University of Illinois Urbana-Champaign

Information risk, uncertainty risk and asset prices

Liang, Mo

Content Files
LIANG-DISSERTATION-2016.pdf

Permalink

https://hdl.handle.net/2142/90750

Description

Title
Information risk, uncertainty risk and asset prices
Author(s)
Liang, Mo
Issue Date
2016-04-14
Director of Research (if dissertation) or Advisor (if thesis)
Johnson, Timothy
Doctoral Committee Chair(s)
Johnson, Timothy
Committee Member(s)
  • Pearson, Neil
  • Pennacchi, George
  • Almeida, Heitor
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Date of Ingest
2016-07-07T20:27:16Z
Keyword(s)
  • Information Friction
  • Information Quality Risk
  • Uncertainty Risk
  • Asset Prices
Abstract
In the first chapter, I offer a structural DSGE framework to analyze the impact of stochastic information friction in explaining business cycles and asset prices. I document a new mechanism to generate time variation in uncertainty from the information channel, where rational agents' beliefs from Bayesian learning features time-varying uncertainty in a stochastic imperfect information environment. Information uncertainty provides considerable explanatory power for business fluctuations and carries a negative price of risk for asset valuations. The interaction between imperfect information and financial market friction provides an important channel to amplify the effect of information uncertainty on asset pricing. Empirical evidence supports the model's prediction of negatively priced information uncertainty risk. Firms with high exposure to information friction shock generate significantly lower returns than firms with low information friction shock exposure. A mimicking portfolio, IFS factor, generates 6% excess return per annum. The second chapter documents the history of aggregate positions in U.S. index options and investigates the driving factors behind use of this class of derivatives. We construct several measures of the magnitude of the market and characterize their level, trend, and covariates. Measured in terms of volatility exposure, the market is economically small, but it embeds a significant latent exposure to large price changes. Out-of-the-money puts are the dominant component of open positions. Variation in options use is well described by a stochastic trend driven by equity market activity and a significant negative response to increases in risk. Using a rich collection of uncertainty proxies, we distinguish distinct responses to exogenous macroeconomic risk, risk aversion, differences of opinion, and disaster risk. The results are consistent with the view that the primary function of index options is the transfer of unspanned crash risk. The third chapter uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and investment banks via managers' past working experience. We find mutual fund managers show significant stock picking skills on firms which are the long-term clients of the investment banks for which the managers formerly work. Managers perform significantly better on connected holdings relative to non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by approximately 7.4% per annum. We also compare the stock performance before and after two network-break events (firm switching investment bank and Lehman's collapse) and we find that managers' stock picking skills disappear when connections break. The results are consistent with mutual fund managers gaining an informational advantage through the social networks.
Graduation Semester
2016-05
Type of Resource
text
Permalink
http://hdl.handle.net/2142/90750
Copyright and License Information
Copyright 2016 Mo Liang

Owning Collections

Graduate Dissertations and Theses at Illinois PRIMARY
Graduate Theses and Dissertations at Illinois