Lars A. Lochstoer
University of California at Los Angeles
Institutional Affiliation: University of California at Los Angeles
NBER Working Papers and Publications
|December 2018||Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off|
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We propose testing asset-pricing models using multi-horizon returns (MHR). A correctly specified stochastic discount factor prices the cross-section of returns at all horizons. We show that MHR are informative about the model's conditional implications. Different from typical conditioning variables, MHR-implied conditioning variables are endogenous to the model. Further, MHR are economically important as they explicitly test the model's ability to take present values of streams of risky cash flows that accrue at different horizons, a core concept in financial economics. We apply MHR-based testing to prominent linear factor models and show that these models typically do a poor job of pricing longer-horizon returns. We find that strong and, surprisingly, pro-cyclical time-variation in the pr...
|December 2013||Parameter Learning in General Equilibrium: The Asset Pricing Implications|
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Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, the variance of shocks, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.
Published: Pierre Collin-Dufresne & Michael Johannes & Lars A. Lochstoer, 2016. "Parameter Learning in General Equilibrium: The Asset Pricing Implications," American Economic Review, vol 106(3), pages 664-698.
|March 2011||Limits to Arbitrage and Hedging: Evidence from Commodity Markets|
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Motivated by the literature on limits-to-arbitrage, we build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases (decreases) in producers' hedging demand (speculators' risk-capacity) increase hedging costs via price-pressure on futures, reduce producers' inventory holdings, and thus spot prices. Consistent with our model, producers' default risk forecasts futures returns, spot prices, and inventories in oil and gas market data from 1980-2006, and the component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to financial arbitrage generate limits to hedging by producers, and affect bo...
“Limits to Arbitrage and Hedging: Evidence from Commodity Markets” with Lars Lochstoer and Tarun Ramadorai, forthcoming, Journal of Financial Economics. citation courtesy of