13 results found
Bhamra H, Dorion C, Jeanneret A, et al., 2021, High inflation: low default risk AND low equity valuations, The Review of Financial Studies, ISSN: 0893-9454
We develop an asset-pricing model with endogenous corporate policies that explains how inflationjointly impacts real asset prices and corporate default risk. Our model includes two empiricallyfounded nominal rigidities: fixed nominal debt coupons (sticky leverage) and sticky cash flows. Thesetwo frictions result in lower real equity prices and credit spreads when expected inflation rises. Adecrease in expected inflation has opposite effects, with even larger magnitudes. In the cross-section,the model predicts that the negative impact of higher expected inflation on real equity values isstronger for low leverage firms. We find empirical support for the model’s predictions.
Bhamra HS, Uppal R, 2019, Does household finance matter? Small financial errors with large social costs, American Economic Review, Vol: 109, Pages: 1116-1154, ISSN: 0002-8282
Households with familiarity biases tilt their portfolios toward a few risky assets. The resulting mean-variance loss from portfolio underdiversification is equivalent to only a modest reduction of about 1 percent per year in a household's portfolio return. However, once we consider also the effect of familiarity biases on the asset-allocation and intertemporal consumption-savings decisions, the welfare loss is multiplied by a factor of four. In general equilibrium, the suboptimal decisions of households distort also aggregate growth, amplifying further the overall social welfare loss. Our findings demonstrate that financial markets are not a mere sideshow to the real economy and that improving the financial decisions of households can lead to large benefits, not just for individual households, but also for society.
Bhamra HS, Shim K, 2017, Stochastic idiosyncratic cash flow risk and real options: implications for stock returns, Journal of Economic Theory, Vol: 168, Pages: 400-431, ISSN: 0022-0531
Stocks with high idiosyncratic volatility perform poorly relative to low idiosyncratic volatilitystocks. We o↵er a novel explanation of this anomaly based on real options, which is consistentwith earlier findings on idiosyncratic volatility (the positive contemporaneous relation betweenfirm-level stock returns and idiosyncratic volatility). Our approach is based on introducingstochastic idiosyncratic cash flow risk into an equity valuation model of firms with growthoptions. Within our model, a firm’s systematic risk depends on the delta of its growth op-tion. The growth option’s delta is lower when idiosyncratic volatility rises, driving down thefirm’s systematic risk and hence its expected return – firms with higher idiosyncratic volatilitytherefore have lower expected returns. Our model additionally o↵ers the following novel em-pirical predictions: (i) returns correlate positively with idiosyncratic volatility during intervalsbetween large changes in idiosyncratic volatility (the switch e↵ect), and (ii) the anomaliesand the switch e↵ect are stronger for firms with more real options and which undergo largerchanges in idiosyncratic volatility. Empirical results support the predictions of our model.
Bhamra HS, Uppal R, 2016, Does Household Finance Matter? Small Financial Errors with Large Social Costs, Publisher: Elsevier BV
Bhamra HS, Coeurdacier N, Guibaud S, 2014, A dynamic equilibrium model of imperfectly integrated financial markets, JOURNAL OF ECONOMIC THEORY, Vol: 154, Pages: 490-542, ISSN: 0022-0531
Bhamra HS, Uppal R, 2014, Asset prices with heterogeneity in preferences and beliefs, The Review of Financial Studies, Vol: 27, Pages: 519-580, ISSN: 0893-9454
In this paper, we study asset prices in a dynamic, continuous-time, and general-equilibrium endowment economy in which agents have “catching up with the Joneses” utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for time discount, risk aversion, and sensitivity to habit. A key contribution of our paper is to demonstrate how one can obtain a closed-form solution to the consumption-sharing rule for agents who have both heterogeneous priors and heterogeneous preferences without restricting the risk aversion of the two agents to special values. We solve in closed form also for the state-price density, the risk-free interest rate and market price of risk, the stock price, equity risk premium, and volatility of stock returns, the term structure of interest rates, and the conditions necessary to obtain a stationary equilibrium in which both agents survive in the long run. The methodology we develop is sufficiently general in that, as long as markets are complete, it can be used to obtain the sharing rule and state prices for models set in discrete or continuous time and for arbitrary endowment and belief updating processes.
Bhamra HS, Uppal R, 2013, Asset Prices with Heterogeneity in Preferences and Beliefs, Review of Financial Studies, Vol: n/a, ISSN: 0893-9454
Bhamra HS, Fisher AJ, Kuehn L-A, 2011, Monetary policy and corporate default, JOURNAL OF MONETARY ECONOMICS, Vol: 58, Pages: 480-494, ISSN: 0304-3932
Bhamra HS, Kuehn L-A, Strebulaev IA, 2010, The Aggregate Dynamics of Capital Structure and Macroeconomic Risk, REVIEW OF FINANCIAL STUDIES, Vol: 23, Pages: 4187-4241, ISSN: 0893-9454
Bhamra HS, Kuehn L-A, Strebulaev IA, 2010, Long Run Risks, Credit Markets, and Financial Structure, 122nd Annual Meeting of the American-Economics-Association, Publisher: AMER ECONOMIC ASSOC, Pages: 547-551, ISSN: 0002-8282
Bhamra HS, Kuehn L-A, Strebulaev IA, 2010, The Levered Equity Risk Premium and Credit Spreads: A Unified Framework, REVIEW OF FINANCIAL STUDIES, Vol: 23, Pages: 645-703, ISSN: 0893-9454
Bhamra HS, Uppal R, 2009, The Effect of Introducing a Non-Redundant Derivative on the Volatility of Stock-Market Returns When Agents Differ in Risk Aversion, REVIEW OF FINANCIAL STUDIES, Vol: 22, Pages: 2303-2330, ISSN: 0893-9454
Bhamra HS, Uppal R, 2006, The role of risk aversion and intertemporal substitution in dynamic consumption-portfolio choice with recursive utility, JOURNAL OF ECONOMIC DYNAMICS & CONTROL, Vol: 30, Pages: 967-991, ISSN: 0165-1889
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