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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Habit Formation and Macroeconomic Models of the Term Structure of Interest Rates
Published: 11/28/2007 | DOI: 10.1111/j.1540-6261.2007.01299.x
ANDREA BURASCHI, ALEXEI JILTSOV
This paper introduces a new class of nonaffine models of the term structure of interest rates that is supported by an economy with habit formation. Distinguishing features of the model are that the interest rate dynamics are nonlinear, interest rates depend on lagged monetary and consumption shocks, and the price of risk is not a constant multiple of interest rate volatility. We find that habit persistence can help reproduce the nonlinearity of the spot rate process, the documented deviations from the expectations hypothesis, the persistence of the conditional volatility of interest rates, and the lead‐lag relationship between interest rates and monetary aggregates.
Model Uncertainty and Option Markets with Heterogeneous Beliefs
Published: 01/11/2007 | DOI: 10.1111/j.1540-6261.2006.01006.x
ANDREA BURASCHI, ALEXEI JILTSOV
This paper provides option pricing and volume implications for an economy with heterogeneous agents who face model uncertainty and have different beliefs on expected returns. Market incompleteness makes options nonredundant, while heterogeneity creates a link between differences in beliefs and option volumes. We solve for both option prices and volumes and test the joint empirical implications using S&P500 index option data. Specifically, we use survey data to build an Index of Dispersion in Beliefs and find that a model that takes information heterogeneity into account can explain the dynamics of option volume and the smile better than can reduced‐form models with stochastic volatility.
When Uncertainty Blows in the Orchard: Comovement and Equilibrium Volatility Risk Premia
Published: 09/17/2013 | DOI: 10.1111/jofi.12095
ANDREA BURASCHI, FABIO TROJANI, ANDREA VEDOLIN
We provide novel evidence for an equilibrium link between investors' disagreement, the market price of volatility and correlation, and the differential pricing of index and individual equity options. We show that belief disagreement is positively related to (i) the wedge between index and individual volatility risk premia, (ii) the different slope of the smile of index and individual options, and (iii) the correlation risk premium. Priced disagreement risk also explains returns of option volatility and correlation trading strategies in a way that is robust to the inclusion of other risk factors and different market conditions.
Incentives and Endogenous Risk Taking: A Structural View on Hedge Fund Alphas
Published: 04/08/2014 | DOI: 10.1111/jofi.12167
ANDREA BURASCHI, ROBERT KOSOWSKI, WORRAWAT SRITRAKUL
Hedge fund managers are subject to several nonlinear incentives: performance fee options (call); equity investors' redemption options (put); and prime broker contracts allowing for forced deleverage (put). The interaction of these option‐like incentives affects optimal leverage ex ante, depending on the distance of fund‐value from the high‐water mark. We study how these endogenous effects influence performance measures used in the literature. We show that reduced‐form measures that do not account for these features are subject to economically significant false discovery biases. The result is stronger for low‐quality funds. We propose an alternative structural methodology for conducting performance attribution in hedge funds.
Correlation Risk and Optimal Portfolio Choice
Published: 01/13/2010 | DOI: 10.1111/j.1540-6261.2009.01533.x
ANDREA BURASCHI, PAOLO PORCHIA, FABIO TROJANI
We develop a new framework for multivariate intertemporal portfolio choice that allows us to derive optimal portfolio implications for economies in which the degree of correlation across industries, countries, or asset classes is stochastic. Optimal portfolios include distinct hedging components against both stochastic volatility and correlation risk. We find that the hedging demand is typically larger than in univariate models, and it includes an economically significant covariance hedging component, which tends to increase with the persistence of variance–covariance shocks, the strength of leverage effects, the dimension of the investment opportunity set, and the presence of portfolio constraints.