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"Donaldson, John B."
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Intermediate financial theory
The second edition of this authoritative textbook continues the tradition of providing clear and concise descriptions of the new and classic concepts in financial theory.
Book
Demographics and FDI: lessons from China’s one-child policy
Following the introduction of the one-child policy in China, the capital-labor ratio of China increased relative to that of India, while FDI/GDP inflows to China versus India simultaneously declined. These observations are explained in the context of a simple neoclassical overlapping generations paradigm. The adjustment mechanism works as follows: the reduction in the growth rate of the (urban) labor force due to the one-child policy increases the capital per worker inherited from the previous generation. The resulting increase in China’s domestic capital-labor ratio thus \"crowds out\" the need for foreign direct investment (FDI) in China relative to India. Our paper is a contribution to the nascent literature exploring demographic transitions and their effects on FDI flows.
Journal Article
Average crossing time: An alternative characterization of mean aversion and reversion
This study compares and contrasts the multiple characterizations of mean reversion in financial time series as regards the restrictions they imply. This is accomplished by translating them into statements about an alternative measure, the \"Average Crossing Time\" or ACT. We argue that the ACT measure, per se, provides not only a useful benchmark for the degree of mean reversion/aversion, but also an intuitive, and easily quantified sense of one time series being \"more strongly mean-reverting/averting\" than another. We conclude our discussion by deriving the ACT measure for a wide class of stochastic processes and detailing its statistical characteristics. Our analysis is principally undertaken within a class of well-understood production based asset pricing models.
Journal Article
Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle
Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the future income of the young consumers is derived from their wages forthcoming in their middle age, while the bulk of the future income of the middle-aged consumers is derived from their savings in equity and bonds. The young would like to borrow and invest in equity but the borrowing constraint prevents them from doing so. The middle-aged choose to hold a diversified portfolio that includes positive holdings of bonds, and this explains the demand for bonds. Without the borrowing constraint, the young borrow and invest in equity, thereby decreasing the mean equity premium and increasing the rate of interest.
Journal Article
Intermediate financial theory
Targeting readers with backgrounds in economics, Intermediate Financial Theory, Third Edition includes new material on the asset pricing implications of behavioral finance perspectives, recent developments in portfolio choice, derivatives-risk neutral pricing research, and implications of the 2008 financial crisis. Each chapter concludes with questions, and for the first time a freely accessible website presents complementary and supplementary material for every chapter. Known for its rigor and intuition, Intermediate Financial Theory is perfect for those who need basic training in financial theory and those looking for a user-friendly introduction to advanced theory. Completely updated edition of classic textbook that fills a gap between MBA- and PhD-level textsFocuses on clear explanations of key concepts and requires limited mathematical prerequisitesOnline solutions manual availableUpdates include new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, and a new chapter on asset management for the long-term investor
eBook
Labour Relations and Asset Returns
This paper proposes a dynamic GE model with standard business cycle properties that also achieves a satisfactory replication of the major financial stylized facts. We ride on two major ideas. First, we show that operating leverage, originating in the priority status of wage claims given the observed business cycle characteristics of the latter, magnifies the risk properties of the residual payments to firm owners and justifies a substantial risk premium. Further we build on the observation that the low frequency variations in income shares constitute a significant source of risk, one that is unlikely to be insurable. When we price this risk in an incomplete market framework, we obtain a GE model with return volatilities close to observations and a sizable equity premium. This is accomplished in a world of low risk aversion and standard utility function but with agent heterogeneity. Workers with restricted access to financial markets are insured by firms and the consumption and preferences of firm owners solely determine the pricing kernel.
Journal Article
Intermediate financial theory
The second edition of this authoritative textbook continues the tradition of providing clear and concise descriptions of the new and classic concepts in financial theory. The authors keep the theory accessible by requiring very little mathematical background. First edition published by Prentice-Hall in 2001- ISBN 0130174467. The second edition includes new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, as well as a new chapter on asset management for the long term investor. \"This book does admirably what it sets out to do - provide a bridge between MBA-level finance texts and PhD-level texts... many books claim to require little prior mathematical training, but this one actually does so. This book may be a good one for Ph.D students outside finance who need some basic training in financial theory or for those looking for a more user-friendly introduction to advanced theory. The exercises are very good.\" --Ian Gow, Student, Graduate School of Business, Stanford University *Completely updated edition of classic textbook that fills a gap between MBA level texts and PHD level texts *Focuses on clear explanations of key concepts and requires limited mathematical prerequisites *Online solutions manual available * Updates includes new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, as well as a new chapter on asset management for the long term investor.
eBook
Intermediate Financial Theory, 3rd Edition
Targeting readers with backgrounds in economics, Intermediate Financial Theory, Third Edition includes new material on the asset pricing implications of behavioral finance perspectives, recent developments in portfolio choice, derivatives-risk neutral pricing research, and implications of the 2008 financial crisis. Each chapter concludes with questions, and for the first time a freely accessible website presents complementary and supplementary material for every chapter. Known for its rigor and intuition, Intermediate Financial Theory is perfect for those who need basic training in financial theory and those looking for a user-friendly introduction to advanced theory.Completely updated edition of classic textbook that fills a gap between MBA- and PhD-level textsFocuses on clear explanations of key concepts and requires limited mathematical prerequisitesOnline solutions manual availableUpdates include new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, and a new chapter on asset management for the long-term investor
eBook
Junior is rich: bequests as consumption
We explore the consequences for asset pricing of admitting a bequest motive into an otherwise standard overlapping generations economy where agents trade equity, a risk free asset and consol bonds. With low risk aversion, the calibrated model produces realistic values for the mean equity premium and the risk free rate, the variance of the equity premium, and the ratio of bequests to wealth. However, the variance of the risk free rate is unrealistically high. Security prices tend to be substantially higher in an economy with bequests as compared to an otherwise identical one where bequests are absent. We are able to keep the prices sufficiently low to generate reasonable returns and premia by stipulating that a portion of the bequests skips a generation and is received by the young.
Journal Article
Non-falsified Expectations and General Equilibrium Asset Pricing: The Power of the Peso
We discuss the extent to which the expectation of a rare event which happens not to materialise over the sample period, but which is not rationally excludable from the set of possibilities - the peso problem -, can affect the behaviour of rational agents and the characteristics of market equilibrium. To that end we describe quantitatively the macroeconomic and financial properties of a standard equilibrium business cycle model modified to allow for a very small probability of a depression state. We produce a model specification for which both business cycle characteristics and mean financial returns are in accord with United States observations.
Journal Article