules and Behavior
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00287
Anthony W. Lynch, Pierluigi Balduzzi
Recent papers show that predictability calibrated to U.S. data has a large effect on the rebalancing behavior of a multiperiod investor. We find that this continues to be true in the presence of realistic transaction costs. In particular, predictability causes the no‐trade region for the risky‐asset holding to become state dependent and, on average, wider and higher. Predictability also motivates the investor to spend considerably more on rebalancing and to rebalance more often. In other results, we find that introducing costly liquidation of the risky asset for consumption lowers the average allocation to the risky asset, though only marginally early in life. Our experiments also vary the nature of the return predictability and introduce return heteroskedasticity.
Asset Price Dynamics and Infrequent Feedback Trades
Published: 12/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb05196.x
PIERLUIGI BALDUZZI, GIUSEPPE BERTOLA, SILVERIO FORESI
This article combines the continuous arrival of information with the infrequency of trades, and investigates the effects on asset price dynamics of positive and negative‐feedback trading. Specifically, we model an economy where stocks and bonds are traded by two types of agents: speculators who maximize expected utility, and feedback traders who mechanically respond to price changes and infrequently submit market orders. We show that positive‐feedback strategies increase the volatility of stock returns, and the response of stock prices to dividend news. Conversely, the presence of negative‐feedback traders makes stock returns less volatile, and prices less responsive to dividends.