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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Search results: 5.
Time Variations and Covariations in the Expectation and Volatility of Stock Market Returns
Published: 06/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb05150.x
ROBERT F. WHITELAW
This article investigates empirically the comovements of the conditional mean and volatility of stock returns. It extends the results in the literature by demonstrating the role of the commercial paper—Treasury yield spread in predicting time variation in volatility. The conditional mean and volatility exhibit an asymmetric relation, which contrasts with the contemporaneous relation that has been tested previously. The volatility leads the expected return, and this time series relation is documented using offset correlations, short‐horizon contemporaneous correlations, and a vector autoregression. These results bring into question the value of modeling expected returns as a constant function of conditional volatility.
Uncovering the Risk–Return Relation in the Stock Market
Published: 05/16/2006 | DOI: 10.1111/j.1540-6261.2006.00877.x
HUI GUO, ROBERT F. WHITELAW
There is ongoing debate about the apparent weak or negative relation between risk (conditional variance) and expected returns in the aggregate stock market. We develop and estimate an empirical model based on the intertemporal capital asset pricing model (ICAPM) that separately identifies the two components of expected returns, namely, the risk component and the component due to the desire to hedge changes in investment opportunities. The estimated coefficient of relative risk aversion is positive, statistically significant, and reasonable in magnitude. However, expected returns are driven primarily by the hedge component. The omission of this component is partly responsible for the existing contradictory results.
Industry Returns and the Fisher Effect
Published: 12/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb04774.x
JACOB BOUDOUKH, MATTHEW RICHARDSON, ROBERT F. WHITELAW
We investigate the cross‐sectional relation between industry‐sorted stock returns and expected inflation, and we find that this relation is linked to cyclical movements in industry output. Stock returns of noncyclical industries tend to covary positively with expected inflation, while the reverse holds for cyclical industries. From a theoretical perspective, we describe a model that captures both (i) the cross‐sectional variation in these relations across industries, and (ii) the negative and positive relation between stock returns and inflation at short and long horizons, respectively. The model is developed in an economic environment in which the spirit of the Fisher model is preserved.
Ex Ante Bond Returns and the Liquidity Preference Hypothesis
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00140
Jacob Boudoukh, Matthew Richardson, Tom Smith, Robert F. Whitelaw
We provide a formal test of the liquidity preference hypothesis (LPH), that is, the monotonicity of ex ante term premiums, using nonparametric estimates that do not require a structural model for conditional expected returns. Although the point estimates of the term premiums are consistent with previous conclusions in the literature regarding violations of the LPH, the test statistics are generally insignificant, even when powerful conditioning information is used. These results illustrate the importance of correctly accounting for correlations across maturities and of formally testing the inequality restrictions implied by the LPH.
Optimal Risk Management Using Options
Published: 05/06/2003 | DOI: 10.1111/0022-1082.00108
Dong‐Hyun Ahn, Jacob Boudoukh, Matthew Richardson, Robert F. Whitelaw
This article provides an analytical solution to the problem of an institution optimally managing the market risk of a given exposure by minimizing its Value‐at‐Risk using options. The optimal hedge consists of a position in a single option whose strike price is independent of the level of expense the institution is willing to incur for its hedging program. This optimal strike price depends on the distribution of the asset exposure, the horizon of the hedge, and the level of protection desired by the institution. Moreover, the costs associated with a suboptimal choice of exercise price are economically significant.