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A Dynamic CAPM with Supply Effect_QREF_edited

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Nội dung chi tiết: A Dynamic CAPM with Supply Effect_QREF_edited

A Dynamic CAPM with Supply Effect_QREF_edited

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editedevin BuildingPiscataway, NJ 08854-8054 E-mail: lee@business.rutgers.edu Phone 732-445-3907 Fax 732-445-5927Chiung-Min TsaiCentral Bank of the Republic

of China (Taiwan)2. Rooveselt Road, Sec. 1 Taipei. 100-66 Taiwan. ROC E-mail: cmtsai@maiLcbc.gov.rwAlice c. Lee San Francisco State University 1600 H A Dynamic CAPM with Supply Effect_QREF_edited

olloway Ave San Francisco, CA 94132 E-mail: alicelee@sfsu.edu0Dynamic CAPM with Supply Effect Theory and Empirical ResultsI. INTRODUCTIONBlack (1976)

A Dynamic CAPM with Supply Effect_QREF_edited

extends (he static CAPM by explicitly allowing for the endogenous supply effect of risky securities to derive (he dynamic asset pricing model.1 Black

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editedmand side for (he risky securities is derived from a negative exponential function for the investor’s utility of wealth. He finds that (he static CAPM

is unnecessarily restrictive in its neglect of the supply side and proposes that his dynamic generalization of the static CAPM can provide (he basis A Dynamic CAPM with Supply Effect_QREF_edited

for many empirical tests, particularly with regards to (he intertemporal aspects and the role of (he endogenous supply side. Assuming that (here is a

A Dynamic CAPM with Supply Effect_QREF_edited

quadratic cost structure of retiring or issuing securities and that the demand for securities may deviate from supply due to anticipated and unanticip

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editedecified by the dynamic capital asset pricing model. One important implication in Black’s model is that (he efficient market hypothesis holds only if t

he supply of securities is fixed and independent of current prices. In short. Black's dynamic generalization model of static wealth-based CAPM adopts A Dynamic CAPM with Supply Effect_QREF_edited

an endogenous supply side of risky securities by1setting equal quantity demanded and supplied of risky securities. Lee and Gweon (1986) extend Black’s

A Dynamic CAPM with Supply Effect_QREF_edited

framework to allow lime varying dividend payments and then tests the existence OÍ supply effect in the situation ol market equilibrium. Their results

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editeds in the U.S. stock market.ft is worth noting that some recent studies also relate return on portfolio to trading volume (e.g., Campbell, Grossman, an

d Wang. 1993; 1.0 and Wang, 2000). Surveying the relationship between aggregate stock market trading volume and the serial correlation of daily stock A Dynamic CAPM with Supply Effect_QREF_edited

returns, Campbell. Grossman. and Wang (1993) suggest that a stock price decline on a high-volume day is more likely than a stock price decline on a lo

A Dynamic CAPM with Supply Effect_QREF_edited

w-volume day. They propose an explanation that trading volume occurs when random shifts in (he stock demand of non-informational traders are accommoda

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_edited by defining preference lor wealth, instead of consumption, by introducing three state variables into the exponential terms of investor’s preference.

This stale-dependent utility function allows one to capture the dynamic nature of the investment problem without explicitly solving a dynamic optimiza A Dynamic CAPM with Supply Effect_QREF_edited

tion problem, Thus, the marginal utility of wealth depends not only-on the dividend of the portfolio but also on future state variables. This dependen

A Dynamic CAPM with Supply Effect_QREF_edited

ce introduces2dynamic hedging motives in the investors’ portfolio choices. That is, this dependence induces investors to care about future market cond

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editede stock payoffs directly. This “market spirit,” in their terminology, affects investor’s demand for the stocks. In other words, for even the investor

who holds no stocks, his utility fluctuates with the payoffs of the stock index.Black (1976), Lee and Gweon (1986), and Lo and Wang (2000) develop mod A Dynamic CAPM with Supply Effect_QREF_edited

els by using either outstanding shares or trading volumes as variables to connect the decisions in two different periods, unlike consumption-based CAP

A Dynamic CAPM with Supply Effect_QREF_edited

M that uses consumption or macroeconomic information. Black (1976) and Lee and Gweon (1986) both derive the dynamic generalization models from the wea

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editeda role in determining the asset price. This proposes a wealth-based model as an alternative method to investigate intertemporal CAPM.In this study, we

first theoretically extend the Black’s dynamic, simultaneous CAPM to be able to test the existence of the supply effect in the asset pricing determin A Dynamic CAPM with Supply Effect_QREF_edited

ation process. We use two datasets of price per share, earning per share, and dividend per share to test the existence of supply effect with both inte

A Dynamic CAPM with Supply Effect_QREF_edited

rnational index data and US equity data. The first dataset is the3stock market indices from sixteen countries in the world, which consists of both dev

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editedis study, we find the supply effect is important in both international and US domestic markets. Our results support Lo and Wang’s (2000) findings that

trading volume is one of the important factors in determining capital asset pricing.The paper is structured as follows. In Section II, a simultaneous A Dynamic CAPM with Supply Effect_QREF_edited

equation system of asset pricing is constructed through a standard structural form of a multi-period equation to represent the dynamic relationship b

A Dynamic CAPM with Supply Effect_QREF_edited

etween supply and demand for capital assets. The hypotheses implied by the model are also presented in this section. Section III describes the two set

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editedesented in Section IV.II. DEVELOPMENT OF MULTIPERIOD ASSET PRICING MODEL WITH SUPPLY EFFECTBased on framework of Black (1976), we derive a multiperiod

equilibrium asset pricing model in this section. Black modifies the static wealth-based CAPM by explicitly allowing for the endogenous supply effect A Dynamic CAPM with Supply Effect_QREF_edited

of risky securities. The demand for securities is based on well-known model of James Tobin (19S8) and Harty- Markowitz (1959). However, Black further

A Dynamic CAPM with Supply Effect_QREF_edited

assumes a quadratic cost function of changing short-term capital structure under long-run4optimality condition. He also assumes that the demand for se

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editedme varying dividends and then test the existence of supply effect. In Lee and Gweon’s model, two major differing assumptions from Black's model are: (

1) the model allows for time-varying dividends, unlike Black’s assumption constant dividends; and (2) there is only one random, unanticipated shock in A Dynamic CAPM with Supply Effect_QREF_edited

the supply side instead of two shocks, anticipated and unanticipated shocks, as in Black’s model. We follow the Lee and Gweon set of assumptions. In

A Dynamic CAPM with Supply Effect_QREF_edited

this section, we develop a simultaneous equation asset pricing model. First, we derive the demand function for capital assets, then we derive the supp

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

A Dynamic CAPM with Supply Effect_QREF_editedxistence of supply effects. Finally, the hypotheses of testing supply effect are developed.A. The Demand Function for Capital AssetsThe demand equatio

n for the assets is derived under the standard assumptions of the CAPM? An investor’s objective is to maximize their expected utility function. A nega A Dynamic CAPM with Supply Effect_QREF_edited

tive exponential function for the investor’s utility of wealth is assumed:(!) u =a- hXe{'hW’-'}-where the terminal wealth W;.x =Wt(l+ R); w; is initia

A Dynamic CAPM with Supply Effect_QREF_edited

l wealth; and Rt is the rate of return on the portfolio. The parameters, ứ, b and h, are assumed to be constants.5

A Dynamic CAPM with Supply Effect: Theory and Empirical ResultsCheng-Few Lee* Distinguished Professor of Finance. Rutgers University, USA Janice H. Le

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